CME: Hogs & Pigs Report Still Being Dissected

US - Steve Meyer and Len Steiner provide more information on the impact of the government shutdown on livestock and meat information systems and markets.
calendar icon 3 October 2013
clock icon 6 minute read
  • CME Group announced this afternoon that both live and carcass grading will be available for all live cattle deliveries against the October Live Cattle contract. Until further notice, the most recently issued reports from USDA will be used for adjustment factors in computing final invoice amounts for all live and carcass deliveries against Live Cattle contracts. The first notice day for delivery of October Live Cattle is Monday, 7 October.

  • In a move that should surprise no one, CME Group today suspended the calculation and release of the CME Lean Hog Index and CME Feeder Cattle Index, a pretty much inevitable decision since the data needed to compute the indexes came direct from USDA’s Livestock Market News office which is closed as part of the government shutdown. The exchange stated that it would monitor the situation as it might relate to potential changes to its settlement procedures for the October Lean Hogs contract on 15 October and the October Feeder Cattle Contract on 31 October. The exchange did not speculate on what it might do if Market News data were still unavailable on those dates.

  • The critical day for the October Lean Hogs contract as it relates to Market News services is 16 October. The contract closes on 15 October, the tenth business day of October due to the observance of Columbus Day on 14 October. The final CME Lean Hog Index that will be used to settle the October contract will include the data for 15 October which is published the morning of 16 October and the data for October 16 which will by published the morning of 17 October. USDA has indicated USDA that any missing data will not be back-computed so we are presuming that if Market News is still dark on 16 October, the first day’s data for the needed CME Lean Hog Index value will not be available.

  • Smithfield/Farmland Fresh Meat Groups sent a letter to customers stating their intent to use Monday’s closing prices (the last ones published prior to the shutdown) to value pork sales for the remainder of this week. Should the furloughs stretch into next week, Smithfield/Farmland told customers that they would then negotiate base price to the best of their ability to determine “fair market values.” We suspect that a number of entities will use the “last available price” for both products and animals. The practice will not likely be far wrong for a while — as is indicated by Smithfield/ Farmland’s limiting the practice to this week.

  • A Reuters article published this morning outlined several other key information pieces that will be missing. Those include commitments of traders data normally published by the Commodity Futures Trading Commission. The Reuters report says that only 28 CFTC employees (out of a total of 680) will be on the job to provide “a bare minimum level of oversight and surveillance.” The Energy Information Agency, according to Reuters, has funds remaining from the past fiscal year to continue to publish oil and gas supplies and other information until about 11 October.

Maybe we should all dust off those technical analysis books on the shelves. Or perhaps toss those ancient ones and get some more modern editions. We may need some help if fundamental data are not available for an extended period of time.

Analysts are still dissecting Friday’s quarterly Hogs and Pigs report that provided some surprising data. We’re not going to rehash anything we have already covered but we think some retrospective and perspective may both be warranted.

First, USDA has a pretty good track record on these reports over the past few years. You might say “Well hitting a target that is hardly moving is not that hard to do!” And you would be right. But not all parts of the pork inventory and production picture have been standing still. The breeding herd and farrowings have been much more stable than in years past but litter size and thus pig crops and subsequent market inventories have varied significantly — and not always consistently. We would offer the fall of 2007 and spring of 2008 as evidence of that.

Second, we need to remember that USDA does not “sample” the largest hog producers in its survey. They make every attempt to conduct a census of the largest operations — ie. talk to every one of them — that account for the lion’s share of the nation’s hog supplies. Some of those companies, of course, have been the hardest hit by PEDv so it is almost unfathomable that USDA “missed” the PEDv losses. If one accepts that, then one of two conclusions must be drawn: a) the PEDv losses were not, as of 1 September, nearly as large as we thought or b) litter size grew at an extraordinary rate in order to overcome the PEDv losses and still show an almost 2% larger pig crop. Both of those seem unlikely but if some of each is actually true, then the USDA numbers appear may be reasonably accurate.

Finally, even those larger inventory numbers will not dampen profit outlooks much. Our model which is based on the Costs and Returns model used by ISU for several years puts costs at $78/cwt. carcass and 2014 profits at over $18 per head. We know that the industry has reduced costs relative to the ISU model over the past few years. Many farms are looking at $30-plus per head profits in ‘14. A few more pigs on 1 September may have taken a bit off that but the reduction will not be large. ’14 still looks like a good year!

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