Thursday, September 5, 2013

Hog, cattle markets need context to judge supply numbers

By Rich Nelson

Hogs: Another day of lower-than-last-year kills makes it appear as though we have a surprising shortfall in market-ready numbers. Tuesday’s kill was 12,000 head lower than last year. Today’s run was 4,000 head smaller.

Though this sounds exciting, we have to keep in mind last year at this time producers were scrambling to move anything near market ready. Between mid August and mid September in 2012 you were looking at slaughter levels from 3% to 7% over 2011. As you may remember, with this incredible effort to move those animals at any cost, cash hog prices were sharply lower. The lean hog index on Sept. 4 was 77.29!

In the big picture, it must be pointed out these are some pretty stout supplies. Last week’s pork production was actually 5% over two years ago. We need a proper context for this bounce seen in cash and futures right now. There is nothing wrong with cash and futures posting higher trade in the “right now” time frame. Buying for next month’s features typically gives the trade something to talk about right now. The problem comes if you expect this market to last.

The lean hog index is about $92. October futures are at $89. By the time futures expire, on Oct. 14, you are looking at a very different (lower priced) environment here. However, after mid-September, you have trouble making a bullish argument. This market could certainly push past our stop level for the speculative trade, but we can’t suggest this is a new paradigm in pricing.

Cattle: There’s been a few more questions from research subscribers about how long this “slump” in futures can last. We had a good rally off those June lows, a moderate slump, then a quick rally into mid-August.

In addition to full fundamental analysis and technical factors (trends, chart formations, etc.), we also monitor simple behavior. Today makes it 19 days off the Aug. 16 high for October fat futures. The July to August slump lasted 24 days. For price action this makes it a 2.7% correction off the August highs. The July to early August slump was only 2.2%.

A quick and dirty look at market behavior would suggest this slump has about run its course. This also coincides with the market hitting the uptrend line on the charts drawn from the June to early August lows. Both of these issues would suggest it is getting time to buy this market.

This conflicts with our fundamental analysis, though. Even with October now at $126, we just are not too excited. With the normal basis at the end of October at +$1.00, this market is pricing in $127 cash. Yes, cash will continue its general rally from summer lows to winter highs. But a $4 rally over the next two months sounds about right, not too low. For the short-term cash market, some are also noting packers may be offered a few extra of the Zilmax cattle before Tyson stops buying those numbers this week. We can make many sound arguments for the winter contracts, but just are not too excited here over the short-term market.

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