Livestock end the week on a high note.

Livestock

This week's trade was a positive one. Recent economic reports, and a win for wholesale beef are positive issues. How long this lasts, and whether the December 9 seasonal will work, remain unanswered questions. For now, ending the week with the best close of this six day rebound is a good start.

USDA estimated the week's cattle kill at 649,000 head. Our morning estimate was 638,000. There has been a changed pace recently. Through the third week of November our general cattle kill, all classes, was about -6% year/year. But for the two next weeks it was -3.1% and -2.1% year/year. Today's number was a flip to +4.3%. Our general kill change is not unexpected. The next few months ahead, here in December through about June, will see a changed pace as those prior six months of +0.7% feedlot placements work through way through the system. It won't be until second half of 2024 that the supply part of this bull 2023 - 2026 cattle story resumes.

And while we're discussing this change from 1st half 2024 to 2nd half let's note next Friday's monthly Cattle on Feed report should show this shift happening. Six months of placements +0.7%, in a period of continuous year over year declines in offered calf crops, means we'll revert back to below last year placements in the months ahead. This next placement wave determines 2nd half 2024 fed cattle supply.

Allendale sees November placements, reported next Friday, at -3.1% year/year. This helps determine a part of the July - October slaughter period. Marketings of finished cattle in November matched with offered fed cattle supply at about -5.5%. Feedlots do have some numbers in them. Remember, December 1 On Feed is what will be worked through in the coming months. We see that number increasing from +1.7% as of November 1 to +2.4% as of December 1.

A slight addition to the bear argument about a change in offered fed cattle supply now showing is also weights. Steers are now finishing out 15 lbs. dressed over last year (+1.6%) and heifers +4 lbs. (+0.5%).

This big bear move we've had over the prior two months is based on a change in supply perceptions ahead (noted above), concerns over a recession (now easing) and seasonals. As beef buyers are procuring out three weeks and more the trade is very sensitive to holiday bill paying in early January. And that brings in the discussion about this dramatic rally normally seen December 9 - January 1. The trade is eager to see if there is any change to wholesale beef prices this week. Remember, last week was terrible for choice at -9.45. Including today's morning report of -0.24 the week will end +4.07.

For cash cattle trading this week has been a little sparse. Nebraska has moved live based $168 to start to now $170. Dressed sales of $267/$268 have been seen. Last week's sales in Nebraska were $168/$169 live and $270 dressed. There is no action to report in the South where $170/$171 sold last week.
Futures are still implying the bears will have the show directly ahead. With normal basis applied they imply Southern cash will fall to $167 later this month, $166 in Q1 then up to $170 this spring. For a comparison to prior year we have Southern cash at $155 in December 2022, $161 for Q1 2023 and $175 for Q2 2023.

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 far our best close on 12/12 of 168.60, and lightly lower trade after, is not any type of strong breakout yet.

The stock market soared to new highs this week. 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 for cattle.

February Live Cattle Futures 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 don't like the fact this current rebound has left an unfilled intraday gap to the 12/7 close of 162.52 or recently to the 12/13 close of 167.23. There is something lightly positive on the chart though. The near term downtrend line was lightly broken this week. The main downtrend line is still intact. Today's close was also the best of this six day rebound. 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 Futures 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. Bulls can note this week has broken the first downtrend line and current trade is right on the main one. Bears can warn this week's advance left an open downside intraday gap to the 12/13 close of 217.85 on the March. That's the second one open. There is still one from the 12/7 close, 211.17. But bulls can note today's close was the best yet of this six day rebound. If/when there is a low there are gaps at higher prices. The daily chart shows one at 244.75 - 245.37. Intraday charts show unfilled closes from 11/22 at 230.12 and 10/18 at 253.60.

Summary: Positive recent developments are a lightly positive employment report on Friday, retail CPI data as expected, a still-high retail beef price for November and new highs for the stock market. 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 a rebound which can 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

This week's Thursday and Friday trade removed the prior two weeks of general declines. February has now filled two smaller intraday upside gaps and also closed at the 50% 71.80 retracement of the past two months of trade.

