Market Matters Blog

Exploring the Stars With a Microscope

Rick Kment
By  Rick Kment , DTN Analyst

Over the past two months, with COVID-19 the focus in both livestock markets and the entire economy, the picture remains extremely blurry. The focus continues to shift from near- to long-term market direction and back, many times over, not to mention the impact on producer operations.

Trying to assess overall market direction and determine short- and long-term factors affecting the market continues to be a challenge. This raises the question: Are we even using the correct instruments to gauge the overall moves in the market, or are the instruments we have in our arsenal even adequate to examine the changing market patterns with an unknown future.

Futures and cash market prices have shown incredible variability. Live cattle futures, for instance, have traded within a $30-per-cwt range in less than two months. Lean hog prices are also showing significant losses, trading at or near lows after a $27-per-cwt drop in one month's time. The wild swing from day to day in futures, cash and wholesale meat prices makes it hard to tell how short and immediate market shifts will affect the industry as a whole, not to mention long-term industry changes. This has led to growing uncertainty, not only about overall meat demand, but also about producers' expectations of how the rest of 2020 will look. The effects of COVID-19 are likely to significantly shift producer mentality for years to come and also skew the way most of us assess and analyze the market.

Last week's release of the April WASDE (World Agricultural Supply and Demand Estimates) report showed moderate to strong adjustments were made to beef and pork production through the remainder of 2020 compared to what USDA estimated in its March report. Projected beef production during the first quarter of 2020 is estimated to increase 80 million pounds, while pork production during the first quarter is projected to increase by 15 million pounds more compared to projections one month earlier.

Both beef and pork production continue to show strong year-over-year growth with beef production 511 million pounds and pork 557 million pounds over year-ago levels. Prices for both cattle and hogs during the first quarter are expected to show limited changes from both a year ago and from March estimates. However, the expectation that major shifts will develop in both price and production levels though the second quarter (April through June) of 2020 is likely to create additional uncertainty in the complex. Year-over-year production of beef and pork is still expected to hold through the second quarter, but beef production is expected to fall significantly in the second half of 2020. Most of this shift is associated with the increased beef production through 2019 that continued to ramp up as the year progressed.

Total beef production projections compared to 2019 levels are as follows: second quarter, 101%; third quarter, 98%; fourth quarter, 98%. This puts expected total production for 2020 at 101% above 2019. Pork production is projected to continue to show significant increases through the year, although a coronavirus-related dip is expected in second-quarter levels compared to what was previously estimated in the March report. Third-quarter pork production is expected to lead the gains with a 108% increase from 2019 levels. Due to the shorter turnaround time in the pork industry, major reductions in production compared to the previous March reports are expected in the second quarter. Meanwhile, beef production will take longer to adjust and will slow significantly in the second half of 2020.

Prices have been significantly adjusted in the latest WASDE report, with first-quarter cattle and hog prices both showing little movement. But significant losses are seen through the rest of the year in the latest report. Cattle prices have been adjusted $9 per cwt lower from March projections during the second quarter, while hog prices are expected to fall $10 per cwt from last month's projections. Significant uncertainty is seen through the rest of the year with all remaining 2020 price expectations adjusted lower.

The market continues to focus on immediate short-term changes in economic and consumer patterns that seem to be changing by the minute. I hope that, soon, we will be able to get a better indication of what the short- and long-term effects will be on producers and consumers. But, until then, we try to establish a good market balance between short-term price moves and how they affect long-term operational decisions.

Rick Kment can be reached at rick.kment@dtn.com

(BE/AG)

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