Boxed beef gains for two days. Retail beef and pork prices slip only minimally in November

Livestock

Both fed and feeder cattle futures have now made it three days since new downtrend lows. Wholesale beef was strong for a second day. Retail beef prices in November were not as feared. Lastly, the stock market made new highs. The cattle trade is wondering if this major low, December 9 using 15 years of data, will hold true.

During the months of October and November there was a growing discussion about a potential economic slowdown that was starting in Q4 and which could turn into a recession in first half 2024. Some of those concerns have lightly eased recently. Today's Consumer Price Index data also held retail pricing for meats.

Retail choice beef prices peaked in July for this long uptrend at $8.308 per lb. That was +9.0% vs. last year and a full +35.2% over a four year period. Prices were down to $8.166 in October. Some of this is seasonal price pressure from summer to winter. We can't call that October data bad news though. It was +10.0% over last year and +38.6% over four years. Today's release showed retail prices in November slipped further, now $8.039 per lb. This is +9.2% from last year and +32.5% over four years. We did see a very very light consumer pushback when looking only at the four year comparison but it was nothing like what was feared.

February Live Cattle Decline Study: This current sharp decline in live cattle futures, from the 9/19 major high to the recent 12/7 low, was made with five separate stair-step declines. The first four averaged -5.9% each time. Our most recent break from 11/29 to 12/7 was -6.6%. In each of these prior four declines there was mild half-hearted rebound. The rebounds lasted only 2 to 10 days. The average of these half-hearted rallies was +3.1%. Off this recent 12/7 low of 162.40 that would imply up to 167.38. The max of these prior four rebounds was +4.0%. Applied to our recent low it would suggest 168.82. So, these two numbers are our measure of whether this current rebound is nothing unusual or something different. Today's close was 168.60 on the February. This rebound is just about ready to suggest it is something different.

Wholesale beef prices fell from June highs down to Friday to the tune of -55.08/cwt. But Monday was +2.42 and today's morning report was +2.68. Last week's boxed beef trade is normally a bad one as procurement is filling the period directly after the holidays, a bill paying time. But this week, and through all of December, is typically a period of strong price rebounds. We're filling the second week of January and beyond period, a slightly better demand period. For a market that has been trying to find any type of positive news, these two days of positive boxed beef trade is good.

If boxed beef prices may have finally posted their major seasonal low on Friday, and have rebounded since, does that mean the market needs to adjust its bearish view of cash cattle prices? The South traded live based cash cattle at $185 in the first week of November. It was down to $170/$171 last week. As of yesterday's settlements futures were implying the South would fall further to $166/$167 later this month and stay down there through all of Q1. If boxed beef actually has bottomed, do we need these implied lower cash cattle prices?

As you should be able to decipher, the theme of tonight's commentary is “…scratching for anything to justify this cattle market has made its seasonal low”. I'll be honest here. But we can also throw in stock market trade into the mix while we are at it. The nearby S&P 500 futures contract chart shows a 4,364.50 price peak on July 27 of this year. It fell down to 4,122.25 on October 27. With a changed view on interest rate policy since that low today's trad has rallied enough to take out those prior July highs. Given that there has been a moderately okay relationship between the stock market and cattle since 2020, correlation 0.64 and r2 of 0.41, you could also suggest this is a light passively positive influence.

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 general 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 directly behind us. The current low was made December 7. Given the extreme severity of the decline already seen we hesitate to suggest seasonals will be on target this year.

February fats officially remain in a downtrend from a chart perspective. We also don't like the fact this current rebound has left an unfilled intraday gap to the 12/7 close of 162.52. There is something lightly positive on the chart though. The near term downtrend line was lightly broken with today's close. 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 175.2, two daily chart gaps way up there at 184.70 - 184.90 then 186.65 - 187.52 and two intraday gaps at even higher prices. They are at 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. 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. As it stands right now the January's current low on December 4 and the March's current December 7 low fit the correct timeframe.

