Friday, July 5, 2013

Hogs react to PED rumors, while cattle looks for a bottom

By Rich Nelson

Hogs: There are rumors in the pork industry that PED has been found in North Carolina. As you know, North Carolina is the No. 2 hog state in the nation, after Iowa, and holds 13.8% of the U.S. inventory.

At this time, these rumors have not been confirmed. If true, this should not be a surprise. If PED follows other problems from the past, you should expect it to spread for another two or three months. So far, we cannot pinpoint any actual effect from PED on a nationwide slaughter number. There are simply too few findings compared with the almost 70,000 hog operations in the United States. Also, keep in mind PED is generally a piglet issue that should affect pigs weaned per litter numbers.

Before we can start talking about an actual net decline in nationwide PPL numbers you first must consider the March/May PPL was a large 2.2% increase over 2012. For now, you are only talking about taking down the growth in PPL before even considering a net decline. Keep in mind while we all know of someone with PED, or at least a friend of friend, your hog price is made from nationwide numbers. This is just like the mistake grain producers make with backyard marketing (making marketing decisions based on conditions in their particular area). So far on a nationwide basis, you are only talking about narrowing the growth that is happening in pork production.

Given the dramatic drop in feed costs already seen, and much more remaining into 2014, our only question is about how much to increase pork production estimates for next year. The discussion here is not marginalize the terrible problem shown on individual operations from PED. We need to look at this from a clear and realistic perspective, though.

Our official price viewpoint is that July and August are about priced right, October and December are only slightly overvalued, and that 2014 contracts may see moderate price declines. We are 100% hedged on all hogs to be marketed through August 2014…Rich Nelson

Cattle: Trading was seen in Kansas on Wednesday at $119. That was $1 lower than last week’s trade. That had little effect on the trade. Allendale looks for the cash cattle trade to post its summer low, which will be the low for the year, at any point in the next three weeks.

While the trade was lower we must also point out boxed beef is up 58 cents for choice and 1.48 for select so far this week through the midday report. For short term pricing many would question how $122 August futures reconcile with today’s $119 cash. Keep in mind in July basis can range from -$1 to -$2.90 depending on the week in July. August already has this priced in. In the later part of August, normal basis levels imply a $120 to $121 trade. We feel August is correctly priced. October futures, with normal basis applied, are pricing in cash at $123 at the end of the month. That is not much of a premium over the end of August cash.

Keep in mind the latest COF reports indicate a few extra cattle showing up at that time than normal. It will be Q4 (Nov and Dec) and Q1 where we can get excited. Not only do those periods have tight supplies and high prices to begin with, but it will be even tighter than normal. USDA’s Q1 estimate is for beef production is -6.1% from 2012. Cash cattle ended in February at $128.

On top of all this February 2013 discussion, it must be reported we had lower consumer demand due to sequester issues earlier this year. We do not find it too hard to suggest lower production in 2014, and slightly higher consumer demand, will push prices to $134 to $136…Rich Nelson

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