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Livestock Call by John Otte

Stronger beef cutouts provide optimism early in grilling season, hogs need proof of tightening supply, drift lower on soft demand

Published on: Apr 22, 2014

April 22, 2014

Opens
Fed cattle
, steady to higher
Feeder cattle, steady to higher
Lean hogs, steady to lower

Overnight stock futures trade suggests a near steady open on Wall Street.

Overnight livestock trade points steady to higher in fed and feeder cattle. Steady to lower hog futures suggest hogs are unlikely to recover from Monday's sharp selloff.

Cash fed cattle. USDA reported negotiated cash trade was at a standstill in all feeding regions on Monday.

Nebraska feedlots responding to a Dow Jones survey report offering 15,000 more cattle than last week. Colorado show lists are up 5,000 from last week. Kansas offerings are up 1,000. Texas show lists are down 8,000 from last week. That nets out to 13,000 more cattle on this week's show lists in the four states, which were up 13,000 from the previous week.

The bulk of last week's trade occurred at slightly lower prices than the prior week, as market participants braced for cattle numbers to expand in the weeks ahead.

Friday trading in the Texas Panhandle was slow on light demand. In Kansas trading and demand were moderate. For the week live sales sold $1 lower at $147 in both regions. Nebraska saw moderate trading and demand Friday. For the week live and dressed sales sold mostly steady with live sales from $150 to $151.50 and dressed sales at $240. In Colorado on Friday trading was slow on light demand. For the week live sales sold unevenly steady from $151 to $151.50. In the Western Corn Belt on Friday trading was slow on moderate demand. For the week live sales sold unevenly steady mostly at $150. Dressed sales sold steady to $1 higher at $240.

Monday's morning choice boxed beef cutout was up $1.69 at $228.04, with select up $1.87 at $217.10. Afternoon cutouts were higher on moderate to fairly good demand and light to moderate offerings. Choice was up $2.71 at $229.06, with select up $2.84 at $218.07 on 151 loads.

USDA estimated Monday's cattle slaughter at 103,000, down 12,000 from last Monday and down 19,000 from last year.

Cash feeder cattle. Compared to last week, Oklahoma National Stockyards reported Monday's feeder steers steady to $2 higher. Feeder heifers lightly tested and few sales steady. Steer and heifer calves steady. Quality mostly plain to average, few attractive. Cattle showed the complete range of thin to fleshy.  Supply included several large drafts off graze out wheat. Demand for all classes moderate to good. Supply included 56% steers and 44% heifers. Supply weighing over 600 lbs was 80%.

Cattle futures. Fed cattle ended mixed on Monday. Front-month April faced pressure as last week's lower cash-market prices offset persistent strength in wholesale beef prices.

Expectations of seasonally rising fed cattle supplies have dampened recent cash and futures markets. But traders continue to eye historically high prices for wholesale beef. If investors believe consumers will stay willing to pay up for burgers, steaks and other beef products, processors have more incentive to bid aggressively for cattle.

Market participants are closely watching prices what retailers are willing to pay while stocking up for a seasonal uptick in demand for the U.S. grilling season. It's all a matter of what the consumer is willing to pay for beef as temperatures warm up.

Consumers will undoubtedly buy steak for the first cook out. But will they become regular repeat customers are current prices?

Friday's USDA Cattle on Feed Report will provide clearer insight into supplies. Some market participants contend cattle numbers could expand in the months ahead following an uptick in lighter-weight cattle placed into commercial feed yards last fall and winter.

On Monday, April fed cattle fell 75 cents to $143.45. Most-active June gained 17 cents to $134.55.

May feeder cattle rose 5 cents to $178.10. August gained 50 cents to $181.90.

Thus far the CME has listed no tender notices to deliver on the soon-to-expire April fed cattle contract. With April futures $5 to$7 below cash trade, no deliveries are likely.

Bottom line. Last week's light cash fed cattle trade at lower prices weighed on front-month fed cattle futures. Seasonally rising fed cattle supplies could bring a bit lower wholesale and retail prices, thereby spurring more consumer buying as grilling season heats up.

Livestock Call by John Otte

Cash hogs. Compared to Friday, on a plant by plant basis, Monday's weighted average base prices were $2.03 lower to $4.58 higher. The market trend was not well established. Trading was slow with light demand. Some plants were closed for Good Friday.

USDA's afternoon reports showed Monday's weighted-average:

* National base price down 18 cents at $113.06.

* Iowa-Minnesota up $1.72 at $114.07.

* Western Corn Belt up $1.52 at $115.47.

* Eastern Corn Belt was $1.02 lower at $110.56.

Price changes are compared to USDA's afternoon report for Friday.

