Are hogs now starting to form a Right Should of a H&S chart bottom?

Livestock

Concerns over both beef demand and offered fed cattle supplies for the months ahead remain clear issues. Though the trade does not expect a V type bottom for these markets, we are stabilizing.

We have two reports for cash cattle bids in Nebraska today, dressed at $278 and a second at $282. We are not sure what the discrepancy is about. Cash cattle last week was $178 in the South. The North traded live at $178 and dressed at $281.

Futures, with a normal basis applied, are still suggesting lower cash cattle trade. December futures imply $174/$175 next month for cash in the South.

Wholesale beef through Monday has fallen -47.34 from June highs. Today's morning report was -0.24. Cash cattle from the June highs to last week is -6.64 on a live basis. Packers are not going to be eager buyers.

Cattle on Feed Friday was “not as bad as expected”. Placements during October, inflows into feedlots, were counted at +3.8% from last year. The past six months of inflows averaged +0.7% from one year ago. This removes concerns about 1st half 2024 fed cattle supplies. However, it will eventually mean sharp concerns of 2nd half 2024 supplies.

Retail beef prices in October were stronger than expected, +10.0% from last year. This October price is +39% from October 2019, four years ago. The farmer share of that retail dollar, now 49.4% in October, is the best in eight years.

The live cattle futures chart is bearish. New lows for this two month downtrend were made recently. Current prices are not much off those lows. We have a few days of stability but can't call any major low just yet. There is a small intraday upside gap to the 11/15 close of 178.77. Much higher than that there are two daily chart gaps, 184.70 - 184.90 and 186.65 - 187.52.

You may remember back in August when cash feeders were rip-roaring higher and we were amazed that futures implied much higher prices still ahead. They implied gains past the normal August peak, lasting all the way through January. That sharply changed when the cash markets hit their top. Futures then implied much lower prices and kept that discount. Something has changed recently. Friday's Feeder Cattle Index, a collection of seven days of cash feeder prices, was 225.92. Take a look at current Nov/Jan/Mar feeder futures, all at higher prices. Futures are now implying this sharp cash feeder decline is over. This fits in with our view of an earlier than normal seasonal low. The seasonal is for a break until December 9 for futures and Q1 for cash.

Calf prices in Oklahoma City on Monday gained $1. While it does not sound remarkable, it is. $301 for nice 525# med/lrg 1 steer calves is a new high for the year and the best trade since 2014. There are only five other weeks in all of 2014 with higher prices. This is partly due to the seasonal, a low on October 1 when everyone is selling freshly weaned numbers. It is partly due to the fact many of those freshly weaned calves were not held back for overwintering. They hit the feedlot which means remaining numbers still to place over the coming months have tightened. This price here on Monday is a big deal. It shows the market has full confidence 2nd half of next year will see sharp declines in fed cattle supplies.

The feeder cattle chart still remains in a downtrend. New lows were made recently. There are still chart points for bears to note. There is an intraday gap from the 4/5 close at 223.32 left to fill. There are other gaps down to 218 along the way from back in March. But IF this market can stabilize there is a good upside target. On the daily chart an open gap is noted 242.37 - 242.65, 243.05 on the intraday.

Summary: We're not sold on the idea that cash cattle will stabilize and December/February futures will have to remove their discount. Wholesale beef and packer margins are issues. But the feeder side may be showing changes. Futures now have a premium to the Feeder Cattle Index (cash feeder prices). We may be getting signs that the trade is seeing our view, that this seasonal break may be the last opportunity for buyers for the next 10 months. On the speculative trading side we have started a second attempt at saying enough is enough. We are starting out slow and not buying futures. Today's filled order is a bet there is not another $12 left on the downside. That's a start. Let's do this calmly...Rich Nelson

Working Trade:

(11/21) Sold January feeder 216 put 1.75, risk 3.20, objective 0. Closed

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Hogs

We're not sure whether today's sharp decline in futures was a delayed reaction to yesterday's bearish China news or not. Lean hog futures posted a clear decline back to prices last seen on 10/27.

