Thursday, July 11, 2013

Hog traders anticipate peak; cattle placements in play

By Rich Nelson

Hogs: We spent some time Wednesday getting a little more into this summer top timing question. As we and many other hog market analysts have discussed before, the last few years have seen a trend for the summer market. In the four years, from 2008 to 2011, the summer’s wholesale pork top ranged from July 21 to Aug. 27. Two of those years were due to extraordinary Chinese pork buying, and one was because our exports were finally recovering from our swine flu finding.

Peaks in July or August are not the norm though. In the five years before this period, from 2003 to 2007, the top ranged from May 16 to June 23. This leads to the question of whether late summer peaks are the new normal or simply an anomaly.

The answer we feel is clear. Last year returned to the traditional pattern with its June 25 peak, 12% drop until July 16, then a minor 6% rebound until Aug. 6. That Aug. 6 price was still a full $7 under the June peak.  This year the peak was made on June 26. If we follow the same pattern, we have a few days left until the minor rebound happens. For producers that have not followed our July 1 long-term hedge recommendation yet, all hogs through August 2014 are sold, then the first week of August may be the last chance.

One thing to point out is that so far the data do not support those May and June rumors of extra hog buying. The weekly U.S. pork export report shows China only accounts for 3.5% of our total muscle cut sales. Contrary to rumors, we cannot say 2013 is a big China pork buying year.

Getting back to the short-term picture, the pork industry will be watching this corn picture closely. Because the USDA is unlikely to make any significant changes on Thursday’s grain numbers, changes in weather will still a price driver for corn, and in a moderate way hogs. Aside from the potential small rebound to expect from mid-July to the start of August, stay bearish…Rich Nelson
Cattle: After we began on our long-term bullish stance in far deferred, live cattle futures last month, corn prices took a tumble. Even with recent concerns in the far Western states, covering about 20% of production, factored in it still looks as though a wall of corn will be brought in this fall. That has led many to wonder if cattle feeders will decide to react by placing a bunch more feeders right now. This is timely because July feeder placements are marketed between Dec. 1 and late March. It is also important because placements will now be compared against last year’s drought rally in grains.

Last year, July through October placements ran from 10% to 19% lower than last year. Anything we place in the coming months will appear big by comparison. Again, the numbers won’t be big by historical standards but will appear big when announced. The timing of when these apparent increases come is important.

The other thing to consider is that available feeder numbers are just plain tight. We estimate July 1 feeder supplies that are not already in feedlots are 1% smaller than last year. Also, let’s keep in mind the cattle feeders are not making money yet. For almost two years straight, they have been looking at losses. They may have the incentive to buy those animals due to implied feed costs but may not want to jump back in just yet. If our thoughts are proven wrong we will happily change our bullish February futures opinion….Rich Nelson

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