August 3, 2014
As posted on CQG.
Bullish and bearish fundamentals are pulling in two directions at the end of grilling season.
It has been a wild ride in 2014 for animal protein markets. Beef and pork prices both traded at all-time highs this year.
In the live cattle contract, every dip so far in 2014 has been a raging buy. The last dip took prices from almost $1.61 per pound on July 28 to $1.4425 on August 20, a drop of 10.4% in less than a month. The move down was the sharpest so far this year, and open interest (the number of open long and short positions) dropped with the price, indicating that longs got out of positions. Alas, during the final week of August, prices turned higher to close the month and the end of grilling season at $1.51425 per pound.
There are bullish and bearish factors pulling at beef prices.
On the bullish side:
- Every dip this year has been a buying opportunity
- Herd sizes remain historically small
- Cash cattle prices remain high
- Global demand for animal protein is on the rise
- The US will actually become a beef importer in 2015
On the bearish side:
- Grain prices are at four-year lows – feed prices have dropped like a stone
- Animal protein producers are increasing herd sizes as fast as they can given low feed and high beef prices
- Grilling season in the US ended with the Labor Day holiday
It is a mixed bag in the cattle markets as we head into fall. Let us take a quick look at the state of another animal protein – the market for lean hogs.
In the lean hog market, the big story of 2014 was the PED virus that killed almost 7 million sucking pigs and forced prices up to all-time highs before the summer. Estimates of damage from PED were higher than actual mortality figures; it turned out that fewer baby pigs died, so prices fell throughout most of the summer. The price of lean hogs reached a low of 90.45 cents a pound on August 21. Since then we have seen a nice recovery rally to 98.12 cents where the October contract closed on the final day of August.
Consumers suffered sticker shock this year as beef and pork prices reached the highest levels ever. Beef prices remain at a significant premium to pork prices, some 54% higher based on closing August prices. Global demand for meat is on the rise, but in hogs, many of the same bullish and bearish factors we see in cattle are presently in play.
It is very difficult to get a handle on where animal protein prices may be heading given conflicting fundamentals now that grilling season has officially ended. However, an interesting pattern has emerged in the intercommodity spread between cows and pigs that may give rise to an opportunity for nimble traders.
The price spread between cattle and hogs seems to have extended on weekly charts. The price of live cattle divided by the price of lean hogs is currently at 1.589:1. The high in this relationship this year was 1.66:1 back in January. Moreover, the slow stochastics is at the 90 level and turning. Could this be flashing a signal that a move lower is on the horizon?
It is a hard call whether animal protein prices are going up or down here; there are too many bullish and bearish factors competing. Beef appears expensive relative to the price of pork based on historical data. It is likely that consumers will make the ultimate choice of ‘what is for dinner’ and may wind up choosing pork over beef at current differentials. There is a lot of room to the downside in the intercommodity spread between cattle and hogs at this time. This could provide an excellent risk-reward opportunity based on current price levels and momentum.
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