Wednesday may confirm 11% drop in the US beef cow herd.

Livestock

Fed and feeder futures broke above their 50% retracement marks but failed to hold it by the close. The morning trade saw new highs for this two month uptrend. Recent US GDP data, still-strong beef and hopes for further breeding herd declines on Wednesday are factors.

Last week's cash trade was $175 in Texas, $174 in Kansas and $176 live/$277dressed in Nebraska. The prior week's sales were generally $173 live from South through North and $273/$274 dressed. Live prices bottomed in December at $170.

Allendale's current price projections are February at $173, April at $179 and June at $176. Our upside targets for live cattle futures have been met and lightly exceeded. We are now neutral to the live end from a fundamental numbers basis. We expect the big restart to the 2023 - 2026 falling supply story to show in the later part of the year. One bigger change 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.

As of Friday wholesale beef had advanced 24.63 over 16 days. Today's morning report was +0.97.

Last week's 618,000 head cattle kill was a bit lower than we expected Friday morning, 647,000. That USDA 618,000 estimate was held unchanged on today's update.

The 2023 US beef cow slaughter was -11% from 2022 at 3.603 million. But that does not mean expansion. 2022 was the single heaviest liquidation year of the prior 50. 2023, even with a smaller cow slaughter, was still a liquidation year. It was tied for the third heaviest liquidation of the past 50.

On Wednesday USDA will release its bi-annual survey of cow/calf producers. 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. By 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.

Chart action for April live cattle is very strong. New highs for this uptrend were made today. The 50% retracement mark as 182.60 has held so far. 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.

Our 2023 - 2026 view for the beef complex has 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. March and all backmonths are over that trigger price from October 23. The year's low in feeder prices is likely in.

The March feeder cattle chart is quite strong. Today's trade saw new highs for the uptrend but a second test of 50% retracement, 240.36, has held. 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: Our fundamental based upside target is met on fats. A leg up 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

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.

As of Friday cash pork was 8.16 from the low in December.

Cash hogs were +1.17 on Friday. The 70.50 Lean Hog Index is starting to put some distance away from the 65.05 seasonal low from December.

Last week's 2.719 million head estimated kill was revised down to 2.689 after the weekend. We estimate 130,000 head of the 572,000 backlog from two weeks ago has been made up.

China's sow herd, 41.42 million head, is finally near the government's long term downside goal of 41.2. Cash hog prices in China, just like the US, have found their winter seasonal low.

Allendale's price outlook is for the February at $74, April at $82 and June at $102. Spring contracts have met our upside target. The summer contracts have more to go.

Though April did not make a new high for the uptrend it did post its best close yet. The next open upside gap is at the 9/20 close, 85.75.

Summary: Odd to say but February and April have hit our upside targets. There is still further to go for summer contracts. Interesting to see the market does not have much concern over are light backlog in US hog processing...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.

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