Cash hogs post one higher day

Livestock

Lightly higher trade was seen with a slightly positive GDP report.

The Bureau of Economic Analyst released its second estimate of Q3 GDP. The original +4.9% year/year growth estimate was revised to +5.2%. The trade was expecting a slight gain to +5.0%. This does not really fix the trade's main concern, here for Q4, but it is lightly supportive psychologically.

On Tuesday Deutsche Bank called for a recession in the first half of 2024. They look for a rise in unemployment from the current 3.9% level to 4.6%.

Retail beef prices in the US advanced 39% from October 2019 to October 2022. A discussion about a consumer pushback is valid. How much there is, after such outright and extreme demand increases, is a question.

The supply story has also been blunted for the time being. USDA has corrected its prior sharp beef production decline estimates in recent months. They now have Q1 at -3.2% and Q2 at -2.5%. In our view, those numbers are still likely a little low. But the 2023 - 2026 beef supply story is not in any way dented. The second half of next year will go right back to the bull argument. USDA has -3.9% for Q3 then a severe -7.1% set for Q4. We would suggest that Q3 number may be a little too large. The bear argument in front of us only lasts for the period directly ahead then disappears.

Last week's cash trade was $177 in the South and $176 in the North on a live basis. Dressed sales of $278/$279 were noted. Bids today in Nebraska were at $175.

February Live Cattle Seasonal: We monitor seasonal price trends but are not tied to them. The seasonal for fed cattle futures is a general long term rally to November 26 then a quick and very sharp price break to December 9. After that significant low there is a generally rally into expiration. We will point out this year the peak was a bit early on September 19. If the seasonal would hold true then a major low would be in two weeks. Given the extreme severity of the decline already seen we hesitate to suggest seasonals will be on target this year.

February fats still have a minor intraday gap to the 12/27 close of 168.82. We're essentially trying to walk out of the store but forget to pay the bill. Bears also have a clear argument here. The two month downtrend is firmly in place and won't be tested on the chart until way up at 179.75. Bulls have plenty to discuss for upside IF a low can be posted. You've got a minor upside intraday gap from the 11/22 close at 175.27. Two daily chart gaps are way up there at 184.70 - 184.90 then 186.65 - 187.52. Higher than that are two intraday gaps, the 10/18 close of 191.07 and the 10/2 close of 193.17.

March Feeder Cattle Seasonal: We monitor seasonal price trends but are not tied to them. The 15 year seasonal average price trend for feeder futures is for a significant peak for the year on August 1 then a good moderate low on December 9. After that low we get about 50% of the big downtrend back with a rally to January 1. Then the bear move restarts and lasts into Q1. We did not mention in yesterday's comment on the seasonal that the May and August contracts are different. They hit that same December 9 low as January and March. The May rallies up to remove the entire downtrend and posts new highs to a peak on 2/19. Then it posts a clear downtrend to new lows into expiration. The August is really different. It posts a MAJOR low on 12/9, rallies to new contract highs to a peak on 2/19. Though it does see weakness into the month of May it does not make a new contract low. From May to August is posts a second strong rally until the year's seasonal peak for the year in the month of August. IF/WHEN we do hit a low in the coming days/weeks you want to be onboard the May or August contracts.

The feeder cattle chart still remains in a significant downtrend for two months. Resistance is at 229.60. While we would like to call today's trade a major low we don't like how an intraday gap was left to yesterday's 212.80 close. There may be unfinished business there. Also, an $8 rally really does not really change much after our -$18 drop since 11/20. Bulls would like to have a discussion about upside gaps on the chart. The daily shows one at 242.37 - 242.65. Intraday charts show unfilled closes from 10/18 at 250.90 and contract high's 9/15 close at 268.32.

Summary: Calling a bottom in a severe downtrend is often an exercise of futility. There are plenty of fundamental news stories that could validate even lower prices ahead. But let's give the bull argument a discussion here and not get locked into one-sided thinking. Gaps are waiting all over at higher prices on the chart. At some point in the months ahead the supply story is still waiting. The seasonal price action story is really interesting here. We've left yesterday's seasonal price move chart up for another day. Please look at it closely. The severe decline we are in right now fits in relatively well with normal price action at this time of year. It is normal for February live cattle futures to completely wipe out all of the rally going back to the prior May in a very short period of time from 11/26 - 12/9. It is completely normal. This year's clean-out was even more severe with yesterday's price action the lowest price since March. Now, look at the seasonal rally from 12/9 to 12/28 on that chart. In most years we completely erase the entire bear price move, and make new contract highs, over just three weeks. Between fats and feeders we still adamantly suggest the greatest upside in the 2023 - 2026 story remains with the market closest to the supply decline story. That means #1 calves and #2 feeders. And that was the story with the rally in place for most of this year. Monday's sale barn trade in Oklahoma City had calves +46% from last year and feeders +27%. Cash cattle last week was only +14%. We will fully point out that seasonally, fed cattle futures do recover much better than feeders at this time of year. That chart still leaves bears a little more room for downside into Q1. As discussed before, it is the random extreme moves that clean out accounts. Please have a risk in place for all speculative trades...Rich Nelson

Trade Recommendation:

(11/27) Stand aside.

Hogs

Hog futures posted a second positive close. Prices are now nearing the upside gap left three days ago. It is also nearing the 50% retracement point of this general 11/17 to 11/28 price break, 71.80. The market continues to debate a seasonal winter low.

USDA will extend its special program that allows six hog plants to run at accelerated speeds. The extension will add another 90 days for this trial program. This program started last year.

The slight change to cash hog expectations, positive, continues. Tuesday's cash trade was +0.38. That was the first higher trade in 10 sessions. December futures expire in 12 business days, 12/14. Today's 68.97 settlement is only -2.56 from the index. The market is now implying daily losses ahead of only -0.21. We're not going to go from sharp daily losses to sudden big daily gains. This is a good first step. At a minimum we can say the worst is behind us.

February futures remain under last year's artificially low February pricing, -7%. It is also -24% from the last normal year of pricing, 2022. Even after recognizing some consumer pushback this discount is a little much.

February Lean Hog Seasonal: We monitor seasonal price trends but are not tied to them. The seasonal for hog futures, not cash hogs, is for a rally from November 6 to November 25 then sharp break into December 17. That becomes the final major low. After a minor rally to January 5 then minor break to January 11 this contract then rallies into expiration. If you are looking at this year's price action our moderate October 25 to November 7 rally would be the first step. We would therefore be on the second step to major lows right now if this seasonal holds.

On the chart lean hog futures remain in a sharp downtrend. Two higher closes from new lows have been noted. The daily chart has a gap from last week, 71.40 - 71.57. Then you've got the multiple upside gaps on the intraday chart. They are at the closes of 75.05 from 11/20, 78.60 from 9/28 and 80.90 from 9/20.

Summary: Calling a low in a runaway bear market is a very touchy issue. We don't have positive news right now. The only bull argument is that perhaps futures have declined enough. This is the sloppy time of year for hog pricing. The seasonal would suggest still lower futures ahead an we really have not solved any of the fundamental bearish news items. We still estimate a $72 expiration for the December but that is not a high confidence claim. Please use a risk order in place if you are trading this market...Rich Nelson

Trade Recommendation:

(11/29) Sell February 66 hog put market, risk 3.80, objective 0.

Working Trade:

(11/15) Sold February 66 hog put 1.90, risk 3.80, objective 0. Closed 1.87.

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