Livestock Analysis | February 17, 2023

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Hogs

Price action: Hog futures couldn’t sustain early gains, with nearby April ending the day having fallen 50 cents to $85.275. The closing price marked a weekly rise of $1.95.

5-day outlook: Hog futures climbed Friday morning in apparent response to the sustained advance posted by pork cutout values Thursday afternoon. Conversely, the market seemingly turned lower in response to significant wholesale losses at midsession today. The vulnerability to setbacks likely stems from the sizeable premiums carried by nearby futures over the latest quotes for the lean hog index. As expected, Wednesday’s official quote rose 23 cents to $75.85 this morning, while Thursday’s preliminary figure gained another 24 cents to $76.09. The seasonal uptrend in cash values will probably continue next week. However, having this week’s hog slaughter top the year-ago level (by 23,000 head or 0.9%) raises questions about supplies going forward. That is, industry expectations have been for hog numbers to consistently fall 2% below year-ago levels, but this week’s rise represented the fifth time in the past six weeks hog slaughter has exceeded their early-2022 counterparts.

30-day outlook: The cash hog market has a strong history of rallying into late February, but its subsequent path becomes less clear. Prices often tend to move sideways to lower as slaughter rates stabilize at seasonally lower levels and consumer demand is limited by Lent. However, the market sometimes sustains its early-year gains through March and into spring, before accelerating upward after Easter. We are inclined to expect the latter scenario, partly due to ideas the sustained weakness experienced through early February will spur fresh buying from grocers and processors as they take advantage of the comparatively low cost of pork. This could amplify seasonal gains across the hog/pork complex. On the other hand, if the mid-winter increase in hog supplies persists, the market’s upside potential may prove smaller than previously thought.

90-day outlook: The hog market’s upside spring potential could be quite large if the USDA was correct in indicating likely 2% annual supply reductions into early summer. But, as discussed above, there are now clear questions on the supply front. Increased hog numbers could limit the size of the usual spring price surge. Indeed, if forthcoming supplies were to match those seen in mid-2021, which modestly exceeded those of 2022, the market could still enjoy considerable upside potential. We would again remind readers the hog index topped the $122.00 level in each of the past two years, which makes summer futures in the $102.50-$105.00 range look undervalued.  

What to do: Get current with advised feed coverage. Be prepared to extend coverage on additional price pressure.

Hedgers: Carry all risk in the cash market for now.

Feed needs: You have all corn-for-feed and soymeal needs covered in the cash market through February.

 

 

Cattle

Price action: April live cattle futures rose 57 1/2 cents to $164.65, closing near mid-range after setting a new contract high today. For the week, April cattle rose 70 cents. March feeder cattle futures gained 30 cents to $186.525 and nearer the session high. For the week, March feeders gained 12 1/2 cents.

5-day outlook: The push to a new contract high in April live cattle futures today, including a technically bullish weekly high close, sets the table for follow-through technical buying when trading resumes next Tuesday. Cash cattle market fundamentals remain solid and the technical posture for live cattle is fully bullish. Cash cattle trading action has so far been light at slightly firmer prices compared with last week. Feedlots are passing on $162 bids in the Southern Plains. Packers are going to need to bring more aggressive bids or trade for the week may end up light. Choice boxed beef cutout value at midday rose another $1.34 to $280.89, while Select grade rose $4.01 to $266.65, narrowing the Choice/Select spread to $14.24. Packer margins have improved significantly from the rising wholesale prices, likely prompting packers to actively compete for a tightening supplies of market-ready cattle. The USDA monthly Cattle-on-Feed report next Friday is expected to show placements down around 1% from year-ago levels.

30-day outlook: This week USDA reported steer dressed weights at 908 pounds per head, down 22 pounds from last year at this time. While that weight difference is likely to decline in the short term, year-to-year weight reduction is still likely to remain significant. This, along with the cattle market’s history of price strength into early spring, favors the cattle market bulls in the coming few months. The cattle market has a strong tendency to rally through the first quarter of years when late-January steer weights have fallen below year-ago levels. The weight reductions imply limited supplies of market-ready cattle in feedlots, which then force packers to boost bids for those animals.

90-day outlook: Concerns about the U.S. and global economic outlook may limit the upside in the cattle markets in the coming months. It appears the general marketplace this week, following a hot U.S. producer price inflation report, came to the realization that the Federal Reserve will have to keep interest rates higher for longer to tamp down problematic price inflation. That scenario means squeezing consumer demand that may in turn prompt substitution buying of cheaper-priced meats. Still, history shows red meat demand doesn’t suffer that significantly except in the very worst economic conditions. 

What to do: Get current with advised feed coverage. Be prepared to extend coverage on additional price pressure.

Hedgers: Carry all risk in the cash market for now.

Feed needs: You have all corn-for-feed and soymeal needs covered in the cash market through February.

 

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