Livestock Analysis | January 7, 2022

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Hogs

Price action: Nearby February futures led the deferred contracts lower, losing $3.30 to $79.65. Friday’s close marked a $1.825 loss on the week.

5-day outlook: Hog traders seemingly decided today the premiums built into futures were too large, possibly in response to the quick midsession dive suffered by pork cutout (down $6.38 to $81.64) after having surged Thursday. Having the preliminary quote for the CME index rise just 16 cents to $73.73 may also have spurred selling. Nearby contracts could stage a comeback Monday since this week’s slaughter total at 2.578 million head fell short of the mid-December high of 2.655 million head and was 9% short of the comparable year-ago figure. This may mean producers are letting a backlog of animals build in their barns, but it seems more likely the hogs simply aren’t as plentiful as bears would like to think. We’re in the latter camp.

30-day outlook: Much depends upon supply and demand forces over the next month. Slaughter rates typically decline significantly from the inflated post-holiday high by mid-February. The strength of demand this year is particularly important, since most assumptions about the 2022 outlook depend upon ideas the vigorous demand seen through much of the past two years will persist. Bears are surely anticipating buying from consumers and export customers will diminish in the wake of the greatly elevated level reached last summer. We still think the 6.0% supply reduction implied by the December Hogs and Pigs Report will justify the premium built into the nearby February contract.

90-day outlook: Hog supplies are expected to run about 6.0% under year-ago level through winter, with the annual decline expected to fall to “just” 4.0% under 2020 levels through spring. Given the normal tendency for hog slaughter to drop to annual lows in early summer, this clearly implies something of a pork shortage by late spring. And yet, summer futures in the $100 area are far below the June 2021 high of $122.68. We believe high retail costs will slow demand and doubt Chinese buying of U.S. pork will approach the levels seen in 2020 and early 2021, but Chinese imports had already slowed dramatically last spring. Also, by the time spring rolls around, grocers and consumers will likely have had time to adjust to the higher prices experienced in recent months.

What to do: Get current with feed advice.

Hedgers: You currently have all risk in the cash market.

Feed needs: You are hand-to-mouth on corn-for-feed and soybean meal needs. Wait on price pullbacks to extend coverage.

 

Cattle

Price action: Live cattle futures finished mixed, while feeder cattle ended lower in most contracts. February live cattle slipped 2 1/2 cents to $137.325, down $2.375 for the week. March feeders weakened 60 cents and fell $3.275 for the week. 

5-day outlook: To stop short-term downward momentum, the cash cattle market likely must show some strength next week. That may depend on how much production plants lose to absenteeism due to Covid. While worker shortages weren’t widespread or severe this week, they did impact some plants and could have been a partial reason for the lower cash trade. Another factor in next week’s cash trade will be how much of this week’s showlist was cleaned up. If some animals are rolled into next week, packers would seemingly have the initial upper hand in cash negotiations.

30-day outlook: Front-month February live cattle are priced about the same as summer-month futures, which is unusual. While feedlot supplies are expected to decline, February live cattle appear underpriced and don’t hold any weather premium. Based on the lack of reaction to the recent cold blast, traders don’t seem interested in building in weather premium, meaning upside price movement will need to come from the cash market.

90-day outlook: Record retail beef prices remain a concern for demand. While prices have backed down some, steaks and other high-end cuts aren’t likely to garner a lot of interest from consumers. That could hold the cutout value down, though even ground beef prices are high enough to keep the product market elevated.

What to do: Short-term protective hedges for fed cattle producers may be needed if recent lows are violated.

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

Feed needs: You are hand-to-mouth on corn-for-feed and soybean meal needs. Wait on price pullbacks to extend coverage.

 

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