Cattle market recovers with an eye on wholesale beef. Hog processing backlog expands

Livestock

Higher trade was seen for fed and feeder cattle futures. Traders now have strong boxed beef pricing as one positive against last week's weather related reduction in processing.

Last week's kill estimate from USDA, 549,000 head, was changed minimally on Monday's USDA update to only 546,000.

Monday's 112,000 head kill estimate was left unchanged by USDA on today's update. Today's 114,000 estimate was just under our morning guess of 117,000.

When including today's morning report, +2.73, choice beef has recovered +18.25 over eight trading sessions.

Cash cattle last week, $172 in the South, was under the prior week. Nebraska traded $173 and $273 on average last week for live and dressed.

On Friday USDA will release the next monthly Cattle on Feed report. As you know, May - October placements were a problem at +0.6% vs. prior year. That stopped the prior trend of clear year over year declines. We have the first half of 2024 beef supply set from those prior lightly higher placements. The trade is now wondering if/when the next change will be seen. Last month's report showed November placements -1.9% from last year. The trade estimates December placements -4.2% from last year (ALDL -2.5%). So we are not fully in the transition yet back to clear year over year declines. December inflows help determine a part of July - October fed cattle supplies. December marketings of finished cattle were estimated at -0.7% (ALDL +0.7%). The December 1 count of all Cattle on Feed is estimated to decline from the November 1 +2.7% estimate to +2.2% (ALDL +2.2%).

USDA's monthly report this past Friday also included livestock balance sheets. It held a little negative news for beef. USDA upped their 2024 beef production view by 120 million lbs. today, now 26.110 billion. They still have a decline from 2023 but it has been reduced to -3%. You may remember months ago USDA was suggesting -6%. For the four quarters they see -1.4% for Q1, -1.0% for Q2, -2.7% for Q3 and -7.6% for Q4. The first half of the year was set for more muted production declines from prior months of placements. They are suggesting muted declines will remain through summer and into early fall. The return back to severe declines may not be seen until Q4. For much of the prior two years we have had moderate disagreements with USDA's production view. This looks mostly reasonable. We would suggest Q3 just a little lower at perhaps -4% but it is not major. Along with raised 2024 production USDA also raised imports by 70 million and lowered exports by 60. They now see exports -7.6% from 2023. US beef and cattle prices are not really determined by production levels alone, but by the amount left for the US consumer. That view was raised from 56.0 lbs. per capita to 56.5. This view of “tightness of supply” is -2.7% from last year. Allendale still holds the belief the 2023 - 2026 beef production decline story is set in stone. The next 6 - 8 months of more muted production declines are a short term issue in this general multi-year supportive market.

April is now the lead contract for live cattle.

The April live cattle chart shows a light uptrend. There is still a gap open down to the 12/29 close, 172.25. That is still a reasonable short term target. We do not expect the much lower open gap, the 12/7 close at 165.95, to be filled. Bulls are slowly getting control of this market. A break above the rejected high from last week, 175.72, would open up further upside. 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.

The feeder cattle chart is in a light uptrend. Different than live cattle, today's trade pushed above the prior two weeks of sideways action. It was the highest trade since 11/24. We are also facing that first chart gap directly ahead on the upside. Upside gaps are intraday to the 11/22 close at 230.12, daily gap at 244.75 - 245.37 then intraday to the 10/18 at 253.60. We would like to fill at least the first downside gap on this chart before the bull pattern is established, the 1/5 close at 224.15. We don't expect the others to get filled, the 12/13 close of 217.85 and the 12/7 close, 211.17.

Summary: We would feel better about the bull argument if the first gap at lower prices was filled then a reversal. So far, we are still stuck within the recent range. We are general bulls and suggest prices “should” be able to recover 50% of the big downtrend, 179.50 on the February live cattle contract. Please have a risk in place for all speculative trades...Rich Nelson

Working Trade:

(12/28) Sold February live cattle 164 put 1.45, risk 2.80, objective 0. Closed 0.17.

Hogs

Futures set back after learning that Saturday's hog kill fell short of expectations. The processing backlog from last week's weather issues due to weather now totals 569,000 head. That was added to with cold weather yesterday and today.

Last week was a problem for US hog slaughter. Western Cornbelt plants were impacted by weather early in the week and the East was hit later. On Friday USDA's estimate for the week was a bit of a surprise at 2.279 million. On Monday's update, after Saturday's slaughter was computed, USDA revised that down even more to 2.174. This would imply last week's shortfall, which we originally computed at 400,000 head, was actually 569,000.

This week's kill is not doing anything to help make up for last week. Monday's MLK Jr. Day kill was revised down from a 399,000 head estimate to 378,000. Today's run was also short from a full day at only 464,000. This week is adding to last week's processing shortfall. Saturday's kill will be the first chance to start to make up for recent shortfalls, 381,000 expected.

Last week's cash hog trade was +1.11. Monday's trade was +0.01. The 66.85 Lean Hog Index is lightly over the current 65.05 low from 12/29.

Cash pork last week gained 1.88. Along with Monday's +0.98 trade pork is now +5.71 from the current 12/21 low.

USDA's monthly report on Friday also included livestock balance sheets. This is the first update on the monthly reports since USDA's quarterly Hogs & Pigs report on 12/22. As you may remember, that report confirmed light breeding herd liquidation but offset that with views of continued pigs per litter efficiency gains. In today's report USDA added 240 million bushels to their prior 2024 pork production view, now 27.970 billion. USDA is currently +2.4% vs. 2023. Allendale is slightly more muted with its production view, +1.5%. There were no changes to their 2024 import view. Exports were raised by 20 million. They now see exports +1.5% from 2023. The amount of pork offered to the US consumer was raised from 50.9 lbs. to now 51.4. This is +2.0% from 2023 and the largest supply offered, per capita, in four years. These numbers are not a big surprise after the H&P report. But it is not positive seeing them on the official long term report.

April is now the lead contract for speculative trading. Open interest has rolled over from the February.

The chart perspective for lean hog futures has changed after this week. Bulls still have many upside targets to discuss. 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: The downtrend is broken and prices have recovered. This is still not exactly a solid market for bulls. Prices have simply returned back to economic value/where they should be. Please use a risk order for all speculative trades...Rich Nelson

Working Trades:

(11/15) Sold February 66 hog put 1.90, 1/16 move risk to 1.80, objective 0. Closed 0.37.

(11/30) Sold February 66 hog put 1.45, 1/16 move risk to 1.80, objective 0. Closed 0.37.