US - In recent weeks, the fundamental market contrasts between hog/ pork and cattle/beef market trends have been important, but last week became even more striking, write Steve Meyer and Len Steiner.
Directionally, hog and the pork cutout value remained on their seasonal upswing, right on schedule.
Fed cattle prices and beef cutout values declined counter seasonally. USDA’s preliminary Federally Inspected (FI) production for last week showed hog output at 457.0 million pounds (see the prices and production summary on page 2) was generally in-line with seasonal patterns.
Indications from the USDA-NASS Quarterly Hogs and Pigs report are that pork production was less than 1 per cent below a year ago and the smallest for any week since the week ending January 2, 2016.
FI beef production (485.8 million pounds) was up 6.3 per cent year-over-year and was the largest for any week since the week ending December 19, 2015.
Saturday slaughter level is often the swing factor when packers are adjusting output. As with other comparisons, Saturday hog slaughter last week was normal for this time of year and declining generally week-to-week.
In contrast, Saturday’s cattle slaughter last week was reported at 31,000 head the same as the prior week and the highest since early February (week ending February 2, 2015). Seasonally, Saturday cattle slaughter should be picking-up, but the increases have been earlier and larger than normal for this time of year.
Steer slaughter and total cattle slaughter levels in April were well above forecasts. The latest break-out of FI slaughter is for the week ending April 16th, when steer slaughter was 9.7 per cent over the same week in 2015.
For the last six weeks of data, steer slaughter was up dramatically, jumping 9.0 per cent year-over-year. Steer and heifer slaughter, which combined are often referred to as fed cattle slaughter, over that same six week timeframe was up 4.1 per cent year-over-year (note heifer slaughter was below 2015’s).
Fed cattle marketing rates have returned to normal levels compared to the depressed situation last year, which eventually was a driver of the 2015 price collapse.
Dressed steer and heifer weights seem to confirm that (dropping at a more seasonal pace recently). Additionally, it appears that some fed cattle have been pulled forward (marketed quicker than in recent months and quicker than last year), in part supported by dramatically discounted futures prices.
Additionally, on the cash side, cattle feeders can replace animals currently onfeed with feeder cattle that will have much lower breakeven sale prices. Packer margins have been highly positive setting the stage for them to pull animals into plants to the extent possible.
The Livestock Marketing Information Center estimated packer margins (difference between live steer cost and the value of meat and byproducts) in the last four weeks was fully 30 per cent above a year ago.
In the beef market, did the cart get ahead of the horse? That is did beef packers produce more than featuring gear-up and short -term needs of retailers and other buyers had in place? And as a result, did that contribute to pressure on fed cattle prices last week?
Based on wholesale price action and slaughter levels in recent weeks the answer could be yes. If that turns out to be true, then some price rebound would be expected. Still, the long-term trend is a beef market that faces more-and-more product after several years of tightening supplies.
To wrap up this article we return to the contrasting recent hog and live cattle markets, and turn our attention to the futures markets.
Hog futures prices gained on the week and Friday’s close on the June contract ($81.07 per cwt.) was the highest daily settle since late March. From a traditional textbook standpoint futures can be used to lock in a profit on slaughter hogs for every contract from June through October, based on the Iowa State University estimated total costs of a typical US farrow-to-finish operation.
The June Live Cattle contract averaged $116.58 per cwt (weekly average of the daily close prices), down for the week and collapsing $9.54 per cwt. over the last five weeks. On a continuous basis, the June Live Cattle contract for the week was the lowest since the week ending June 29, 2012.
As has been the case for many months, from a textbook hedging perspective, it remains difficult to get close to locking in a profit feeding cattle.
TheCattleSite News Desk