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Livestock Call by John Otte

Fed cattle futures ease lower as cash trade slips $1 on adequate supply, hog futures rally on PEDV death loss concerns

Published on: Apr 18, 2014

April 18, 2014

Opens
Fed cattle
, closed
Feeder cattle, closed
Lean hogs, closed

Wall Street and the Chicago Mercantile Exchange are closed today for Good Friday.

Cash fed cattle. USDA reported limited trading in Kansas Thursday morning on light to moderate demand. Compared to last week, early live sales ran $1 lower at $146. Trading accelerated to light to moderate, still at $146.

Later, slow trading began in Nebraska with a few early sales trading at $148 live, and few dressed sales trending $2 lower than last week at $238.

Trading was slow in Iowa with some dressed sales Thursday morning reported at $239 to $240.

Thursday's morning choice boxed beef cutout was up $1.65 at $225.40, with select up $1.06 at $215.53. Afternoon cutouts were higher on moderate demand and light to moderate offerings. Choice was up $2.13 at $225.88, with select up 96 cents at $215.43 on 185 loads.

USDA estimated Thursday's cattle slaughter at 110,000. Slaughter so far this week of 458,000 is down 2,000 from last week and down 24,000 from a year ago.

Cattle futures. Slippage in cash fed cattle prices and variable weather creating a shaky start to grilling season let fed cattle futures drift lower. Sharply lower 2013-crop feed costs and pricy fed cattle spurred winter feedlot placements. The market sees larger summer fed cattle supplies coming, which keeps pressure on prices.

Ten days ago packers were short bought. Now they're not. That means they do not need to chase supplies. That's letting cash fed cattle prices drift lower, which pressures fed Cattle futures.

April fed cattle fell $1.55 to $144.20, down 0.4% from last Friday's close. Most-active June skidded $1.25 to $134.37. Remaining contracts lost lesser amounts.

May feeder cattle fell $1.85 to $178.05. Most-active August slipped $1.57 to $181.40.

Thus far the CME has listed no tender notices to deliver on the soon-to-expire April fed cattle contract.

Bottom line. Cattle prices slump as packers need fewer cattle.

Livestock Call by John Otte

Cash hogs. Compared to Wednesday, on a plant by plant basis, Thursday's weighted average base prices were $2.37 lower to $1 higher. Trading occurred throughout the full $104 to $117 range on slow market activity with light demand.

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

* National base price down 24 cents at $114.70.

* Iowa-Minnesota up 50 cents at $115.69.

* Western Corn Belt up 55 cents at $115.65.

* Eastern Corn Belt was not available.

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

USDA estimated Thursday's hog slaughter at 417,000. Slaughter so far this week of 1.621 million is down 6,000 from last week and down 51,000 from a year ago.

USDA reported Thursday's morning plant cutout down 62 cents at $120.54. Afternoon cutout values were:

FOB plant down $1.08 at $120.08.

FOB Omaha down 71 cents at $119.20.

Based on 283 total loads.

Based on the new cutout Dow Jones estimated Thursday's packer margin index at plus $2.15 per head vs. plus $5.62 Wednesday.

Wednesday's CME two-day lean hog index slipped for a tenth straight day, sliding 92 cents to $122.16. 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 mostly higher Thursday. Summer hogs rose on persistent uncertainty on how much earlier baby pig losses will trim summer hog slaughter.

Through April 12, the National Animal Health Laboratory Network reported the total number of positive tested cases for Porcine Epidemic Diarrhea Virus and another coronavirus called swine delta corona virus at 5,790. Vermont reported the state's first positive PEDV accession in the most recent update.

Most-active June hogs surged $1.05 to $124.82. July rose $1.42 to $123.07. August was the big gainer, up $1.65 at $121.90. Deep deferreds slipped. February 2015 hogs sagged 15 cents to $86.70, a sizable $38.12 discount to June. Deferreds slipped on thoughts hog expansion is underway.

Bottom line. Most hog futures contracts advanced on persistent concerns about how much death losses due to viral diseases will trim slaughter runs in the days ahead. Some semblance of cash price stability is constructive. Still, cutouts continue to weaken, which is a negative.

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. martie says:

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

  2. 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

  3. 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.

  4. 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

  5. Anonymous says:

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

  6. 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.