The Market's Fine Print

When the high rollers of herd expansion and liquidation first set down for a game of poker in January, tall stacks of chips from one end of the table to the other looked fairly even. Wearing both blinders and ear plugs, Lady Luck herself shuffled and dealt the cards with cool professionalism, a paragon of impartiality.

I suppose would-be expanders could have claimed a few more cheerleaders in the casino. Generally speaking, 2014 was a banner year for livestock producers, and there's nothing like extraordinary profit margins to whet your whistle for doing more. If psychology and enthusiasm always won the pot, growth-minded gamblers might have broken the bank in no time.

Yet other sharks in the room were not exactly devoid of bluffing talents, rabbits' feet and hidden aces. In other words, there were plenty of reasons to bet against the rising tide of livestock numbers, ranging from the uncertain reach of porcine epidemic diarrhea (PED) virus to the unbroken back of widespread drought to the questionable determination and strategic planning of aging producers.

The game was indeed on.

Six months later, many champions of expansion are no doubt eager to double down, tip the croupier and visit the cashier. To be sure, the hard slaughter evidence covering the last two quarters has convincingly supported ideas of significant herd growth for both cattle and hogs.

Let's start with the virtual absence of PED. With only isolated cases of last year's devastating plague reported in the first half of 2015, the critical metrics of pigs per litter and litters per sow soared back to normal levels. Through the end of May, commercial hog slaughter totaled 47.1 million head, 6% greater than the first five months of 2014.

Frankly, I was a little surprised when USDA confirmed no more than a 1% increase in the size of the June 1 breeding herd last month. Besides some tough market weeks in the late-winter/early spring period, pork producers have done a pretty decent job holding black ink. Further, the first-quarter rally in lean futures afforded some longer-term hedging opportunities.

While big money plans can often be wrong headed, plans for two new pork plants to be operational by late 2016 and early 2017 clearly reflect a high comfort level in the future curve of expansion. Farrowing activity could remain in relatively slow gear for another quarter or so, but much will depend upon one expansion variable still in the bubble.

Hold that thought.

Another legitimate early year fear of expansion potential has dried up and blown away thanks to a remarkable monsoon that blew across much of the Central Plains from early spring through the first half of the summer. Although drought-breaking talks need to be a conversation of years rather than a few freaky seasons, the generous rains of 2015 represent a significant blessing for cattle ranchers looking to seriously reclaim lost bases of production.

And if there's any doubt in your mind that green (both the color of grass and money) is especially easy on ranch eyes, consider how female cattle slaughter has dropped like a stone so far this year. On one hand, commercial cow slaughter through the end of May totaled 2.21 million head, 7% below Jan-May 2014. On the other hand, commercial heifer slaughter for the same period totaled 3.23 million, 9% smaller than the previous year.

The diversion of heifers from the feed bunk to the halls of motherhood represents a major factor in explaining lagging placement activity and extremely tight fed supplies. Total commercial slaughter through the first five months of 2015 equaled 11.7 million head, 7% less than Jan-May 2015.

All of these pieces of the puzzle suggest to me that ranchers are retaining the biggest class of heifers seen in years. As far as the motivation of aging cowmen, there's nothing like the siren call of $300 calves (i.e., fall sales confirmed by last week's "Top of the Rockies" video sale on some 450-pounders) to rejuvenate like a cocktail of Geritol and Viagra.

Maybe we'll know a little more next week when USDA releases the July 1 Cattle Inventory (i.e., Thursday, July 24, 2 p.m. CDT). Remember, this was one of the reports on the government's scrap pile just two years ago. Even though it represents a small survey compared with the Jan. 1 assessment, I'm glad Washington decided to rescue it from the shredder, especially given this potentially transformational moment.

For what it's worth, I suspect the July 1 beef herd will number close to 30.9 million head, as much as 4% greater than last summer.

Yes, we've come a long way from the expansion wagering of January. But if you think that all of the cards have now been marked, all of the dice irreversibly loaded, please remember that it's still critical to beat the market dealer's final hand. Before anyone claims the pot, tell me the exact size of the growing feed crop.

Although it would require major and currently unforeseen growing problems through the last half of the summer to throw serious wrenches in the mechanics of livestock growth, a significantly larger corn crop than commonly imagined could easily cause the game of herd expansion to change from one of friendly "calls" and cautious "raises" to something where "all-in" bets are far from unusual.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

(AG)

Copyright 2015 DTN/The Progressive Farmer. All rights reserved.