USDA estimated Monday's hog slaughter at 273,000, down 104,000 from the previous week and down 136,000 from a year ago. Some plants were closed yesterday in observance of Easter.

USDA reported Monday's morning plant cutout up 55 cents at $121.89. Afternoon cutout values were:

FOB plant down $1.92 at $119.42.

FOB Omaha down $1.93 at $118.47.

Based on 232 total loads.

Slipping cutouts erode margins. Based on the new cutout Dow Jones estimated Monday's packer margin index at plus $1.03 per head vs. plus $7.97 Friday.

Friday's CME two-day lean hog index slipped for a twelfth straight day, sliding $1.21 to $119.66. Its recent peaks are $130.35 on April 2, $81.05 on Jan.10, $82.91 on Dec. 4, $91.48 on Oct. 24, $98.25 on Sept. 20 and $102.56 on Aug. 15. Recent lows are $79.91 on Jan. 20, $79.23 on Dec. 23 and $80.83 on Nov. 25.

Hog futures. Hogs ended sharply lower Monday as buying interest from processors appears to be easing and even bullish traders are beginning to insist on seeing slaughter reductions due to earlier baby pig losses to porcine epidemic diarrhea virus before being willing to push prices higher.

On Monday, most-active June hogs fell $2.47 to $122.35. Summer hogs all lost at least $2.47. Deferreds lost up to 70 cents.

Bottom line. Hogs slipped amid the recent sluggishness of wholesale pork prices. USDA reported wholesale prices down about $3 over the last week until Friday. Friday's recovery fueled a bit of optimism. But that was short lived as cutouts slipped almost $2 Monday.

The opinions of John Otte are not necessarily those of FarmProgress.com, Farm Futures.com, or the Penton Farm Progress Group.

Comments:
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  1. J. Otte says:

    For a bit more perspective on hog slaughter and weights. Through the week ended April 19, USDA tallied year to date: Hog slaughter at 32.592 million, down 4.06% from a year ago. Sow slaughter at 749,000, down 5.41% from a year ago. Average dressed weight, 214 pounds, up 3.01% from a year ago. Pork production at 6.965 billion pounds, down 1.19% from last year. j ott

  2. martie says:

    Read what Trader Dan has to say. Hogs are coming in a lot heavier. More then makes up for numbers.

    • Janell Baum says:

      Reply from John Otte: Agreed. Round figures heavier weights are offsetting smaller slaughter runs to keep pork production about steady. For the week ended April 12, USDA tallied Iowa-southern Minnesota barrows and gilts at 285.7 pounds, up from 285.5 the previous week and 9.2 pounds heavier than the 276.5-pound average a year ago. Heavier weights alone boost pork output by about 3.7% per head. Hog slaughter so far this year of about 32.6 million is down 3.9% from last year.

  3. Chris says:

    John, it is clear after two days of trading that traders have chosen to regard the Friday USDA report as underplaying the PEDv problem. Are there past benchmarks that support this thinking (reports that were very innaccurate)? Are these traders likely to be right or is there just a lot of bullish momentum?

    • Janell Baum says:

      Comment reply from John Otte: The hog futures market fairly rapidly bouncing off Monday’s post-report limit down open says futures traders do not think Friday’s Hogs and Pigs Report was as bearish as the numbers USDA reported suggested. Bear in mind two limit moves opposite directions last week suggested traders were fairly nervous going into the report. Some market participants believe the cash hog market is the true measure of the situation. Cash market participants are in direct contact with people who sell and buy hogs, and buy and sell wholesale meat, retail meat and hotel restaurant and institutional meat every day. They likely have the best handhold on the overall day-to-day supply and demand situation. I have heard some comments along the lines of “PEDV is getting a lot of media exposure.” We, ourselves, have mentioned PEDV on numerous occasions. A possibility does exist that PEDV hype exceeds actual PEDV losses. A possibility exist that the cash hog market has over-reacted to that hype with panic buying. Such an over-reaction would spill over to boost futures. One thing is clear, hog prices are much higher than a year ago. The CME’s two-lean hog index has been up 47 straight days, rising about 63% over that stretch. Pork cutouts are also sharply higher. The last four or five days, beef cutouts have slipped, while pork is holding advancing, or at least holding steady. The point there is nothing goes up forever, and hogs have already made a tremendous surge. (But bear in mind a year ago now, Russia pulling out of the U.S. market and China restricting imports from the U.S. on ractopamine issues had prices depressed.) We’re all trying to ascertain how much upside is left in hogs, if any. A lot of people believe USDA’s summary numbers are suspect. I am not in that camp. I believe USDA can do, and does, as good of a job converting numbers people put down on surveys into a portrayal of what is going on in the industry that is consistent with those numbers. The next question is how good are the numbers that USDA uses as a jumping off point? That’s much harder to call. I’ll give you an example. Suppose a pork producer farrows 200 sows a week at 10 pigs per litter. That’s 2,000 pigs a week. The operation does that every week year in and year out, a constant 2,000 pigs a week. Now suppose the producer tallies and records the weekly pig production on Monday of each week. Most months have four Mondays. Some have five. Producing a constant 2,000 pigs a week would result in that producer “producing” 20% more pigs in months with five Mondays than in months with four Mondays. Death losses have always been tricky to estimate. Some producers count pigs that are born. Some don’t count until pigs are ready for weaning. For years, people have been complaining about USDA missing the numbers. An acquaintance says he suspects the most vocal critics are those who took sizable market positions before a report, had the report show something other than that particular participant expected resulting in that person being on the “wrong” side of the market and subsequently looking for someone to blame and the “government” is a handy scape goat. That all said I do not know if the market is correct in interpreting Friday’s report is less bearish than the numbers suggest. I do believe summer hog slaughter runs will provide confirming evidence one way or the other. NASS does provide historical track records. You can find them on livestock at http://bit.ly/1pWHbd4

