Cattle and hogs continue to regain lost ground. New highs for both sides.

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Livestock

Another new high for the cattle complex was made. Both April fed cattle and March feeders are now flirting with the first 38.2% retracement level of the prior three month price break. Cash cattle traded higher again.

It was a bit surprising to see the South trade on a Wednesday. But that is the case this week. $174 was lightly sold, +$1 from last week. We do not have trades in the North yet. Last week they sold at at $173 live and $273/$274 dressed. Bids today, not accepted, were at $274.

Through Tuesday cash beef has been wildly positive, +25.76 over 13 days. Today's morning report was -1.12. We started this week with a few that beef should stablize out. So far that has yet to happen.

Allendale's current price projections are February at $173, April at $179 and June at $176. We expect the big restart to the 2023 - 2026 falling supply story to show in the later part of the year. One bigger chance we made from our prior early-December discussions of prices is a big jump for Q4 outlooks. Our December futures outlook has been upped from $188 to now $193.

After wholesale beef's $22 rally we had expected it to stabilize. Instead today's morning report was +2.34. Choice is now +25.11 over 13 days.

April live cattle lightly pushed to another new high for this uptrend. Today's trade lightly nudged the first resistance point from the 38.2% retracement, 178.55. The first upside magnet for this chart, gap, is quite close. There is an intraday gap at the 11/15 close of 180.47 then two daily chart gaps, 187.30 - 187.55 and 189.02 - 190.27. There are intraday gaps open at lower prices but so far this market is not showing bear interest.

Let's remind you of our 2023 - 2026 view for the beef complex with a specific focus on feeders. As you know we believe 1) that sharp break in feeder prices was 100% valid. That sale barn action July - September was just insane overpriced. In September feeder prices were +54% from last year. And on what, a -2% to -4% supply? That's preposterous. 2) the big three month break in feeder prices is over. 2) 3) Available feeder numbers to place in the coming months is starting to drop. With heavy placements recently, past eight months -0.1% placements and a total supply -2% to -4%, the next few months will see a placement decline which feeds into Q4 fed cattle supplies. 4) Don't forget seasonals. Seasonally the low point in feeder prices is December - January for futures and somewhere in Q1 for cash feeders (sale barn). The year's peak in feeders is in July/August. 6) If you're going to have a long term 2023 - 2026 supply story it is the base unit of supply, calves and feeders, that sharply surpass fed cattle prices.

It must also be noted where feeder prices are right now. This week's Oklahoma City sale barn trade was still holding extreme premiums over last year, +32%. Those fewer late-summer/fall born calves now being sold are +38%. We fully understand many of our subscribers would say that due to cost increases it is not as rosy as it looks. But prices of a finished good are not attached to costs. For what we are putting out, -2% to -4% from last year these are extremely strong prices. Bears would say it is still too high. Bulls would suggest, given the long term nature of this supply restricted market, perhaps that's the lowest premium we should expect.

Feedlots need to be very clear about what is waiting for them over these next three years. You'll have the base purchase feeders likely rallying more than the fed price. Additionally, you're plugging in -2% to -4% drops in placements at the yard for each year ahead. From the start of this four year period to the end they may see a 10% decline in cattle in the yards. Our focus is usually on only the variable spread with cattle feeding margins, feeder purchase vs. fed sale. You take 10% off capacity and the amount of fixed costs that are applied to each remaining head means a cost increase right there. Back in October we advised feedlots to buy 100% of their whole 2024 likely feeder buys if January dipped to $236. That recommendation was made after a $33 break from the highs. The market dropped much more than that price and still has $4 to go to get back there. Happy to agree we did not expect the size of the break in prices that was still ahead. But the general message is still unchanged. The year's low in feeder prices is likely in and we would not play around with this story.

The March feeder cattle chart shows another new high for this 1 ½ month uptrend. March lightly pushed past the 38.2% retracement level of 233.35 and lightly closed above it. We will point out the day's close was not the best. It spiked up to a new high for the uptrend but closed on the day's low. There are many points suggesting further gains ahead. There is a daily gap at 244.75 - 245.37 then intraday to the 10/18 at 253.60. Bears can note there are open intraday gaps at lower prices. For now, the market is ignoring them.

Summary: Between fats and feeders we would suggest feeders have a more valid upside discussion. Fats will have to wait for Q4 to see the next real phase of tightening supplies..Rich Nelson

Trade Recommendation:

(1/24) Buy April feeders 231.85, risk 229.00 objective

Working Trade:

(12/28) Sold February live cattle 164 put 1.45. risk 2.80, objective 0. Closed 0.02.

