Lean hog futures continue rebound

November 28, 2017 11:31 AM

Lean Hog Fundamental Support

Lean hog futures continued their mild rebound. Today marks the seventh day since the Nov. 15 minor low was placed. The trade is speculating that cash hog prices have bottomed. We are not going to discount this talk as this is the right time for it. Given the fact that the specific price moves this fall have been quite off the normal pattern we won't discount it.

Livestock prices follow general seasonals in most years are the seasonal supply and demand increases and decreases are relatively consistent from year to year. Hog prices rise in the summer due to the smallest supply offering and summer outdoor grilling demand. They reach the lows in the winter based on the largest supply and more moderate demand. Moore Research suggests the seasonal for the Lean Hog Index, the measure of cash hog prices that futures are settled against, is for the year's low on November 19, a minor rally until Dec. 9, then one last low posted on Dec. 24. This year the main low was made on September 29 and we posted a minor rally up to Nov. 1. The market is arguing about whether last week's hog trade is the equivalent to the Dec. 24 low.

This week should be the biggest kill week of the year. Numbers should top 2.550 million, over the current peak of the year from late September at 2.528. But markets are always looking in the future. The future for hog supply after the fall peak is a slight decline.

Last week, cash hogs gained 0.46 based on Tuesday through Friday increases. Today's trade posted a 0.71 decline. Futures may be slightly lower on Tuesday.

With the recent push higher, Friday's trade left an open gap at lower prices. The December has it from 62.90 - 63.25. On the February it runs from 69.15 - 69.32. We would expect those gaps to be filled at some point over the next three weeks.

Officially, Allendale is now neutral to the hog market now. We will buy but only at lower prices if offered. 

Live Cattle Fundamental Support

Though cattle prices did have a sharp drop from spring highs down to summer lows, the general theme since August has been bullish. Supplies have run a little lower than the trade expected and the market will not allow any negative news about demand. We just finished with a $9.30 break on the February fat contract which leaves many bulls wondering whether to buy today, tomorrow, or Wednesday (or all three).

USDA pegged last week's cash cattle trade at an $118.97 average. That was just under the $119.35 from the week prior. That is a little lower than we expected. Also, the 73,369 head of sold free market cattle last week would seem to be disappointing. That was sharply under the 104,194 from the year before in the same week. That low level of free market sales would normally be called bearish. It would imply we should have pushed numbers into this week. However, today's 10,300 decline in offered cattle on the afternoon showlist is clearly positive. If cattle feeders are offering fewer cattle, after a low sale week, then our ready supply would be even smaller than we thought.

The afternoon release of the weekly Comprehensive Boxed Beef report did not have good news about the beef demand discussion. End user purchases of beef for extended delivery ran 27% under last year during the Thanksgiving week. That was a Thanksgiving 2017 to Thanksgiving 2016 weekly comparison so the numbers are valid. Five of the past 11 weeks have seen extended procurement lower than last year. We don't call this week's number a game changer in the overall good demand story.

Bulls are also hoping for a bullish Consumer Confidence report tomorrow and bullishly revised Q3 GDP on Wednesday. Don't ignore the market's hopes on demand. We are neutral to this market at this time. 

About the Author

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com.