Allendale released estimates for next Friday's quarterly Hogs & Pigs report. As you may remember the last report in September was a disappointment. Though the breding herd did fall from -0.6% year/year on June 1 to -1.2% year/year on Septemer 1 it was countered by those pigs per litter numbers. Individual sow productivity has surpassed expectations. Dec ‘22-Feb ’23 pigs/litter was +0.7%, Mar-May +3.3% and Jun-Aug +4.2%. For the December 1 Kept for Breeding we estimates 6.024 million head, a light dip to -1.3% year/year. Though sow slaughter will have run +2% to +5% in the completed Sep-Nov quarter we estimate more active fresh gilt replacement than needed.

Before discussing December 1 - May 28 hog kills ahead, as well as second half 2024 let's note Q1 had +3.1% year/year gains in barrow/gilt kill, Q2 +0.4% and Q3 +0.7%. Kill rates began rising in October, November and here in December as we're working through those heavy Mar-May p/l numbers. The Dec-Feb kill ahead will still hold above last year given Jun-Aug farrowings -3.7% but p/l +4.2%. The question is whether lower numbers begin to show by spring. We estimate the -5.1% farrowings set for Sep-Nov will only be partially offset by +2.8% p/l. The next two quarters of farrowings, determining second half 2024 slaughter, are seen at -1.5% and -2.1% year/year. With assumed p/l gains still ahead we'll even out the kill in the second half. The net narrative is this, so far we have not seen severe enough breeding herd liquidation to bring sustained production profitability back.

So here's the numbers, December 1 All Hogs & Pigs -0.6% year/year. The prior September 1 number was +0.3%. We see Kept for Breeding at -1.3% but Kept for Marketing at -0.5%. That Kept for Marketing number has four weight categories which project out Dec 1 - May 28 hog slaughter. We have it at +1.0% for the heavy category down to -2.1% for the lightest. We'll have above last year hog slaughter ahead for Q1, below last year for Q2 then something close to last year for Q3 and Q4.

Underscoring the need for breeding herd liquidation, last week we calculated hog and feed hedges for 2024 would result in -$23 per head production losses. 2023 will pencil out with -$26 per head.

Cash hogs this week were +0.40, +0.33, -1.11 on Wednesday and -0.05 on Thursday. The Lean Hog Index, cash hogs through Thursday, falls to 67.15. December futures, which expired Thursday at 67.17, did a relatively good job on this one. So that LHI quote was still the lowest yet of this downtrend. We don't have a firm low in yet for cash hogs.

Cash pork is also a mixed story. The current official low for the pork composite cutout, 83.20 on 12/6, is not a firm low. Wednesday's trade was just over that at 83.57. Today's morning report, with a wild quote for pork bellies, was +2.74. We do not have a firms low in place for cash pork.

Current offered hog numbers are at the year's seasonal winter high. USDA estimated this week at 2.689 million head. This was over our morning estimate of 2.678 due to an aggressive Saturday slaughter. This is the biggest kill for winter. It is not just that we are at the seasonal peak. This year's December hog slaughter numbers have been a bit wild. This week's will run +4.2%. We're at the bearish of bear time of year right now.

This week was important for the February contract. With December now off the board, and a likely cash hog low any day now, February feels more comfortable with a little premium over the expired 67.15 December. That is normal and higher prices were noted in 14 of the past 20 years into February. The average of those increasing price years was +9.00.

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. But things may be changing after considering Thursday and Friday's trade. The current major low was posted 11/28. Two of the easily attainable upside gaps have now been filled. It also appears as though this market is forgetting there is a downside gap to the 12/13 close at 66.72 left. This market could leave that gap open but it is a small thorn in the bull side. There are now three upside intraday gaps for bulls to monitor. They are 75.05 from 11/20, 78.60 from 9/28 and 80.90 from 9/20.

Summary: Though we are not happy about leaving an open gap at lower prices we do agree with the idea futures, specifically 2024 futures have been undervalued. In just two days we have removed the prior two weeks of lower trade. 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 0.85.

(11/30) Sold February 66 hog put 1.45, risk 3.80, objective 0. Closed 0.85.