Livestock begin to question, when is enough enough?

Livestock

A strong rally, from a gap higher open, was noted for fats and feeders. Trade monitors both demand concerns and seasonals.

This morning Deutsche Bank called for a recession in the first half of 2024. They look for a rise in unemployment from the current 3.9% level to 4.6%.

As you know US beef demand is its own animal. Every beef economist in the nation has been surprised by the great net increases in demand in recent years, astounding increases. Remember, demand is not quantity consumed. It is quantity consumed and the price it took to move it. But the discussion of a consumer pushback against the premium priced meat is not something to ignore. The US consumer has seen, actually it should be called “happily accepted and asked for more”, an extreme 39% increase in retail beef prices over four years. Choice beef in October was priced at $8.17 per lb. at the retail counter. October 2019 retail prices were $5.89 per lb. Can we shake this demand story a little? How about those conversations we all heard this past week at family get-togethers? Wasn't one of the big topics that these outrageous weekly food bills?

The supply story has also been blunted for the time being. USDA has corrected its prior sharp beef production decline estimates in recent months. They now have Q1 at -3.2% and Q2 at -2.5%. In our view, those numbers are still likely a little low. But the 2023 - 2026 beef supply story is not in any way dented. The second half of next year will go right back to the bull argument. USDA has -3.9% for Q3 then a severe -7.1% set for Q4. We would suggest that Q3 number may be a little too large. The bear argument in front of us only lasts for the period directly ahead then disappears.

Last week's cash trade was $177 in the South and $176 in the North on a live basis. Dressed sales of $278/$279 were noted. Light sales early-week so far in South were -$2.

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 generally 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 in two weeks. Given the extreme severity of the decline already seen we hesitate to suggest seasonals will be on target this year.

If we were fishing for a low in live cattle futures we would prefer a different type of trade today. February gapped higher to start and left that minor intraday gap in place to yesterday's 168.82 close. We're essentially trying to walk out of the store but forget to pay the bill. Bears also have a clear argument here. The two month downtrend is firmly in place and won't be tested on the chart until way up at 179.75. 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 175.27. Two daily chart gaps are way up there at 184.70 - 184.90 then 186.65 - 187.52. Higher than that are two intraday gaps, 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. We did not mention in yesterday's comment on the seasonal that 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. IF/WHEN we do hit a low in the coming days/weeks you want to be onboard the May or August contracts.

The feeder cattle chart still remains in a significant downtrend for two months. New lows were made yesterday's Today massive +$8 rally still leaves us far from testing downtrend resistance at 229.60. While we would like to call today's trade a major low we don't like how an intraday gap was left to yesterday's 212.80 close. There may be unfinished business there. Also, an $8 rally really does not really change much after our -$18 drop since 11/20. Bulls would like to have a discussion about upside gaps on the chart. The daily 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: Calling a bottom in a severe downtrend is often an exercise of futility. There are plenty of fundamental news stories that could validate even lower prices ahead. But let's give the bull argument a discussion here and not get locked into one-sided thinking. Gaps are waiting all over at higher prices on the chart. At some point in the months ahead the supply story is still waiting. The seasonal price action story is really interesting here. We've left yesterday's seasonal price move chart up for another day. Please look at it closely. The severe decline we are in right now fits in relatively well with normal price action at this time of year. It is normal for February live cattle futures to completely wipe out all of the rally going back to the prior May in a very short period of time from 11/26 - 12/9. It is completely normal. This year's clean-out was even more severe with yesterday's price action the lowest price since March. Now, look at the seasonal rally from 12/9 to 12/28 on that chart. In most years we completely erase the entire bear price move, and make new contract highs, over just three weeks. Between fats and feeders we still adamantly suggest the greatest upside in the 2023 - 2026 story remains with the market closest to the supply decline story. That means #1 calves and #2 feeders. And that was the story with the rally in place for most of this year. Monday's sale barn trade in Oklahoma City had calves +46% from last year and feeders +27%. Cash cattle last week was only +14%. We will fully point out that seasonally, fed cattle futures do recover much better than feeders at this time of year. That chart still leaves bears a little more room for downside into Q1. As discussed before, it is the random extreme moves that clean out accounts. Please have a risk in place for all speculative trades...Rich Nelson

Trade Recommendation:

(11/27) Stand aside.

