December is starting out with cattle and hog markets moving quickly in opposite directions. It seems only a few months ago that the opposite was true with cattle rallying while hogs were under constant pressure.
Demand has been the key factor in the cattle market all year and the current situation is no different. As beef cutout rose above the $140 per hundredweight area, the demand for beef products began to slip and the volume in the boxed beef trade turned extremely slow. This obviously made packers back away from bidding aggressively for live inventory and as a result live prices have slipped. The fact that numbers of cattle on feed are on the increase does not bode well for an instant recovery if the demand does not increase substantially.
Beef cutouts have declined rapidly in the first week of December, increasing the chances of reestablishing better demand for beef as it becomes more competitive with other sources of protein. Weights have declined over the past month which has helped reduce the overall beef production, but as finished numbers increase this should offset the weight declines.
The cattle market has now moved into a critical psychological area, that being the $80/cwt. level basis the Midwest. A violation of this area could start another decline into the mid-$70s area basis the Midwest.
However, the cattle market is a bit oversold and with the forecast of winter storms for the cattle-producing areas, this scenario seems a little less likely at this time. Producers should remain cautious toward the market and continue to use rallies to protect inventories.
The hog market has finally come to life as prices advanced dramatically into December.
Several factors appear to be the catalyst behind the recent advance in prices. Demand for pork increased both domestically and for export as pork cutouts offered a good value in comparison to competitive meats.
The weakness in the U.S. dollar made the import of U.S. pork extremely attractive. The lifting of the ban on the importing of U.S. pork by China also gave a boost to the market.
Pork cutouts have improved to over $60/cwt., once again reflecting the increased demand for pork product. The challenge now is, can the $60/cwt. level be sustained? Throughout 2009, each time the pork product reached above this level, the demand for pork seemed to disappear.
If the U.S. dollar begins to recover, this could spell the end to the current rally in hog prices. Technically, the market is becoming a little overbought and with the big premium in the futures market, a sell-off would not be entirely out of the question.
Therefore, producers should take heed in the factors affecting the market at the present time and use some caution in marketing forecasts and prepare to protect inventories.
Joe Teale is a commodity broker for Great Plains Commodity in Afton, Minn.
