Q4 GDP stronger than expected. Cattle nearing a 50% recovery of the big price break.

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Livestock

A better than expected Q4 US economy, higher cash cattle trade and confirmation of our first weight decline helped propel fats and feeders to new uptrend highs. They have both surpassed the 38.2% first retracement level and are nearing 50%. Next Wednesday's bi-annual Cattle report should confirm a fourth year of breeding herd liquidation.

The first estimate for the completed Q4 economic growth story was released today. GDP was estimated at +3.3% from last year. That was over the trade estimate of only +2.0%. This Q4 will be lightly revised in February and again in March. GDP was +2.2% year/year in Q1, +2.1% in Q2 and +4.9% in Q3. The 2023 year as a whole would see a +2.5% growth. That is over the +1.9% in 2022.

The South traded moderate cash cattle on Wednesday at $174. Today, bids were upped to $175 which we assume will garner the bulk of trades. Nebraska traded today at $177 live and $277-$279 dressed. Last week's sales were $173 in the South with Nebraska sales $173 live and $273/$274 dressed.

USDA's weekly Actual Slaughter report today detailed meat production data for the second week of January. This will be important to watch as that is the week with Northern Plains snows early on then the start of a cold snap the last day on Saturday. As a reminder, this is the start of weight declines. The whole next week after, not including in today's data release, is where bitterly cold temperatures for all were seen. It will take a good three to four weeks to really see what type of weight hit there is. Dressed steer weights fell 10 lbs. from the first week of January to the second, now 927. Heifer weights slipped 2 lbs. to 849. Given the normal seasonal declines at this time of year our focus is on the year to year comparison. Steers slipped from +18 lbs. from last year in the first week of January to now +13. Heifers slipped from +20 lbs. vs. last year to +16. Weights were hit. However, this specific data is not that exciting. Weights were still adding back 1.6% to US beef production separate from slaughter numbers.

Beef export sales of 22,363 tonnes were reported. This was -11% from last year. Year to date bookings are -12% from last year. USDA’s whole-year goal is -8%.

Yesterday afternoon USDA released the monthly Cold Storage report. This report no longer sees the trade interest that it once did. What is “left over” at the end of the month is not exactly “ending stocks”. Often, meat in frozen warehouses is an export venue. We monitor this report for an overall trend. Yesterday's report showed 485.127 million lbs. of beef at the end of December. This was a 28 million lb. increase over November. That is over the five year average increase for December of +9. This is the largest December increase in seven years. This now marks four months of a higher than normal stocks inflow.

Wholesale beef has a light peak posted Tuesday. Over 13 days into Tuesday it rallied 25.76. Wednesday was hit by -2.16. Today's morning report was -1.66. We are looking for this beef rally to end.

Early talk for Wednesday's bi-annual survey of cow/calf producers, called Cattle, is for confirmation of a fourth year of US beef cow liquidation. Beef cows as of January 1 are seen 97.5% of last year. Beef heifers held back for cow replacement are discussed at 100.1% of last year. The trade estimates here are likely only two or three analysts. The trade range is from 97.3% to 104.1%. We do not know who is expecting a 4% jump and are not really interested in knowing. That is just way too high. The calf crop talk is 97.5%. These estimates are unofficial. Allendale will release our numbers tomorrow morning. We would expect a complete newswire poll out Friday afternoon or Monday morning.

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.

Chart action for April live cattle is very strong. Today's trade blew through 38.2% retracement with ease. 50% is next at 182.60. Today's trade filled the first upside gap. On the intraday chart it was at the 11/15 close, 180.47. The next gaps are a leap higher, 187.30 - 187.55 then 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.

Repeating from Wednesday: Feedlots need to be very clear about what is waiting for them over these next three years. You'll have the base feeder purchase likely rallying more than the fed price. Additionally, you're plugging in -2% to -4% drops in annual placements at the yard for each year ahead. They're going to be squeezed on the variable end. They'll also see fixed costs applied to each head increase as fewer numbers show up. Back in October we advised feedlots to buy 100% of their whole 2024 likely feeder buys if January dipped to $236. January and March futures are still under that trigger which was enacted October 23. All back months from April on out are already back over that trigger price. The year's low in feeder prices is likely in and we would not play around with this story.

The March feeder cattle chart is quite strong. It cleanly broke 38.2% retracement is now facing the 50% level at 240.36. 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: Odd to say it but first half 2024 live cattle futures have hit our upside targets. Another $5 gain from here and we may discuss hedging. Feeders are following the general up-up-up plan quite well. Of note, yes our

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:

(1/25) Buy April feeders 235.10, risk 231.00 objective 245.00.

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 put in a new uptrend high. Futures have broken the clearly defined downtrend on the chart and are now eyeing a gap directly ahead.

Over 99% of US hogs are raised from birth to slaughter in climate controlled barns. We should not expect to see any real weight impact from the Northern Plains snow in the second week of January. In that week dressed barrow/gilt weights fell 2 lbs. from the first week to 215. Compared with last year they slipped from -1 to now -2.

Weekly pork export sales were reported at 24,127 tonnes. This week was disappointing at -46% from last year. Year to date export sales are +8% vs. last year. USDA's whole-year goal is +1%.

Pork stocks of 427.300 million lbs. would be a net gain of +12 from the prior month. This would be over the five year average of no change for that month. This would mark two months of a negative report.

Nine days of light gains for cash hogs have been seen. The Lean Hog Index is now up to 69.67. 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 Wednesday is +7.51 from its low posted on 12/21. Today's morning report was +1.51 mainly due to a pork belly quote.

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. 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: Odd to say but February and April have hit our upside targets. There is still further to go for summer contracts. 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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