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Hogs

Hogs lightly surpassed yesterday's trade. This is a new high for this rebound. Futures have broken the clearly defined downtrend on the chart and are now eyeing a gap directly ahead.

Eight days of light gains for cash hogs have been seen. The Lean Hog Index is now up to 69.39. Yes, the seasonal low is in at 65.05. We are now headed on the normal rally path from winter lows to summer highs. But the seasonal winter low was a little late on 12/29. Also, this is not a gangbusters rally at all.

You'll notice in this commentary we intentionally differentiate clear differences between the three layers of pork pricing. There is the cash hog level, wholesale pork level then retail pork. Retail pork is not really doing bad at all. Retail in December was only -5% from the peak posted October 2022. Compared with four years ago retail is still a massive 26% over last year. But we trade cash hog prices and not wholesale or retail. CME lean hog futures are settled to the lean hog index. Cash hog prices were severely artificially depressed from the Prop 12 issue. The problem is, we have not fixed that unnatural discount. In December the cash hog level was only 17% of retail. Yes, some of that is normal from the time of year. When you are running the plants full, as we do in winter, and there are extra trucks still waiting at the plant there is a wider spread than normal. But this 17% level was below all of the farmer share numbers for 2023, 2022, and 2021. It is the lowest level from COVID 2020 when plants did not even know if they would be open that day or not. Cash hog prices are not just pork production and consumer demand. They are consumer demand, pork supply offered for that demand and the market's view of the share to the cash hog level based on a few factors. Wrapping up this discussion, current cash hog prices are -4% from last year. Given our slight increase in hogs available we have a “cash hog demand” minimally changed from last year.

Wholesale pork as of Tuesday is +6.68 from its low posted on 12/21. Today's morning report was +2.19 mainly due to a pork belly quote.

By our math, and we're sure some will disagree with us, the kill from two weeks ago impacted by snow was -569,000 head from where it should have been. We made up 38,000 head of that last week. We estimate this week's run will make up another 104,000 head. This is still a light negative influence.

Tuesday's sharp rally in futures was not due to any new news for US cash hog, wholesale pork or slaughter level information. The only issue new to that day was China news. As you know from our writings, we feel US hog futures wildly exaggerate China news on the pork end. There was a time when they were largely important. We export about 24% of US pork. In 2020, when China was #1, we exported 2.1 billion lbs. to them. That was 28% of all exports! In that year 7% of US hogs were exported to China. In 2023 China was about #6 on the list at only 0.5 billion lbs. They were only 7% of our exports.

Two stories on Tuesday stick out. As you know the US stock market has been pushing to new highs with ease this year. The Chinese stock market is at four year lows though. The Chinese government announced it would take “forceful and aggressive measures” to stabilize market confidence. In the US hog market's view, perhaps that means more aggressive Chinese buying in the future. It does not exactly work like that but the pyschology of the futures market will not change.

The second story suggested Chinese hog producers are finally nearing an appropriate (lower) level for their sow herd. At the start of the year they were almost at 44 million head. The government's goal, announced last year, was 41.2. The ag ministry announced end of December sow herd numbers down to 41.42. China is still putting out more pork than last year right now. This news suggests perhaps by spring or just later it would drop year/year.

Allendale's price outlook is for the February at $74, April at $82 and June at $102.

This week's trade is a bigger deal for the charts than fundamentals. Regardless of whether you believe hogs are over or under valued the market itself is laying its cards down. The near term downtrend line from the September and November highs is now broken. Today's trade was a new high for the past two months of trade. The closed was at the high. We also have magnets waiting at higher prices (gaps). On the April they are the intraday gaps 75.05 from the 11/20 close, 77.02 from 11/13, 78.60 from 9/28 and 80.90 from 9/20.

Summary: We are not at all excited about this week's China news. It simply helps the market push to levels which we suggest it should see anyway. The downtrend is broken and futures have recovered well. Hindrances to the bull argument are the moderate backup in US processing and lackluster cash hog gains...Rich Nelson

Trade Recommendation:

(1/24) Buy 1 April 73.50, risk 71.80, objective 75.60.

Working Trades:

(11/15) Sold February 66 hog put 1.90, 1/16 move risk to 1.80, objective 0. Closed 0.05.

(11/30) Sold February 66 hog put 1.45, 1/16 move risk to 1.80, objective 0. Closed 0.05.

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