Livestock Analysis | November 12, 2021
5-day outlook: Cash fundamentals continued to sag this week, with the latest CME lean hog index down 77 cents to $77.95. The index has fallen 17% since the beginning of October and is the lowest since $77.74 on Feb. 19. But futures movement so far this month suggests the market has established a near-term bottom and may trade sideways, perhaps slightly higher, in coming weeks. A rebound in pork cutout values this week, if sustained, could also encourage buyers in hog futures. Early today, pork carcass cutout values rose $2.51 to $98.31, up from $96.35 at the end of last week.
30-day outlook: Nearby futures ended the week at slightly over a $2.00 discount to the cash index, narrower than the roughly $3.00 gap at the end of October. But the spread still reflects expectations the cash market will continue to erode through early December. Weekly hog slaughter has lagged year-ago levels, but historically climbs to annual highs in mid-December, foreshadowing growing supplies in the pipeline even as high retail prices curb domestic demand. Meatpackers this week slaughtered an estimated 2.614 million head, up 0.4% from the previous week but down 2.5% from the same week in 2020. Year-to-date, slaughter is running 2.0% under 2020 levels.
90-day outlook: U.S. consumer inflation during October soared to the highest annual rate in nearly 31 years, partly reflecting record retail beef and pork prices. Bacon, for example, averaged $7.32 a pound last month, up 28% from October 2020. Continued high prices at the supermarket meat case likely will prompt consumers to shift to cheaper substitutes, such as chicken. Stronger overseas demand in 2022, as USDA projects, could underpin futures, even though USDA’s latest weekly sales report showed U.S. pork sales during the week ended Nov. 4, down 49% from the previous week and down 28% from the four-week average. USDA’s next quarterly Hogs and Pigs report is Dec. 23.
What to do: Get current with feed advice.
Hedgers: You currently have all risk in the cash market.
Feed needs: You should have all corn-for-feed and soybean meal needs covered in the cash market through October.
Price action: December live cattle edged up 25 cents to $132.125, a 42.5-cent weekly rise. Meanwhile, rising grain and soy prices pushed January feeder futures down $1.075 to $156.25, down $3.35 for the week.
5-day outlook: Despite surging cash prices, cattle futures ended the week on a soft note. The flat futures reaction to this week’s cash strength suggests the industry is anticipating a short-term stall and/or setback in cash cattle values as the holiday season looms. Bears are likely relying upon the downward reversal suffered by wholesale beef values. Choice cutout was essentially unchanged at $285.14 at noon today, down from $289.54 at the end of last week. History suggests more slippage over the next few weeks, so bearish traders are apparently expecting more of the same with Thanksgiving ahead. We tend to doubt cattle prices will decline substantially in the coming weeks, due strongly to ideas that the supply of market-ready cattle is tightening, thereby giving producers much more leverage in cash market negotiations.
30-day outlook: Steer dressed weights averaged 918 pounds per head during the week ended October 23, down four pounds from the week-prior figure. The drop might have been temporary, as indicated by the 2-pound rise posted during the last week of October. But we suspect steer weights reached a seasonal peak in mid-October. Moreover, with fed cattle prices rising $2.00 to $3.00 each of the past two weeks, this strongly implies market-ready supplies of fed cattle have tightened to their lowest levels of the year. Keep in mind that fed cattle supplies will almost surely tighten on a seasonal basis from this point into the February-March period, which will also lend the cash market an upward bias.
Futures are anticipating modest gains into spring, but the latest developments suggest those premiums are too small. Much depends upon the strength of consumer beef demand. We tend to think consumers will respond favorably if/when the wholesale losses suffered since late summer are passed along to them from grocery stores, which should also favor an upward bias.
90-day outlook: Considering the strength in wholesale beef earlier this year, cattle prices have been relatively muted, as indicated by this week’s early live steer average at $131.35 marking the 2021 high so far. Choice cutout values twice topped $340 earlier this year. In contrast, the previous all-time high for fed cattle reached approximately $172 in October 2014, whereas choice cutout topped around $262 in 2014 and 2015. Sustained firmness near $300 clearly gives beef packers a lot of room to pay up for fed cattle as the supply of market-ready animals tightens both seasonally and cyclically.
What to do: Get current with feed advice. Be prepared to add cattle hedges if the rally stalls.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You should have all corn-for-feed and soybean meal needs covered in the cash market through October.
