CME: Hog and Pork Supplies Plentiful

US - CME analysts Steve Meyer and Len Steiner provide a few thoughts on cattle and hog markets as participants return to normal trading following two weeks of holiday disruptions.
calendar icon 5 January 2016
clock icon 4 minute read

Cattle: It will be interesting to see how the fed and feeder cattle futures open following the dramatic rally in cash prices at the end of the year.

USDA quoted the cash FOB steer price on December 31 at $134/cwt, about $10/cwt higher than the previous week and as much as $18/cwt higher than prices quoted in mid December.

It would seem that packers were caught a bit short at the end of the year and had to come in and cover their needs at much higher prices but there is plenty of uncertainty as to whether the current trend will be sustained in the new year.

It would seem that higher futures prices, winter weather and the recovery in boxed beef values have offered feedlots a bit more breathing room in their negotiations.

This could limit the number of cattle offered and help support cash cattle prices in the very near term.

Packers also will be intent on returning slaughter to a more normal flow, again further offering support to fed cattle cash prices.

It is a familiar position for feedlots who saw very strong pricing for fed cattle in 2014 and 2015. The difference this year, however, is that they are starting the year with more market ready cattle on feed than in the last two years.

The supply of cattle that had been on feed for more than 120 days as of December 1 was about 3.34 million head, about 15 per cent more than the previous year and an even larger supply than in December 2013 or December 2012.

Steer weights are down from the all time record highs in September and October but they remain quite heavy by historical standards.

Winter weather will help feedlots keep weights under control but they also need to stay aggressive in order to stay current.

The key for feedlots is to position themselves to have a much better negotiating position come March and April, when beef demand seasonally improves.

If they hold out and limit marketings in January and February, they may win a few small battles this winter but risk limiting the upside for prices come spring and early summer (when marketings are traditionally larger).

With short slaughter and limited supply available, end users paid up for beef at the end of the year, the boxed beef cutout was quoted last Thursday at $212.59/cwt, about $16/cwt higher than what it was in mid December.

The value of fat beef trim will be a key indicator for ground beef sales going into January.

It is possible that retailers planned big ground beef promotions for January and that will help clean up some of the backlog of fat trimmings created in Q4. If fat trim values slump, however, it may not bode well for the beef cutout for the remainder of winter.

Hogs: Hog and pork supplies are plentiful and this can be seen in the pricing of cash hogs (high 40s) and cash pork prices (cutout was down last week).

It is not unusual for ham prices to be weak following the holidays but the value of loins and bellies also has been negatively impacted by the relatively large slaughter.

For the moment market participants will pay close attention to slaughter rates and the potential impact on near term pork prices.

News of a sharp decline in equitities in China may be viewed as negative for US pork exports, especially as it concerns not just China pork demand but also global growth prospects and the value of the US dollar.

Export demand remains a critical factor for pork prices in 2016 given expectations of expanding supplies of all three species.

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