US beef cow herd likely at five year lows.
Livestock
The cattle market ended the week on a strong note. April live cattle futures came within 0.35 of testing 50% retracement. March feeders today recovered a full 50% of that prior three month downtrend! This weeks economic data, still strong beef and hopes for further breeding herd declines are factors.
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.
Officially, the current peak in this wholesale beef rally was on Tuesday at 301.66 for choice. This represented a 25.76 rally over 13 sessions. Prices were 11% over last year. But we really cannot call a clear top yet. After lower trade Wednesday and Thursday today's morning report was +1.87 has a price of 300.55. While we are looking for a top in beef here, it is not yet confirmed.
Allendale released estimates for Wednesday's bi-annual Cattle report. We see the nation's All Cattle & Calves count at 87.358 million head as of January 1, 2014. That is -2.1% from last year. It would represent a five year decline from our recent mini-peak of 94.805 five years ago on January 1, 2019. While there is an increasing dairy presence on the beef side in recent years our general focus is still on the beef end. We estimate the nation's beef cow herd at 28.195 million head. This would be -2.5% from last year and a bit off the 31.691 mini-peak five years ago. My our understanding there is a little disagreement among some analysts on whether heifer retention has started. Based on the numbers we see in feedlot counts we are not seeing it. Our beef heifers held back for the cow herd is counted at 5.071 million head, -1.8% from last year. This represents seven years in a row of falling beef heifer retention. From our understanding the unofficial analyst range is -2.7% to +4.1%. As a reminder, USDA breaks down this group into 1 ½ year olds who are pregnant and set to calf in 2024 and those who are recently weaned and will be bred later this year. We estimate the first group -1.3% from last year and the second -2.6%. After discussing beef and dairy heifers there is another group called other heifers. We estimate this count at -1.6% from last year. These are feedlot focused animals, either in the feedlot or destined for the feedlot. This number is of interest to us. The recent Cattle on Feed report suggested heifers in the feedlot at +1.8% from last year. This number will help us determine how much placements fall in the coming months.
There is a calf crop estimate in Wednesday's report but it is for 2023. And the prior July Cattle report already started with a 2023 calf crop at -1.9%. We expect a light revision to -2.0%. The 33.775 million head beef and dairy calve crop would represent a five year decline from the 36.313 recent mini-peak. In our view Wednesday's report should simply confirm a process that is on auto-pilot right now. In our view expansion, holding back heifers, would likely be started this coming fall. Depending on whether it is accompanied by falling cow slaughter will push back the lowest annual beef production year by either 1 ½ or 2 ½ years.
Thursday's Gross Domestic Product report was the first one covering the completed fourth quarter. US economic growth in that quarter was reported at +3.3% from last year by the Bureau of Economic Analysis. That was over the trade estimate of only +2.0%. There are two further light revisions in the two months ahead. 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.
This week would be another win for cash cattle trading. The South has moved at $174/$175. Nebraska sold at $177 live and $277-$279 dressed. Last week's sales were $173 in the South. Nebraska sales were $173 live and $273/$274 dressed last week.
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. The next upside gaps to fill 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. 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 this week. It also broke, and lightly closed below, 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. 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.
Hogs
This week's rally continued through today. April futures filled the upside intraday gap at 83.47 this week and today's close was the best since 9/21. Chinese news was likely the catalyst.
China's Ministry of Agriculture today reported China's total hog herd at the end of December at 434.22 million head. This would be -4.1% from last year. They repeating this week's earlier release of a 41.42 million head sow herd. That number was -5.7% from last year. China's multi-year over production issues are coming to an end. By spring they'll switch monthly pork production from over last year to soon under last year. Additionally, this current 41.42 estimate is quite close to the government's current official target of a long term reduction to 41.2.
From a numbers standpoint we would be very cautious in making any grand statements about China going back to being a big US buyer. Their 2020 peak US import of 2.1 billion lbs. has been reigned in to 0.5 in 2023. We can at least say psychologically, with many US traders holding an unnaturally large fascination with Chinese buying hopes, it does take pressure of our back.
As of Thursday cash pork prices were only +7.56 from the low in December. Interestingly, today's oddly strong looking +2.84 jump on the morning report was not due to pork bellies. This gain may stick on the revision coming this afternoon.
Cash hogs are gaining but we would not call this an aggressive rally. Thursday's +0.27 gain marks 10 days of consecutive gains. The 69.90 Lean Hog Index is just over the 65.05 seasonal low from December.
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. Issues like percent of processing capacity also come into play. 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.
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. The near term downtrend line from the September and November highs was broken this week. Today's trade pushed past prior highs from 11/13 at 82.80 on the April. Additionally, the next open upside gap to the 9/28 close at 83.47 was filled. There is one last remaining gap, the 9/20 close at 85.75.
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:
(1/26) Buy 1 April 81.70, risk 80.05, objective 84.70.
Working Trades:
(11/15) Sold February 66 hog put 1.90, risk 1.80, objective 0. Closed 0.05.
(11/30) Sold February 66 hog put 1.45, risk 1.80, objective 0. Closed 0.05.