The first half of 2023 saw significant pricing disruptions as the US hog market wanted clarity over Prop 12. February 2023 lean hog futures expired 75.62, significantly under the February 2022 expiration at 91.84. Today's February 2024 contract is now under the pricing from 2023. We'll have US pork production ahead in Q1 relatively even with the 2023 Q1. We hope to have any disruptions with the current Prop 12 implementation on January 1 solved by the time February rolls around which should mean a higher price than 2023.

Yesterday China's Ministry of Agriculture and Rural Affairs reports the nation's end of October sow herd at 42.1 million head. Though posting herd declines for 10 months their government reports it is still too large.

Yesterday China's General Administration of Customs reported October's pork imports from all countries at 90,000 metric tonnes. This was -41% from last year. It is the lowest import since February 2019. It helps bring their January - October total to 1.37 million tonnes, -0.8% from last year. Though China's importance to the US pork market has declined it is still a factor.

Cash hogs Monday were -0.44. That makes it four days of moderate losses from -0.44 to -0.59 daily. The LHI falls to 74.18. The year's cash hog low, based on peak seasonal supply offerings, is generally somewhere mid-November through December.

Cash pork is still doing great considering this is a bearish time of year. The seasonal downtrend from summer highs was stopped on 10/26. Over three weeks it has yet to push below that 10/26 price. Yesterday's afternoon's report showed 86.09, just over that 85.73 10/26 price. Today's morning report was +0.73.

Retail pork price data for October was positive. It is not beef demand great but is less bad than it was. Retail prices April - July were -3.2% to -5.0% from one year ago as the industry grappled with Prop 12 uncertainty. This October price, $5.043 per lb. was only -0.1% from one year ago. It is also the best price of the year and since exactly 12 months ago. US retail pork prices were in a light slump most of the year. We are on the tail end of that slump.

Today's sharply lower trade left yet another unfilled upside gap on the chart. That now makes it four. On the intraday chart they are the 11/20 close of 75.05, 11/13 close of 77.02, 9/28 close of 78.60 and 9/20 close up at 80.90. There's also something else to note. In previous days we discussed a potential long term Head & Shoulders bottom that could be forming. We had asked for one more good price break to around 73.00 on the February to form the Right Shoulder. Well, we have it now with today's 72.02 low. Now, let's not get carried away with big bullish hopes right away. Officially you've now got to reverse this recent break and rally up to the neck line/armpit line to 77.85 before it is validated. If that happens then the formation would project the February way up there at 86.40. The bull argument is now four upside gaps on the chart as well as a “potential” H&S bottom if the trade can reject today's lower pricing. That's great. But let's give bears two points here. Today's close was near the day's lows, a show of confidence in the short term. Also, there is still an open downside gap left from the day we made a major low on 10/25. That day's close is the intraday gap down to 70.70.

Summary: After three weeks of stability at a level we consider economic value, $72 on the December, we're now back below value. Today's sharp break was not related to cash hogs or pork. We also hesitate to say it was from yesterday's China news. The bearish Chinese sow herd numbers and October pork imports were out yesterday morning before futures even started. We had a full day yesterday to trade that news and were only -0.40. We'll give bears a chance at the downside gap at 70.70 on the February. Separate from that, if we can recovery off these prices in the coming days there are now four upside gaps on the charts to fill. We also have a “potential” H&S bottom forming. For speculative trading we're going slow for now. We got the lower trade we asked for but it is not a rejection of lower trade just yet. It will take one more sharply lower day to get that short February put order filled. Fundamentals of supply and demand do not really say buy hogs outright. It is simply that futures appear to be too low...Rich Nelson

Trade Recommendation:

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

Working Trade:

(10/24) Sold December 62 hog put 0.80, risk 1.00, objective 0. Closed 0.02.

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