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Livestock Call by John Otte

Cash cattle bid-ask spread around $4 to $6, feedlots see higher cutouts as reason to ask more, hog futures bounce on lower cold storage stocks

Published on: Apr 24, 2014

April 24, 2014

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

Overnight stock futures trade points higher on Wall Street.

Most livestock futures traded near steady overnight.

Cash fed cattle. USDA reported negotiated cash trade was at a standstill on Wednesday.

Combined show lists in Nebraska, Colorado, Kansas and Texas are up 13,000 from last week and 26,000 more than two weeks ago. Cattle buyers see larger show lists and expectations of further hikes in supplies as reasons not to bid up for cattle.

A dressed bid at $232 surfaced in Nebraska Wednesday morning. That's $4 to $6 lower than last week's sales. Owners passed.

Southern Plains owners are seeking steady to slightly higher prices than last week's sales, which were mostly around $147 live. Last week's Northern Plains live sales ran $150 to $151.50 and $240 dressed.

Wednesday's midday choice cutout was up $6.00 so far this week with select up $5.87. Cattle owners view advancing cutouts as reason why packers ought to pay at least last week's prices.

However, cutouts are roughly $10 off their recent highs. That contributes to recent futures weakness. 

The almost $9 discount from April to June live cattle futures should catch most of the expected seasonal cash decline into summer. The longer the $147 to $150 live basis cash cattle hang around, the higher the summer seasonal low should be because feed yards will attempt to pull cattle ahead and sell them before prices slip. Lots of folk think summer cattle in the $132 to $135 area are well priced.

Wednesday's morning choice boxed beef cutout was up $1.14 at $232.35, with select up $1.28 at $220.90. Afternoon cutouts were higher on moderate demand and light to moderate offerings. Choice was up $1.43 at $232.64, with select up $1.05 at $220.67 on 152 loads.

USDA estimated Wednesday's cattle slaughter at 115,000. Slaughter so far this week of 334,000 is down 14,000 from last week and down 34,000 from last year.

Cattle futures. Fed cattle reversed earlier losses to end Wednesday's session higher, tracing an extended climb in wholesale beef prices.

Cattle futures trimmed overnight losses following USDA's midday wholesale beef price report, which indicated choice-grade beef values rose $1.14 to $232.35. Select also rose, refueling expectations for demand to improve as rising temperatures foster outdoor grilling.

Expectations tomorrow's USDA Cattle on Feed Report will show a small uptick in feedlot inventories offset some gains in the cattle market. If USDA reports more cattle in yards on April 1 than year earlier, it would be the first year-over-year rise in nearly two years. This could produce a small bulge in summer marketings among overall tight beef supplies.

April fed cattle rose 22 cents to $143.92. Most-active June gained 12 cents to $135.10.

Feeder-cattle prices advanced to all-time record highs in April after steadily climbing through February and March. High prices provided more incentive for ranchers to sell lighter animals to feedlots. Recent cash feeder cattle prices show signs of topping.

May feeder cattle rose 27 cents to $178.62. August gained 17 cents to $182.45.

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.

Cattle on feed pre-report guesses. Round figures, feedlot placements have been up about 600,000 since weaning time compared to a year ago. That suggests a potential bulge in summer fed cattle supply. Traders will get clues on how large that bulge might be in Friday's USDA Cattle on Feed Report. On average, analysts responding to a Wall Street Journal survey expect:

Cattle on feed April 1 to be 100.4% of April 1, 2013, in a range of 99.0% to 101.4%.

March placements to be 101.7% of last year, in a range of 95.3% to 104.3%.

March marketings to be 96.6% of last year, in a range of 95.0% to 100.5%.

Bottom line. Despite higher show lists, rising wholesale beef cutout values encourage feed lots to ask higher prices for cash cattle this week. Friday's Cattle on Feed Report should provide insight into cash fed cattle supplies and potential prices going into summer.

Livestock Call by John Otte

Cash hogs. Compared to Tuesday, on a plant by plant basis, Wednesday's weighted-average base prices were 35 cents lower to $2.52 higher, mostly 25 cents to $2.50 higher. The range was $105 to $124. The market was slow with light demand.

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

* National base price up $1.24 at $115.67.

* Iowa-Minnesota up 48 cents $116.20.

* Western Corn Belt up $1.27 at $115.77.

* Eastern Corn Belt was not available.

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

USDA estimated Wednesday's hog slaughter at 418,000. Slaughter so far this week of 1.102 million is down 102,000 from last week and down 152,000 from last year. Some plants were closed Monday this week in observance of Easter.

USDA tallied last week's Iowa-southern Minnesota barrows and gilts averaged 286.4 pounds, up from 285.7 pounds the previous week and up from 277.1 pounds a year ago.

USDA reported Wednesday's morning plant cutout up $1.27 at $118.46. Afternoon cutout values were:

FOB plant up 32 cents at $117.41.

FOB Omaha down 10 cents at $115.97.

Based on 460 total loads.

Slipping cutouts erode margins. Based on the new cutout Dow Jones estimated Wednesday's packer margin index at minus $4.71 per head vs. minus $3.10 Tuesday.

Tuesday's CME two-day lean hog index slipped for a fourteenth straight day, sliding 79 cents to $117.69. 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 rallied Wednesday after Tuesday's USDA cold storage inventory report indicated a bigger drawdown of supplies last month than market watchers anticipated.

Pork stocks were down 11% from the same time in 2013, compared to an expected 3% drawdown by analysts.

On Wednesday, most-active June hogs settled the daily $3 limit higher to $126.25. July also settled limit up at $124.00.

Bottom line. Hog futures bounce on thoughts cold storage stocks drawdown signals expected tightening of supplies going into summer.

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.