MORNING LIVESTOCK REPORT Tuesday December 27, 2011
LEAN HOGS
For the first time in several weeks the cash hog market was reported slightly higher on the early interior report. Lean hog futures started the session slightly higher and rallied during the course of the pit session. By the time the pit closing bell rang the market posted an impressive rally for the second consecutive session. Friday's hog slaughter came in at 423,000 with the Sat kill pegged at 26,000. The weekly kill was reported at 2.155 million hogs. The closing pork report showed the cutout down .32 at 85.85. Hams and loins were quoted steady with bellies not tested. A soft tone in the loin caused the slightly lower carcass value on Friday.
What to Expect?
The hog & pig report did not show industry wide expansion like many in the trade were expecting. The numbers were: all hogs & pigs at 102%, kept for breeding at 100% and kept for market hogs at 102%. The fall pig crop was confirmed at 102%. The Dec/Feb farrowing intentions were pegged at 101% with the March/May estimated at 99%. A closer look at the breeding state by state numbers shows a very stable hog industry. After contracting 10% of their breeding herd over the last couple of years, Smithfield has slowly started repopulating some barns. The NC breeding number was reported at 101%. North Carolina, however, is no longer the largest hog state. Iowa is and breeding numbers in IA were down 1%. Cargill repopulated a facility in TX which they purchased from Premium Standard Farms. TX breeding numbers reflected this, up 50%. IN and NE breeding stock was up 3% with the rest of the major hog states unchanged. Of the 16 major hog producing states one contracted, four expanded and 11 held unchanged. The stability in breeding numbers seems to underscore what I've been hearing; that lenders are not going to finance expansion in hog operations due to high volatility in corn prices and due to generally high costs of production. The industry needs to see a longer period of very profitable returns and needs to see more stability in feed costs and a generally lower feed cost structure to generate large scale expansion. In the meantime, three factors are at work that will likely continue to drive hog prices higher. First, pork export demand should remain strong. Second, the U.S. economy appears to be gaining real traction. And third, total meat production will continue to fall. Both beef and poultry production are projected to decline substantially during 2012. Thursday's monthly cold storage report showed the smallest total meat stocks since November of 2003. I'm expecting a rally, possibly a substantial rally in hog prices in the weeks ahead. Regarding hedges, we're holding put spreads in the Feb and Apr options after having covered the short call potion of these option window strategies. There's a seasonal tendency (5-year seasonal) for the summer hogs to rally into the middle of February. If this occurs we'll hedge production for the second half of 2012 rather aggressively. With my spec crowd we're holding bull call spreads (90/96) in the April options which are profitable and we're holding the Apr/Feb bear spread which is also profitable. My aggressive spec traders will be looking to buy any weakness in the April and June hogs.
LIVE CATTLE
Live cattle futures absorbed some selling early in the pit session which was thought to be profit taking from the impressive gains posted this week. However, about half-way through the session prices began working back higher with futures closing higher with settlements close to the session highs. Technically the action was bullish this week with the charts totally changing their stripes from bearish to bullish. Friday's kill was reported at 128,000 with the Sat effort projected at 9,000. The weekly kill came in at 598,000.
What to expect?
With cattle beat-up by a major winter storm in the S. Plains on Monday and Tuesday, the beef packer moved up north to purchase inventory. It appears they found themselves short bought. Over 40,000 head traded yesterday in NE at sharply higher prices compared to the previous week. The USDA confirmed active cash trade in NE and CO at $1.25-1.26 ½ with tops as high at $1.30 for live cattle. The hot beef trade occurred from $200 to as high as $204 with the bulk of trade at $202. This is up $8.00 from last week. Average dressed cattle weights are declining as feedlots are very current. In addition, the severity of the snow storm will keep weights headed lower in the near term. While cattle numbers are thought to be plentiful for Jan and Feb, the trade is also beginning to realize that plentiful supplies of finished cattle simply won't last long. Exports remain robust, the U.S. economy is showing steady signs of improvement and I'm hearing that beef is trading at higher money for delivery after Jan 1st. While the charts are now bullish, it's difficult to know if prices will break out to the upside or if the huge range of trade remains intact. I've been guilty of not trading the ranges. For next week, recommend liquidating speculative length in the 12550-12590 range basis the Feb and 12840-12880 basis the April. Because the placements have not actually started dropping yet, I'm fairly certain that if filled we'll get some kind of break to buy, eventually. Given a push toward the highs and we'll get real aggressive at hedging against springtime production, using April options. Feeder cattle futures are poised to rally sharply after the first of the year.
This copy of my livestock wire is prepared each day for my clients. If you would like a free 30-day trail please send me an email or give me a call at dennis.smith@archerfinancials.com or 1.877.377.7905.
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