The second half of March was quite different than the first half in the livestock markets. The first half saw increasing prices for both cattle and hogs, only to be on the decrease in the last half of the month.
The cattle market dropped after making an extremely sharp run to new highs for the year on ideas that numbers were not sufficient to meet demand. The market dropped as packers began to balk at higher prices when retailers pared back their buying interest because of the higher beef cutout values.
The futures market had been leading the charge to higher levels with hedge and index funds leading the buying. This represented nothing more than speculators accumulating long positions in the cattle market on ideas that inflation and tight supplies would dictate the future price of cattle.
The caveat to this thinking is the fact that demand, not supply, is the real driving force behind any move in the market. Besides, at this point inflation is still under some control and really had no bearing on the market prices.
With the beef cutouts over $160 per hundredweight, the volume in the boxed beef trade slowed to a snail’s pace, and put the packer in a precarious position of a choice of cutting back the kill or offering product at lower levels to avoid a build up of inventories. Eventually the funds had exhausted their buying and without that continued buying under the futures market, the fundamentals did not support the higher prices and a liquidation ensued.
This action in the market has provided producers with the opportunity to take advantage of the higher prices and lock-in inventories.
The hog market was the first to begin to slip during the month. As pork cutout prices moved above $70/cwt., the volume in pork product began to decrease and again forcing the packers to take a more defensive posture in their bidding for inventory.
The fact that the U.S. dollar also strengthened did not help the export arena and this caused the market to be more defensive in the projections of increased export demand.
On March 26, the U.S. Department of Agriculture released a quarterly Hogs and Pigs Report. The results are: all hog and pigs, 97 percent; kept for breeding, 96 percent, kept for marketing, 97 percent. The report was interpreted as bullish since all major categories were less than expected. This will likely give the futures market a boost and change some attitudes from a negative to a more positive approach to the market.
This report indicated that the hog industry is still in a state of contraction and numbers will likely be lower through the remainder of the year. From a supply standpoint, the hog market appears to be in fair shape.
The question now is, is the economy in good enough shape to support higher prices? Demand will be the key in the months ahead as to the ability of the hog market to sustain higher price levels. Unless we see vast improvements in the economy in the near future, the chances of sustaining a long-term bull market seem remote. Therefore, producers should be patient and use extreme strength to protect inventories.
Joe Teale is a commodity broker for Great Plains Commodity in Afton, Minn.
