Cattle and hog prices typically head in opposite directions in the summer months.
In most years, cattle prices peak in March or April and move to a low in July or August. Hog prices typically strengthen from the fall to mid-February, are stable into April, rally during May and decline in late summer.
This year has a slightly different look as fed cattle prices peaked in January have steadily declined ever sense. Hog prices oscillated through the spring, but did rally over $11 per hundredweight live weight from mid-April to mid-May.
Looking ahead. What can we expect for the remainder of 2006?
Cattle U.S. cattle feedlot inventories for May were 11.56 million head, a record for the month and continued a string of record months started in January.
Placements in April were down 1.9 percent from April 2005, marking the first year-over-year decline in placements since last September.
Feedlot marketings were also down, 0.4 percent lower than April 2005, and the third month in a row of lower marketings.
Thus, the higher placements and slower marketings have built inventories that will lead to higher marketings for at least the short run.
Backlog. Feedlots are dealing with a backlog of market ready cattle.
Steer carcass weights for the four weeks ending May 13 averaged 15 pounds heavier than the same period in 2005 and have started their seasonal climb to higher levels.
The number of cattle May 1 that have been on feed 120 days or more was 12 percent higher than the year before and at the highest levels since USDA began this reporting series in 1996.
The Choice-Select spread widened to more than $20 per hundredweight in mid-May which is not unusual, but it is also expected to narrow in the weeks ahead.
Trading. Currently, June futures are trading lower than August and later months, suggesting that the market believes the low may be earlier as well.
In fact, based on the futures market, the low for the cash market was reached in the second half of May at $78-$79.
In spite of the futures market projections, there is reason to think that prices may be lower later in the summer.
In eight of the last 18 years, the low price of the year has occurred in the third quarter.
Spending cuts. Ample supplies of beef, pork, and poultry at a time of high energy prices cutting into consumer spending will be a challenge for the cattle market.
Another factor to monitor is drought conditions in leading beef cow regions.
Pasture and range conditions for the U.S. are slightly worse than last year and about even with the 2000-2004 average, which does include three years of severe drought.
As of mid-May, 20 percent of the nation’s pasture and range was considered very poor to poor versus 14 percent a year ago. Slightly more than half of pasture and rangeland was deemed to be good or excellent.
However, the Southern Plains are significantly worse than prior years, despite recent moisture.
As of mid-May, about 42 percent their pasture and rangeland was considered as poor or very poor compared to only 21 percent last year and the 2000-2004 average of 22 percent.
Culling. A continued drought will likely pressure fed cattle prices in the short term.
Dry pastures could force sales of cows to other regions or to the cull market which would add to supplies.
Longer term heavy culling will slow the herd expansion that is under way reducing the increase in overall beef supplies and price decline.
Watch the weather conditions and the rancher’s response.
Hogs. Hog slaughter through the first 20 weeks of 2006 averaged 1.978 million head a week, up 0.7 percent from the same period in 2005.
The seven weeks from April 1 through May 20 saw slaughter 4.2 percent higher than the previous year.
This pace is higher than the 1.5 percent increase predicted from the March Hogs and Pigs report for the April to June time frame.
This additional slaughter is approximately 550,000 head more than the year before.
Production. Imports of Canadian slaughter hogs increased 11,600 during this period.
Imports of Canadian pigs in December and January that would have been slaughtered during this time totaled approximately 100,000 head more than the same period a year earlier.
Domestic production accounted for over 80 percent of the increased slaughter.
Carcass weights for all hogs have averaged 203.4 pounds year-to-date through mid-May, 0.7 pounds heavier than the same period in 2005.
Weights for mid-April to mid-May are also up by the same amount.
Seasonally, weights decline through the hot weather of the summer months and increase again in the fall.
Bright spot. Pork exports continue to be a bright spot in the market.
First quarter pork exports were up 22.2 percent from the same time in 2005.
Seventy-eight percent of this first quarter growth comes from three countries: Mexico, South Korea, and Russia.
Mexico is our second largest export customer for pork behind Japan. Japan imported more than a billion pounds pork in 2005, nearly 40 percent of U.S. pork exports.
Japan recently implemented changes in testing for residues in imported meats. While the changes may result in additional testing of U.S. pork, it does not appear that imports will be blocked if violations are found.
Weekly average Iowa to Southern Minnesota hog price topped $51 per hundredweight on a live basis (near $70 carcass) in mid-May, but weakened in late May.
Lean hog futures fell approximately $2 per hundredweight across all contracts the week ahead of Memorial Day.
Basis adjusted futures the last full week of May suggest live prices could remain in the mid $40s through early August.
However, futures also predict live prices near $40 in early October and the fourth quarter.
Feed price risk. While U.S. corn stocks are ample today, there is growing concern about the impact of rising ethanol demand for corn if there is a short crop.
December 2006 corn futures traded above $2.85 per bushel in mid-May, 45 cents higher than they were in mid-January.
Perhaps more interesting is that December 2007 futures were more than $3.10 and December 2008 were more than $3.20.
There is a lot of time between now and then, but do you have a plan for corn prices at these levels – double the harvest price in 2005?
(John Lawrence is an agricultural marketing, risk management and livestock economics specialist with Iowa State University.)
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