  4. Joe Nicholas says:

    Hey John, any insight as to the discrepancy between near and distant hog futures (specifically the break b/w Aug/Oct?). Is the market discounting the potential impact of PED, or do they anticipate a cool summer w/ lots of cheap feed in the autumn for the fall futures contracts?

    • J. Otte says:

      Joe Theories yes. Insight maybe. The first reported PEDV cases surfaced April, May, June 2013. Fall and winter hog slaughter runs held up pretty well, hinting that death losses back in the spring may not have been as severe as some thought at the time.. Trade talk indicates severity of PEDV outbreak intensified as weather got colder in early winter. The surge in samples being tested in the vet network in November, December that were positive provides some confirming evidence. November December January pigs come to the slaughter market in May June July give or take a bit. The smallest hog slaughter week of the year is typically the week of the fourth of July. It is a short kill week during a seasonally low slaughter time of the year. Summer slaughter is typically the lowest seasonally because historically and continuing somewhat to this day, the winter pig crop is the smallest pig crop of the year. Now backing up a bit, pigs born in May June come to slaughter market in November December January. Death losses due to PEDV in May June 2013 shaved some slaughter hogs off what is normally the seasonally largest slaughter runs of the year in November December. That dampened winter hog price lift from spring PEDV losses. The reverse will be true for the pigs lost during November, December, January. Those pigs would have come to market at the seasonally low slaughter time of the year. Thus those PEDV losses make the already seasonally tight summer supply even tighter, therefore amplifying price lift. Expectations PEDV will sharply curtail summer slaughter supply drives the premium in summer futures. A bunch of factors contribute to the sharp discounts into the fall contracts. One is the expectation that PEDV outbreaks will ease soon as the weather warms, which result in more of the pigs that are born reaching slaughter weight in the fall. Another is slaughter hog supplies normally rise seasonally into the fall. Plus recent and current hog profits seem likely to be enticing producers to up production cyclically. We’ll get some insight into expansion plans in USDA’s Hogs and Pigs Report at the end of the month. Those numbers could well under estimate the amount of expansion that will occur. USDA surveyed producers around the first of March. Hog prices and pork prices have surged dramatically since USDA took the survey. Everything the market does it overdoes. Chatter is intensifying that hogs may have risen too high, too fast. A correction will eventually come. Expectations are USDA’s March 21 Cattle on Feed Report will show more cattle were on feed March 1, driven by earlier up ticks in placements. Summer beef supply could be a bit larger. It won’t be cheap. But retailer beef featuring may attract some grilling demand from pork chops. The surge in retail pork prices has yet to flow all the way through to the retail meat case. Price-sticker shock when it does may help trigger a correction in pork and hogs. J Otte

      • Northwest Iowa pig farmer says:

        A pig being born March 1st wouldn't even make the August market with August expiring on the August 14. I think the market is under estimating the impact on October. The biggest hole just might be August and October.

  5. J. Otte says:

    Estimating anybody's margin is an exercise fraught with peril. The packer has so many ways to slice and dice the carcass. Then there's the issue of spot meat sales, forward sales and deliveries on contracts. That same string of variables applies to live animal purchase methods resulting in variability. One might be better off using changes in estimated margins as an indicator of direction profitability is moving, rather than as a measure of profitability. J otte

  6. Anonymous says:

    Hope the poor packer is making money they been losing for 40 years

  7. Willie Vogt says:

    Dear reader, if you want to post a link in here please use a link shortener - we understand your need to share your favorite chart, but your links are not working here. I have removed those links because of the formatting issues. - Willie Vogt, Editorial Director.