Livestock Analysis |February 23, 2023
Hogs
Advice: We advise livestock producers to cover all corn-for-feed needs in the cash market through the end of March. Be prepared to extend coverage on additional price pressure.
Price action: Nearby April hog futures edged 17.5 cents lower to $86.025 at Friday’s settlement. The closing quote represented a weekly rise of 75 cents.
5-day outlook: Hog industry activity this week was greatly hampered by the winter storm over the central U.S., with slaughter slowing sharply on Wednesday and Thursday. That played a sizeable role in the 117,000-head (4.7%) weekly drop in slaughter rates. The disruptions seemed to give packers bargaining leverage, since the hog index turned lower, consequently. For example, Wednesday’s preliminary figure for the index came in above $78.00, but downward USDA revisions to the data, caused Wednesday’s official quote to come in just 20 cents higher at $77.73. Thursday’s preliminary figure is $77.49, down 24 cents. The implied backlog of hogs available to packers next week seems likely to weigh on cash and futures. Much depends upon the wholesale market, which may translate into early-week pork gains, followed by weakness as increased slaughter and production flow through the marketing chain.
30-day outlook: History suggests weekly hog kills will diminish only slightly on a seasonal basis during early March, then accelerate downward as hog numbers drop toward early-summer lows. It isn’t uncommon for the hog/pork complex to struggle from late February into early April, but we believe the depressed prices reached during the first six weeks of the year have set up a much-improved demand scenario as the industry gears up for grilling season. If we’re correct in this regard, pork values could lead the hog market higher. The size and length of the anticipated gains will partially depend on hog supplies. As noted previously, last week’s large kill appeared to indicate current hog supplies are greater than previously thought. This week’s weather further confused the situation. If late-winter and spring hog supplies match expectations for 2% annual declines, the anticipated seasonal rally could prove quite large. Conversely, the modest year-to-year increase suggested by the early-2023 gains might clearly diminish the market’s upside potential.
90-outlook: If we’re correct in thinking the early-year weakness is setting the stage for outstanding consumer demand during grilling season, the hog and pork markets might prove extremely strong this spring. If hog supplies do fall 2% below year-ago levels, we suspect the hog index will challenge its 2021 and 2022 highs around $122.00. The outlook is less promising if supplies increase, but we still think the market could top the levels currently implied by spring and summer futures.
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: NEW ADVICE -- Cover all corn-for-feed needs in the cash market through the end of March. You have all soymeal needs covered in the cash market through February.
Cattle
Advice: We advise livestock producers to cover all corn-for-feed needs in the cash market through the end of March. Be prepared to extend coverage on additional price pressure.
Price action: Expiring February live cattle futures ended the week at $165.20, up 5 cents. Still, that marks a weekly advance of $1.625. Most active April cattle also rose 5 cents to $165.375, ending the week 72.5 cents above last Friday’s close. March feeder futures skidded 15 cents to $189.075, thereby marking a weekly rise of $2.55.
5-day outlook: This week’s winter storm probably didn’t bother Great Plains cattle all that badly, since they are likely pretty-well adapted to the cold at this point. Still, it won’t have done them any good, which will likely translate into further diminished supplies of market-ready animals in feedlots. This will maintain or increase producer leverage when bargaining with packers. Thursday’s active trade at $163.65, up $2.48 from the week-ago average, illustrated the latter, since many in the industry expected packers to hold out until after the release of the Cattle on Feed report in hopes of keeping a lid on prices. The February contract’s premium to cash also implies great strength, since it expires next Tuesday. That is, market insiders (who are likely the only ones active in that contract at this juncture) expect sustained cash strength. Look for the whole complex to continue rising next week.
The USDA Cattle on Feed report stated January feedlot placements at 96.4% of last year, a bit below industry expectations for a 2.9% annual decline. Conversely, January marketings were expected to post a 3.9% annual gain; the USDA figure topped that level, rising 4.2% annually. The net result was a February 1 U.S. large-lot feedlot population of 11.704 million head, down 68,000 from the anticipated figure. The numbers should prove supportive of futures on Monday’s opening.
30-day outlook: Weekly cattle slaughter traditionally hits an annual low in late February and/or early March. The reduced production clearly plays a sizeable role in powering early-year cash gains. However, cattle weights are also dropping sharply at this time of year, reflecting an increasing percentage of calf-fed animals (placed in late summer and fall) in the slaughter mix. This trend also reduces the percentage of prime- and choice-grade animals, which puts further upward pressure on most prices. We expect this phenomenon to be exaggerated this year, since the latest reading on steer weights is well below year-ago and achieved the rare result of matching the five-year average (due to the long-term upward trend in fed cattle weights). We don’t see the upward trend slowing substantially during March.
90-outlook: The 10-year average of cash cattle prices implies a seasonal high is most likely in late March. However, in years such as this, in which marketings are extremely current and steer weights are running well below year-ago levels, the seasonal top has tended to come in late April. We see little to stand in the way of such a course, particularly since retail beef prices (including those for steaks), while still greatly elevated, have been trending slowly lower since late 2021. That should amplify consumer demand in late winter and early spring. However, we expect grocers to start passing surging costs for wholesale beef on to consumers by mid-spring and expect steak prices to lead retail beef costs to new record highs. That will almost surely strangle consumer demand and bring an end to the bull market in cattle by late spring.
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: NEW ADVICE -- Cover all corn-for-feed needs in the cash market through the end of March. You have all soymeal needs covered in the cash market through February.
