Hogs & Pigs Update:

On page 2 we have included a summary of the latest USDA Hogs and Pigs Inventory survey. The report had something for both bulls and bears. The total inventory at 64.872 million head was up 1.9% from the previous year, compared to pre-report estimates looking for a 1.7% increase. The sow herd was 5.820 million head, 0.6% higher than last year Probably one of the more bearish indicators in the report was the pig crop during Dec—February, up 2.9% from a year ago. While pigs per litter were in line with expectations, up 1.7% from year before, sow farrowings during the quarter rose 1.2% compared to trade estimates of a 0.7% increase. The survey indicated that producers do not expect to increase farrowings in the next two quarters, a somewhat dubious proposition given the larger sow herd. High feed costs and eroding product prices may cause producers to put the foot on the brake and projections of farrowings well below estimates for the next two quarters could be construed as bullish for the market. Still, futures may opt to focus on the reality of larger supplies today rather than promises of slower growth in the future.

LFTB Impact:

As we noted in our Friday letter, cattle futures remain on the defensive. One particularly troubling indicator is the weakness in the price of fat beef trimmings. We estimate that 50CL beef trim accounts as much as 10% of total beef on the carcass (using USDA cutting yields and taking the highest volume possible for each primal). In addition, packers generate another 5-10% as extra fat trim and a good portion of this supply went into making LFTB and related products as well as into rendering. We have seen a lot of estimates as to the supply of LFTB coming to market. Steiner estimates overall production at around 400 million pounds a year. Other estimates peg this supply at 500 million pounds a year. The conversion rate of extra fat trim to LFTB is generally 3:1, i.e. it takes three pounds of fat trim to generate one pound of LFTB. If 75% of the production capacity of LFTB is lost due to the controversy, and this is a big if at the moment, it would imply an additional 900 MM pounds of extra fat trimmings available. Some of this product will go into the 50CL supply or traded as extra fatty trim to be blended with leaner product and eventually become ground beef. A large portion will go back into rendering and trade at a discount to what it sold for in the past.

So how does this affect live cattle? Back in January and early February, before the heavy weights became apparent and before the controversy over LFTB, analysts were estimating fat beef trim prices for April and May at around $120/cwt. On Friday, 50CL beef was quoted at 73 cents/lb. This kind of difference translates in about $3.2/cwt. per head live. While we do not have prices for extra fat trim, it is fair to say that prices for this product are down sharply as well. Traders have been discounting cattle futures based in part on the fact that trim values are weak and could stay weak. The removal of LFTB implies that packers now have to sell a good portion of the fat trim generated from the carcass at much lower prices, thus reducing cattle values. What is a further concern for the market is that once Memorial Day is behind us, demand for fat beef trim going into hamburgers declines. With more fat trim around us and weaker demand, we could see further downward pressure in the complex, hence the sharp decline in June futures.

Another factor that is a corollary of the LFTB story is the impact it could have on consumer demand. It is always hard to speculate how consumers will respond to specific issues. We think it is fair to assume that the longer the issue percolates in the press, the more significant the impact on demand. Different from E.coli, which is an issue that is known to consumers and about which they have been educated, the LFTB issues is new and until the consumer knows more about it, their final demand is unknown or unknowable The removal of LFTB from a number of retail and foodservice operations implies the need for another source of supply that will replace it. The extra supply can be found but at significantly higher prices as some lean beef cuts will probably go in the grinder. The consumer will eventually get the supply of ground beef they need, it may cost more even if cattle are valued less.

Further Reading

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You can view the full report by clicking here.

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You can view the USDA Quarterly Hogs and Pigs Report by clicking here.