Livestock

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Position

Working Speculative Trade: (7/17) Sold 1 October $188 call 2.75, risk 5.25, objective 0. Closed 2.22.

Hedges: (4/12) 50% of production via futures (Jun 105.12, Jul 107.24, Aug 104.60, Oct 87.80 and Dec 78.30). Working Speculative Trade: (7/3) Sold 1 October 71 put 2.92 and sold 1 October 79 put 2.32 for 5.25 total, risk 9.00, objective 0. Closed 3.82 (2.07/1.75).

Cattle:

Cattle on Feed was supportive. It suggested June placements, part of the Dec - Mar fed cattle supply, will help restart the general 2023 - 2026 beef supply decline story. After a higher open Monday, the market will have to reconcile sharply falling choice beef and an open downside gap.

Cattle on Feed would be called bullish. June placements, feeders and calves entering feedlots, were counted at 1.564 million head. That was a full -6.8% from last year. The trade estimate was -2.8% (ALDL -3.7%). This 1.564 million head inflow would be the smallest in eight years. Six of the past eight months would have lower placements. This eight month period has run -3.2% June placements determine a portion of December - March fed cattle slaughter.

June marketings, fed cattle leaving feedlots for the slaughter plant, were counted -8.7% from last year. The trade estimate was -9.3% (ALDL -7.8%). As we have been very clear, a full 8% of this was due to the June calendar, 2024 vs. 2023. The July calendar, what will be shown on the August COF report, almost exactly reverses this. It will show an unnaturally large looking marketing. Cattle on Feed therefore rises from -0.1% year/year on June 1 to now +0.5% as of July 1. The trade estimate was +1.1% (ALDL +1.1%). After the August COF report, which will show an oddly large looking marketing, the August 1 On Feed number will correctly slip back to below last year.

Every three months USDA includes a breakdown of steers and heifers in the feedlot. The trade uses this to gauge whether heifers are being held back or being sent to the feedlot. The July 1, 2024 heifer count was 39.6% of the feedlot. That is slightly under last year's 39.8%. As a reminder, when cow/calf producers were in full expansion mode after the 2013 - 2015 rally the 2015 count was 32.5%. Though cow slaughter has certainly set back this year the other side of the equation, heifer retention, is not showing expansion. Cow/calf producers are still in liquidation, albeit a milder one than 2023 or 2022.

Wholesale beef was hit this week. Including today's morning trade of -2.02 choice ended the week -7.93. Over 10 days, a full 16.34 of the prior 44 day rally totaling 37.53 has been removed. That's 43% of the rally! Considering that fact, cash cattle and fed cattle futures are currently doing great.

Cash cattle traded in the South at $187/$188 this week. This is down from $188/$189 the prior week. The North traded at $310 - $314 dressed. Last week saw $312. Futures are currently pricing in the belief cash will fall to $183 early-fall.

The overnight IT problems hit the cattle processing sector a little harder than expected. Friday's run was dropped to 103,000 head. Saturday was seen at only 6,000. This helped bring USDA's weekly estimate to 584,000 head, -6.7% year/year. The prior six weeks were -4.0%.

Finished cattle weights were adding +4.0% to beef production five weeks ago. That overage is now +3.0%.

Weekly beef export sales came to 15,401 tonnes last week. This was -26% vs. last year. Year to date sales are -6% vs. last year. Sales are just over USDA's current goal of -7%.

USDA has Q3 beef production +0.3% and Q4 at -1.8%. 2025 is seen -4.5% from 2024 at 25.465 billion lbs.

A two week period of consolidation has been noted for August fed cattle futures. This market is still avoiding that big daily chart gap just under our feet, 179.67 - 180.35. That may be a realistic target. The other three are intraday gaps are at the 5/13 close 173.40, 5/1 close 171.10 and the 4/12 close 168.75.

August feeders fell enough to fill intraday gap from the 7/10 close, 254.35. though the market lightly rebounded from that gap fill we're are not ready to call it a big rejection. Today's trade is under the prior three month uptrend line. Next area for chart support is the 6/6 low of 250.80. We hesitate to suggest the last gap below that, the 4/12 close of 245.50, is a realistic target…Rich Nelson

Hogs: 

Cash pork, not really cash hogs, have shown a bit of resilience recently. We remain a little skeptical of this given no real lasting interest from China yet.

After three months of clear disappointment it seems odd to report positive cash pork news. As you know, cash pork peaked in April. That is long before the traditional peak in July. From that April peak the market dropped -9.97. Over a period of 10 recent days it has regained 6.62 of that loss. Today's morning report was +2.49. We'll see if that stays on the afternoon update.

Cash hogs were -0.04 on Thursday. The day before was oddly strong at +0.92. The Lean Hog Index is 89.71.

On Thursday China's General Administration of Customs reported June pork imports from all countries at 90,000 tonnes. This was -34% from one year ago. January - June imports run -45% from last year. We suggest there may not be any real turn to the US pork market from their spat with the EU.

After the EU's tariff increase for Chinese electric vehicles they announced an anti-dumping probe into EU pork. That is continuing. Today the Ministry of Commerce announced they would not analyze all imports. Instead, they'll look at the top three EU exporters and 24 Chinese importers.

Brazil's ABPA meat industry organization reported one poultry sample from Rio Grande do Sul tested positive for Newcastle Disease. This was from a farm where 5,000 - 8,000 birds had died. Authorities have not found any spreading to nearby farms yet. At this time there are no bans on Brazil poultry exports. The market did not see this news as market moving for US pork.

China's long period of breeding herd liquidation is now showing up in pork production. The National Bureau of Statistics reports Q2 production of 13.98 million tonnes, -3% from the prior year. Q1 was -0.4%.

Last week USDA did not lower their 2024 pork production estimate from June. They added to it. They now see Q3 at +5% year/year and Q4 at +5%. Those are not the numbers implied from the June Hogs & Pigs report.

Last week Maple Leaf Foods, the Canadian packer, announced it would spin-off its pork processing business. Press releases carried corporate slogans such as “unlocking significant growth potential”. Most of us would suggest that means they are concerned about low processing margins in the future. It could also warn the trade of the possibility of further contraction in the Canadian pork processing sector. In other words, a few more hogs may be crossing the border. Canada sends us about 7 million head annually. Total US hog kill, both US and Canadian born hogs, is 128. Allendale does not expect any Canadian plant closures from this move. It is mostly psychological.

We have been asked whether we are interested in removing hedges that were started in April, not at this time.

October is taking over as the dominant contract this week. Open interest has rolled over. Volume is in the process of rolling from the August.

Chart action for August futures is interesting. It rallied this week enough to fill an upside gap and also test resistance, the 6/18 high of 92.42. This area is important as it is the highest trade of all of June and so far in July. But this market is not retreating. We can't call this a clear rejection of higher trade. Bears note there are two downside gaps recently left on the chart. The first is the unfilled 7/15 close of 88.42 while the second is the 7/11 close of 86.67. Just from a chart perspective, no fundamentals discussed one good price break to fill those downside gaps would give this market the appearance of a possible Head & Shoulders bottom…Rich Nelson

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