CME: Volatility Remains in US Hog Markets

US - Volatility remains the name of the game in both the cattle and hog markets. USDA released on Friday the results of its monthly feedlot survey and we think the results will likely be viewed by futures participants as neutral to slightly bearish.
calendar icon 23 August 2016
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There was a lot of debate among analysts coming into the report as to the level of placements in July. What complicated matters a bit was the fact that there were two fewer marketing days in July compared to a year ago.

The USDA survey indicated that feedlots placed 1.6 per cent more cattle on feed in July than a year ago compared to analysts estimates for a 0.4 per cent decline. Our forecast was for a 3.5 per cent increase in placements.

Marketings in July were 0.7 per cent lower than a year ago, largely reflecting the impact of those two fewer marketing days. The survey result was exactly the same as what analysts were expecting and pretty close to our estimate for a 0.5 per cent decline.

Total supply of cattle on feed as of August 1 was estimated at 10.165 million head, 163k head (+1.6 per cent) higher than a year ago, 0.3 points higher than analysts were expecting.

Overall the difference between analysts and the survey results was not very significant but we think futures will view the report as neutral to slightly bearish given the larger than expected placements.

The latest report showed that the supply of cattle that have been on feed for more than 120 days currently stands at 3.5 million head. This is 5.2 per cent lower than a year ago but still quite a bit higher than the five year average.

Feedlots will need to stay aggressive in order to work down the supply of market ready cattle going into the fall. August has more marketing days and this should allow them to get more current. Based on our initial estimates of placements and marketings for August, we expect the supply of +120 day cattle to decline to 3.310 million head as of September 1.

This would be 8.2 per cent lower than last year but still higher than the 3 million head supply in 2014 and 2.8 million head inventory in 2013.

Feedlots continue to place cattle on feed at heavier weights which implies will remain relatively heavy as we go into the fall. But as feedlots continue to get more current, this should provide some price support for the market, especially as we go into the holiday period.

Hog slaughter numbers continue to move up and last week were pegged at 2.291 million head, 2.5 per cent larger than the previous week and 2.7 per cent higher than a year ago. The current number is a bit larger than what is implied by the June Hogs and Pigs report for this time of year.

However, since the beginning of June through current, hog slaughter is running about 1.1 per cent higher than last year. The forecasted slaughter based on the USDA June report for this time period was 1.2 per cent.

It seems to us that the survey results so far have been pretty good at telling us about the supply of hogs on the ground. What seems to have happened, however, is that big premiums build into the July and August back in the spring caused producers to slow down marketings in June and early July and slaughter during those weeks tracked under what was implied in the USDA report.

Since then, however, producers have picked up the pace of marketings and this is evidenced in hog weights, which have been tracking lower. The challenge for the pork market remains demand.

Data from University of Missouri shows weaker retail pork demand in May and June.

Also the sharp break in the price of pork bellies is further evidence of disappointing demand in July.

Export sales also have not been as strong as expected, in part because Chinese buyers have for the most part continued to source out of the EU rather than the US. But in the last two months the gap between US and EU prices has started to widen and maybe that will help underpin US shipments to that market into the fall.

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