The feeder cattle chart still remains in a downtrend. We don't like the fact this market still has an open open downside intraday gap left from the 12/7 close. On the January it is at 210.27. A small win for today would be that we closed just over the most recent downtrend line. If/when there is a low there are gaps at higher prices. The daily chart 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: Positive recent developments are a lightly positive employment report on Friday, retail CPI data as expected today, a still-high retail beef price for November reported today, two days of wholesale beef increases and a stock market making new highs today. As remember, we've been eyeing these seasonal charts with a bit of suspicion (hope). While we are not sure if the December 9 major low and rally to January 1 trade will happen with the strength it normally does, new contract highs, can we get back 50% of this very strong recent price break? And while we are further grasping at bullish straws let's also remember that rebounds which break well-established downtrend lines on the charts also open up the discussion of filling multiple chart gaps open at higher prices. Is this massive sharp price break wrapping up? Please have a risk in place for all speculative trades...Rich Nelson

Trade Recommendation:

(12/12) Sell February live cattle 160 put 2.20, risk 4.10, objective 0.

Hogs

Three prior days of wholesale pork gains, one day of higher cash hogs and not too bad November retail pork prices gave us mixed trade today. The market continues to look for signs of a seasonal price low.

Retail pork prices officially peaked in October 2022. They have been lightly lower this year. For October, the $5.043 per lb. price was only -0.1% from last year. Different than beef, we are putting out a little more production than last year. This price was +28.9% over four years. Today's release showed retail prices in November slipped further, now $4.88 per lb. This is -1.3% from last year and +26.4% over four years. We did see a very very light consumer pushback but we have to say this was nothing like what was feared.

Monday's hog slaughter was estimated at only 462,000 on yesterday afternoon's USDA report. That was under our 483,000 morning estimate. There were said to be two plants down, one for planned maintenance and the other for mechanical reasons. This morning we estimated a still-reduced 477,000 run based on reports the plant with mechanical issues was still down today. USDA's 1 pm report today suggested 479,000 for today.

Cash hogs were +0.40 on Monday. That's an accomplishment. The prior nine business days all posted consistent losses. The Lean Hog Index, a measure of cash hog prices that futures are settled against, falls to 67.70 for cash hogs through Monday. December lean hog futures expire on Thursday. Today's 67.82 settlement implies the trade believes cash hogs will gain 0.12 over three remaining days. Futures are still suggesting a seasonal low for cash hog prices this week.

Cash pork is also doing something interesting. Including Monday's +0.95 trade the wholesale market has gained from new lows for three days in a row now. These three days of gains total 3.42. We will give a little caution here as today's morning report was -0.97.

Over the past 20 years February futures settled at prices over the prior December contract 14 times. The average of those increasing years was +9.00. There were six years with a decline during this time. Usually these were years with a winter supply bulge. The -6.26 decline earlier this year from Dec ‘22 to Feb ’23 this year was due to demand concerns from the looming July 1 Prop 12 implementation. Those six years with declines averaged -7.23.

Possible explanations for the lack of premium in this year's February contract would be demand related. We'll give bears a little room here. Chinese hog prices are still seasonally declining. The US hog trade has light, but clearly reduced from prior months, concerns over the current January 1 Prop 12 implementation. For the US economy the trade has lightly changed its perspective. In  October and November the trade's mindset was for a recession of some sort for Q1 or Q2 ahead. The current mindset for the economy has lightly changed in recent days. Friday's positive jobs report suggested we may not see an economic slowdown much into early next year, or at least without much employment loss. From a supply perspective there is not a big surprise ahead for Q1. USDA which we feel has too large of a production increase for 2024, +1.8% year/year, has no increase set for this coming Q1.

Producers are still looking at a second year of hog production losses for 2024. Last week we calculated hog and feed hedges for the year would result in -$23 per head production losses. 2023 will pencil out with -$26 per head.

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.

The general trend on the hog futures chart is down. The current major low was posted 11/28. There are four separate intraday gaps on this chart at higher prices. They are at 70.80 from the 12/4 close, 75.05 from 11/20, 78.60 from 9/28 and 80.90 from 9/20. Bears remain in control.

Summary: As noted before, the trade is looking for more solid reasons to justify a major price low than we currently have. Three days of wholesale pork gains were lightly countered by lower trade this morning. Nine days of cash hog losses were seen. We now have one day up. When we have a better official low established the trade can also revise this minimal premium in the February contract. Please use a risk order in place if you are trading this market from any direction...Rich Nelson

Working Trades:

(11/15) Sold February 66 hog put 1.90, risk 3.80, objective 0. Closed 2.15.

(11/30) Sold February 66 hog put 1.45, risk 3.80, objective 0. Closed 2.15.