China’s falling hog prices bring down imports.

Livestock

Concerns over both beef demand and offered fed cattle supplies for the months ahead remain clear issues. Though the trade does not expect a V type bottom for these markets, we are stabilizing.

Wholesale beef was up on today’s morning report, +2.28 for choice. But that does little to calm our concerns. The wholesale side through Friday has lost -49.22 in value from June highs. Texas based cash cattle prices have fallen only -6.64 from June highs through last week.

Cash cattle last week was $178 in the South. The North traded live at $178 and dressed at $281. Futures, with a normal basis applied, are still suggesting lower cash cattle trade. December futures imply $175 next month for cash, February $175 and April $177/$178.

Cattle on Feed Friday was “not as bad as expected”. Placements during October, inflows into feedlots, were counted at +3.8% from last year. This was under the trade estimates of +6.1% (Urner Barry) and +4.9% (Reuters). Allendale suggested +2.7%. Bears are correct in noting this really does not change the story though. The past six months averaged +0.7% from one year ago. The next two quarters ahead will not have the tight supply situation previously thought. It won’t be until the second half of next year that this long period ahead of supply tightness resumes. The bull argument is heavy fall placements on a smaller offered calf crop will restrict remaining placements in later months.

Retail beef prices in October were stronger than expected, +10.0% from last year. This October price is +39% from October 2019, four years ago. The farmer share of that retail dollar, now 49.4% in October, is the best in eight years.

The live cattle futures chart is bearish. New lows for this two month downtrend were made recently. Current prices are not much off those lows. Bears are still in control. We will note a clear chart target for bulls if this downtrend stabilizes. An open gap remains 183.27 – 183.52 on the daily chart, 183.87 on the intraday.

This recent break in cash feeders and futures is reasonable for this time of year. Though the seasonal was delayed for six weeks it is back on. Futures typically peak in early August and decline until December 9. Futures bottom before cash in most years. Given the severity of this downtrend, and new beliefs regarding interest rate policy, we would not be surprised for an earlier than normal low.

The feeder cattle chart still remains in a downtrend. New lows were made recently. There are still chart points for bears to note. There is an intraday gap from the 4/5 close at 223.32 left to fill. There are other gaps down to 218 along the way from back in March. But IF this market can stabilize there is a good upside target. On the daily chart an open gap is noted 242.37 – 242.65, 243.05 on the intraday.

Summary: We do agree with a portion of the break in live cattle futures. We certainly agree with most of the feeder cattle price decline. In the big picture we still suggest feeders are likely undervalued compared with where they will likely be over the next 10 months. This wholesale beef trade will keep the bull side sidelined for now…Rich Nelson

Trade Recommendation:

(11/20) Sell January feeder 216 put market, risk 3.20, objective 0.

Hogs

Hogs remain in a three week sideways trade. Futures imply just a little downside left for cash markets before a seasonal low can be called.

China’s Ministry of Agriculture and Rural Affairs reports the nation’s end of October sow herd at 42.1 million head. Though posting herd declines for 10 months their government reports it is still too large.

China’s General Administration of Customs reported October’s pork imports from all countries at 90,000 metric tonnes. This was -41% from last year. It is the lowest import since February 2019. It helps bring their January – October total to 1.37 million tonnes, -0.8% from last year.

USDA revised last week’s estimated hog kill down by 5,000 head. Now at 2.644 million head it lightly lowers the increase vs. last year down from +2.0% to +1.8%. The prior six weeks were +2.1%.

Cash hogs Friday were -0.47. The prior two days were also in this range at -0.58 and -0.59. The Lean Hog Index falls to 74.52. CME Group December lean hog futures, which are trying to price the LHI as of December 14, imply just a little further cash hog declines. The year’s cash hog low, based on peak seasonal supply offerings, is generally mid-November through December.

Cash pork was +2.24 on Friday afternoon. The week as a whole was -1.26. We’ll still call this bullish. Prices have not made a new low for this downtrend since 10/26. We fully expect new lows, as it normal seasonally still ahead, but this lack of clear selling is lightly positive in this seasonally bearish time frame.

Retail pork price data for October was positive. It is not beef demand great but is less bad than it was. Retail prices April – July were -3.2% to -5.0% from one year ago as the industry grappled with Prop 12 uncertainty. This October price, $5.043 per lb. was only -0.1% from one year ago. It is also the best price of the year and since exactly 12 months ago. US retail pork prices were in a light slump most of the year. We are on the tail end of that slump.

February is now the dominant lean hog futures contract.

Hog futures are sideways. This market has failed to hold both upside tests past 50% retracement and downside tests. We will note there are still open gaps at higher prices. Intraday gaps at 77.02, 78.60 and 80.90 remain. Let’s monitor for one more downside test then see if these three upside targets can get filled. We’re also monitoring for a potential down move here that could form the right shoulder of a general long term Head & Shoulders bottom. A sharp break to around 73.00 then rebound would be what we are looking for.

Summary: The hog market is following our general plan. Our view of economic value for December holds at $72. February is now the dominant contract and it has a 50% retracement mark at 75.25. We would buy given a good break to $72 or sell $79 on up. Between the two choices we would rather buy lower trade than attempt to sell a rally. The open upside chart gaps are a possibility…Rich Nelson

Trade Recommendation:

(11/15) Sell February 66 hog put 1.90, risk 3.80, objective 0.

Working Trade:

(10/24) Sold December 62 hog put 0.80, risk 1.00, objective 0. Closed 0.02.

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