In lean hogs, tighter supply doesn't translate to higher prices

February 7, 2018 08:14 AM

Lean Hogs

On a seasonal basis, we have generally tighter supplies from the start of the year into April. After late April, supply takes a more dramatic decline into the year's lows in the summer. That does not mean price goes straight up in this period. Spring is a period where a little shake-up is normally seen. Traders are aware of a slight slump in prices from the minor February or March peak into spring.

Based on recent price action, we can see a clear reason fora price drop. Friday's 73.02 price for the Iowa/Minnesota is the highest since August 18. These prices are 6% over last year. Cash pork is off its recent price high from Jan. 23. Compared with last year, it is 2% lower.

Seasonally there is a small slump in prices from the start of February to mid-month. This is often a good point to work on short-term buys for a move into March. One thing the trade is quietly concerned about is another spring like 2017.

For the 2018 picture, Allendale expects a 3.0% year/year increase in offered supply of pork (26.433 billion lbs.). After exports and other factors, the U.S. consumer will see a 1.7% increase in the amount of pork offered to them on a per-capita basis (66.1 lbs.). We expect the year to average $72 per lean cwt. That is just over the $70 price from last year. Due to cheap feed, US producers can lock in a $27 per head profit for hogs in 2018 assuming both feed and hog prices are locked in right now.

At a minimum, we would lock in feed prices now (feed grains, not soymeal). For speculative trading, we are simply playing a range. RN

Live Cattle

The Dow Jones Industrial Average, the general measure of the U.S. stock market that the public follows, was down as much as 1,597.08 points after 2pm Central on Monday. It rebounded after that point. At the close of cattle futures, it was down 406.19 points. Though we do point out economic events and general stock market moves on this column we do not suggest there is a direct relationship we need to follow on a daily or weekly basis. It will be interesting to see whether the lower stock market after the CME cattle close leads to a lower opening for cattle tomorrow morning.

New highs for the uptrend in cattle futures was noted today. It didn't hold. In fact, the close of the day was on the low. That leads us to expect a lower open tomorrow regardless of the stock market.

USDA revised down the Friday estimate of last week's kill from 629,000 head to now 611,000. A lower, and more reasonable Saturday revision was noted.

Last week's average price for live cattle was $125.91. That was just under the $126.46 from the prior week. For two weeks in a row we have seen an average price of $126. This is still quite a bit better than the $119 average price traded last year in the same week.

Showlists, the number of finished cattle ready for packers this week, was seen at 4,700 head over last week. As this week and the next two are typically the smallest supply offering of the year, this is negative.

Allendale has lower prices plugged in for our price projections. However, due to market psychology, we had advised holding off from starting hedges. Prices are now getting close to the overvalued prices that we had been expecting. Today's 127.20 high for the April is close to our $128 sale target. We advise getting orders in on the April and June based on that April $128 price. We will still hold from speculative sales 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.