Pork exports could benefit from continued problems

January 3, 2018 08:50 AM

Lean Hog Fundamental Support

In the morning comments we included a small note about the avian flu issues for both South Korea and Russia. Each country recently confirmed a cull of over 600,000 head. U.S. chicken and pork exports could benefit from continued problems this year. For the 2017 export season, the United States had sold 147,400 metric tonnes of pork to South Korea as of the Dec. 21. That is 21% over the 121,800 sold to them last year by this time. Total US exports, using the weekly data set, are up 10.6%. This means U.S. pork sales to other countries beyond South Korea are only up 8.5% year-over-year.

A stock market analyst with the financial firm, Jefferies, estimates 2018 chicken production will run 4% over last year. USDA is calling for only a 1.8% year over year increase at 42.275 billion lbs. By the Jefferies estimates, they see a 3% to 10% drop in chicken prices this year. Though we do have a little caution in paying attention to equity analysts and their viewpoints on commodities, in this case we only discount this call by perhaps 50%. From our direct experience in working with outside money on their commodity investments since 2004, there are a few good ones out there. For meats, they are best in covering chicken and less advanced in pork and beef. We have no problem in raising concerns about 2018 - 2020 meat production. That will be a key topic in just three weeks at the AgLeaders Conference.

Brazil's Trade Ministry reports 43,923 tonnes of pork shipped out during December. That was just under the 45,833 from November but just over the 43,047 from one year ago.

The cold weather issue is not really a problem for hogs. Perhaps some of the recent rally is on unfounded concern but for actual problems, we can't put a finger on it. The psychological issue with cold weather, along with good recent exports and the bullish Cold Storage report from December, have bulls in control. For this week, with a little warm up coming, we may see a small setback in hog futures. One thing of interest, on Friday April lean hog  futures broke their 75.90 early November peak. There was no close over that price. Today, it did not break it with the day's high or close. We won't call this a valid breakout at this point. 

Live Cattle Fundamental Support

The general adage is that we get two limited rallies each winter due to storms/cold weather. Generally, a $3 futures gain is made from these events (later taken back). We are now approaching a $4 jump from this weather system.

For the previous nine days, temperatures have run below normal. In fact, at the worst for the location shown on the chart, they were 33 degrees under normal at one point. This past weekend, most areas in the Plains ran 20 degrees under normal. Weight gains and panicked end users should be the result.

It will be some time before the see the actual weight impact. For prices, it is pretty apparent. Boxed beef was +2.24 for choice and +3.59 for select today. Cash cattle last week averaged $122.84, up from the previous week's $119.97.

McDonald's announced it was testing a new fresh beef burger in seven locations in Tulsa, Oklahoma. The Archburger is their second attempt at burgers using fresh beef. Earlier in 2017 they announced Quarter Pounders would be offered using fresh beef in limited markets. They are expanding that program to most of their 14,000 locations by mid-2018. We see any moves towards higher quality offerings as positive for the industry.

Brazil's Trade Ministry noted 108,569 tonnes of beef exported in December. That was under the 116,172 from the previous month. December 2016, by comparison, ran 87,259 tonnes.

For short term issues we would feel comfortable starting long positions for a drive higher in price into the spring, only on a good pull back in price. On the fat side we are slightly positive with a $124 April futures target. It will be interesting to see how well feeders do in the coming days. This recent bounce would be against the seasonals.  

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.