Hogs

After pushing to new downtrend lows in the morning futures were able to rebound to a higher close. Today's higher close is the first among a five day slide. From the 11/20 close to today's lows the February contract has removed -9.25 in value.

Today's rebound in futures, after new downtrend lows in the morning, is good to see. But there is another message in this trade that is interesting. Cash hogs dropped -0.64 on Wednesday, -1.41 on Friday and -0.51 on Monday. That lowers the measure of cash hog prices that futures use, the Lean Hog Index, to 71.66. We are coming up on the expiration of the December contract in 13 business days, 12/14. Today's 68.92 settlement is only Th-2.73 from the index. The market is now implying daily losses ahead of only -0.21. Though futures are still implying lower cash prices ahead, they are implying the worst of the daily declines are now behind us.

Cash pork, due to the erratic pork belly quotes used on USDA's pork cutout report, was +4.58 on Monday. Today's morning report corrected that to -3.79. We expect something similar on the afternoon update. So far, the lowest cash pork prices is on Friday. We still expect some new lows ahead but wonder, as with cash hogs, if the daily declines will begin to slow.

There are valid bear stories that have come out recently beyond just the normal seasonal pressure from winter US hog supplies. Chinese hog farmers continue to liquidate and their prices continue to fall. There has been a match between US and Chinese prices in recent months. Yesterday's story of a human transmission of swine flu in the UK is a light psychological issue. It was common back in 2009 so we're not going to get too excited. You also have concerns from the US consumer. Deutsche Bank this morning suggested a US recession in the first half of 2024. Let's not hide uncomfortable truths here. Over a four year period, October 2019 to October 2023, the US consumer has seen a 29% increase in the price of pork at the retail counter. Let's also be honest and admit every family get-together this past week included a significant conversation about high food prices.

But giving full respect to the bear side, which is valid, the issue we have to focus on is whether the market has the right amount of bearish beliefs factored in or whether it has gone too far. February futures, even after today's up day, are -9% from the February settlement from 2023. April and June are +5% over 2023. But that first half period this year was artificially low. We were playing with clear psychological unknowns from the perception that Prop 12 would start in July and that no one was prepared. Today's settlements look even more mispriced when compared against the last normal year, 2022. This February 2024 contract is still -25% from two years ago. April and June are -25% and -16% from their respective contracts from two years ago. USDA's view of 2024 pork production, which we suggest is a little overstated, is +3% from two years ago. Even including a little pushback on demand, a -25% price from only a +3% production is a bit much. Yes, there is bearish news but have futures overdone things?

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.

On the chart lean hog futures remain in a sharp downtrend. New lows were posted yet again today before the rebound later in the day. IF today's low is THE low for this move we could see a few upside targets. The daily chart has a gap from last week, 71.40 - 71.57. Then you've got the multiple upside gaps on the intraday chart. They are at the closes of 75.05 from 11/20, 78.60 from 9/28 and 80.90 from 9/20.

Summary: Calling a low in a runaway bear market is a very touchy issue. We don't have positive news right now. The only bull argument is that perhaps futures have declined enough. This is the sloppy time of year for hog pricing. The seasonal would suggest still lower futures ahead an we really have not solved any of the fundamental bearish news items. We still estimate a $72 expiration for the December but that is not a high confidence claim. Please use a risk order in place if you are trading this market...Rich Nelson

Working Trade:

(11/15) Sold February 66 hog put 1.90, risk 3.80, objective 0. Closed 2.27.

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