Hogs
Price action: Hog futures continued their rally into the weekend, with the expiring February contract rallying 60 cents to $87.25. Most-active April gained 40 cents to close at $92.15. That represented a weekly rise of $1.80.
5-day outlook: Seasonal forces continued driving hog and pork prices higher through this week and seem likely to continue doing so again next week. Pork cutout led the way higher, building upon Thursday’s $1.81 advance with a $1.65 rise to $97.29 at midday Friday. Pork bellies powered the bulk of the latter gain, although that may mean afternoon weakness will limit or reverse the rise in cutout at the end of the day.
Meanwhile, the CME confirmed Tuesday’s quote for the hog index at $84.60, up 52 cents from Monday. There’s little reason to doubt Wednesday’s quote will deviate from the preliminary figure at $85.05. Thursday’s data puts it at $85.39, up another 34 cents. The USDA estimates the weekly slaughter total at 2.536 million head, which represents an 88,000 head (3.4%) decline from year-ago. The numbers still point to annually reduced hog supplies through winter, in contrast to the USDA’s December Hogs & Pigs report.
30-day outlook: Seasonal patterns imply hog supplies will continue generally dwindling through the first half of the year, which is price supportive. Increased industry demand for hams has probably powered the usual mid-winter price advance. Again, we think the late arrival of Easter (on April 20) will extend the advance through February and possibly into March. That looks supportive of sustained cash market gains as well.
90-day outlook: The big question about the outlook is how the complex will behave during March and early April. As noted above, the late arrival of Easter could provide support through much of winter. On the hand, the market could prove vulnerable to a sizeable late-winter setback if grocers back away from pork after completing planned ham purchases. Will they immediately start buying the other cuts (i.e. loins, butts, ribs and trimmings) in preparation for the belated post-Easter onset of the grilling season? If so, the market could simply continue rising through spring. Conversely, if grocers do step back from the pork market, a late winter/early spring setback could occur. History suggests a strong spring rally would follow, although last year’s dreadful spring performance demonstrated that isn’t guaranteed either. Nevertheless, we believe robust demand from farther up the marketing chain and from consumers will prove very supportive of spring prices.
What to do: Get current with feed coverage.
Hedgers: You are carrying all production risk in the cash market.
Feed needs: You should have all soymeal needs covered in the cash market through the end of February. You are hand-to-mouth on corn-for-feed needs.
Cattle
Price action: Cattle futures stabilized in the wake of this week’s breakdown, with nearby February rising 15 cents to $200.775 at Friday’s close. Most-active April futures closed unchanged at $196.775; the settlement price represented a weekly drop of $5.525. March feeder futures fell 40 cents to $264.90, thereby marking a weekly plunge of $10.825.
5-day outlook: Given the size and length of the preceding price advance, next week’s cash market activity is likely to see another significant loss. Futures seem likely to start the week rather poorly given the cash weakness, but that is not entirely assured. Much about the short-term outlook could depend upon bulls’ ability to sustain technical support, particularly at the April contract’s 40-day moving average near $196.71. A drop below that level seems likely, given traders’ propensity for looking to trigger stops below major support in hopes of triggering a cascade of selling, to be tested severely. On the other hand, futures are already trading far below this week’s four-day cash average at $207.11. Bears are also likely counting on sustained wholesale weakness, which saw Friday’s midsession quote for choice cutout at $322.68, down over $9.00 from Monday’s closing figure. Conversely, we believe grocers will be looking to feature beef rather aggressively in early March. If so, their sustained wholesale buying could limit beef price losses and provide support for the cash and futures markets. The fact that cattle slaughter and beef production typically reach annual low in the February-March period should also lend underlying support.
30-day outlook: As noted just above, beef production usually dips to annual lows at this time of year, which should encourage bulls during the coming weeks. Conversely, the late arrival of Ash Wednesday and the start of Lent on March 5 may limit beef demand from grocers and consumers in the coming weeks. The cattle and beef complex’s history of late winter/early spring strength also argues against a sustained short-term cash market breakdown. And given the size of the discounts now built into nearby futures, continued futures losses also seem rather unlikely in such circumstances.
90-day outlook: Recent USDA reports indicate the feedlot supply of cattle will remain modestly below year-ago levels, although greatly elevated cattle weights are supplementing beef production somewhat. Moreover, the annual Cattle report implied the supply of calves and yearlings will continue dwindling on a cyclical basis, especially if/when ranchers get serious about expanding their herds, since that will require them to withhold numerous heifers scheduled to join the cow herd from feedlots. And while the fed cattle market traditionally tends to post a seasonal price peak in late March or April, it has shown a marked tendency to peak in late spring or early summer of the past few years. Much depends upon grocers and their willingness to continue featuring beef, particularly steaks, at favorable levels. Big price increases to consumers could seriously hamper the industry’s ability to sustain cattle prices at or near record highs.
What to do: Get current with feed coverage. Carry all production risk in the cash market for now.
Hedgers: Carry all production risk in the cash market for now.
Feed needs: You should have all soymeal needs covered in the cash market through the end of February. You are hand-to-mouth on corn-for-feed needs.