• The composite of meat prices moves lower as cattle and hog prices fall.
  • Animal proteins fell 20.45% in Q1- Lean hogs posted the most significant loss.
  • Live cattle prices fell 18.34% in Q1.
  • Feeder cattle were down 16.10% in Q1.
  • Lean hogs post a 26.92% loss in Q1.

The animal protein or meat sector moved 20.45% lower in Q1 as lean hog and cattle futures price posted double-digit percentage losses over the first three months of 2020. The sector finished 2018 with a 3.73% loss and moved 5.15% higher in 2019. Meats ended 2017 with an 8.39% gain after falling 8.80% in 2016. In the meat markets, results can be skewed by term structure given the seasonality in the prices of beef and pork. However, risk off conditions in all markets weighed on the animal proteins in Q1 during this extraordinary time.

During the first three months of 2020, the animal protein fell during the offseason. The January 15 “phase one” trade deal with China initially increased optimism that US exports would lift the demand and prices. However, risk-off conditions over the spread of Coronavirus that began in China increased the potential for a global pandemic that weighed on markets across all asset classes, and the meats were no exception.

Live cattle futures fell steadily over the three months. Feeder cattle prices did the same. Lean hogs were choppy but finished the quarter with the most significant percentage loss. The pork shortage in China because of the 2019 outbreak of African swine fever did little to support the price of lean hogs. The lack of pork could have given rise to the outbreak of Coronavirus. Some experts believe that the consumption of animal protein from “wet markets” in China could be the root of the global medical emergency that took hold of markets in February.

The iPath B Bloomberg Livestock Total Return ETN product (COWB) reflects price action in the meat markets. The Invesco DB Agriculture STF (DBA) just over a 9.4% exposure to the live cattle and hog futures markets.

Live Cattle Review

Live cattle futures fell by 18.34% in Q1 after rising 0.67% in 2019. In 2018, they moved 1.91% higher for the year. In 2017, live cattle gained 4.74% for the year. In 2016, live cattle futures lost 15.17% of their value. The nearby month live cattle futures contract on the CME traded in a range between 85.25 cents and $1.27550 per pound in Q1 2020. Nearby live cattle futures closed on March 31 at $1.01825 per pound.

It takes 18 to 24 months to raise a head of cattle; therefore, supply issues can take months, if not years, to impact the price of beef. The population of planet earth now stands at 7.774 billion people, around 20 million higher than at the end of 2019. In Asia, diets have changed as wealth has grown. A traditional rice-based diet now includes more complex proteins, which has increased demand for complex proteins like beef and pork in the region. It takes six pounds of feed for cattle to add each pound of weight. The average weight at the time of slaughter is between 1,200 and 1,400 pounds. Therefore, grain or feed prices have a significant impact on the price of beef. High feed prices often cause producers to take cattle to processing plants early at lighter weights to avoid paying the input costs. Lower feed prices often lead to heavier carcass weights and lower prices.

The 2019 crop year in the US produced ample supplies to meet global requirements. The trade war between the US and China had resulted in gluts in the US, while shortages could develop in the world’s most populous nation. However, each year is a new adventure in agricultural markets. As we move into the second quarter of 2020, it will be the weather conditions in the US and around the world in the Northern Hemisphere that dictate grain and feed prices. The second quarter of the year is the time when uncertainty over agricultural production tends to rise, leading to increased price volatility.

When it comes to the inputs for raising cattle and all animal proteins, prices are sensitive to price action in the grain sector as feed prices are a primary input in raising animal protein. Soybeans moved lower by 6.04% in Q1 while corn fell 12.12%, while CBOT wheat posted a gain of 1.79%. Production of grains and animal proteins are now focusing on the coming crop year as we are moving towards the beginning of the planting season in the northern hemisphere.

The latest March WASDE report reflected weakness for the beef market. The WASDE told the beef market:

The 2020 forecast of total red meat and poultry production is raised from last month. Beef production is raised from the previous month as higher expected steer and heifer slaughter more than offsets lower non-fed cattle slaughter. Heavier carcass weights are also expected to support increased beef production. Pork production is increased on higher first-quarter slaughter.

The 2020 beef import forecast is raised from last month on higher expected imports of processing grade beef, while the export forecast is reduced on weaker anticipated demand in several markets. Pork exports are raised from last month on recent trade data and strong international demand for U.S. pork products. The fed cattle price forecast is reduced from last month on recent price weakness and increased production. The hog price forecast is reduced on pressure from large hog supplies.

Source: USDA March WASDE

Ranchers and animal protein producers often have a tough time dealing with volatile feed prices as they panic and buy on or near highs for fear of even higher prices. When the prices come down, they find themselves with feed price commitments that are much higher than market prices. In 2018, producers faced trade issues and increased competition from South American producers who have the benefit of weak currencies making their beef products more competitive in global markets. The ranchers faced the same issue in 2019. In August 2019, the trade issue with China escalated, which could cause increased price distortions in the cattle market over the coming months. While the US and China signed the “phase one” trade agreement on January 15 during Q1, Coronavirus swiftly replaced trade as the primary issue facing markets.

The forward curve in live cattle is in backwardation from April 2020 to June 2020. The market then shifts to contango from June 2020 through April 2021, at which point it switches back to backwardation from April 2021 through August 2021. The current shape of the forward curve indicates that supplies of beef ample to meet demand over the coming months.

Source: CME/RMB

There is lots of seasonality of this commodity, but it is also highly sensitive to feed costs, which are the critical input in raising cattle. Risk-off behavior in markets caused by the outbreak of Coronavirus in the world’s most populous nation in Q1 weighed on the price of beef so far in 2020.

The price of live cattle futures was in a bear market throughout Q1.

Source: CQG

The weekly chart of live cattle futures shows that price momentum and relative strength moved below neutral territory to an oversold condition. Open interest moved from 378,965 contracts at the end of Q4 2019 to 264,447 contracts at the end of Q1 2020. The decrease of 114,518 contracts or 30.2% in the technical metric that measures the total number of open long and short positions in the live cattle futures market is not a technical validation of a continuation of the current bearish trend. Decreasing open interest as the price of a futures contract falls is not typically a technical confirmation of a bearish trend in a futures market. However, the metric tends to decline during the winter months, which is the offseason for the cattle market.

As we move into the second quarter of 2020, live cattle futures will reflect the peak season for demand in the US that starts at the end of May. Meanwhile, the status of Coronavirus will determine if risk-off conditions continue to plague markets. The decline in emerging market currencies has weighed on beef prices as Brazil and Argentina are both producers of cattle. The Brazilian real and Argentine peso currencies hit new historical lows during Q1. Any rebound in the currencies against the Us dollar in Q2 could be supportive of prices. Moves in grain prices always have the potential to alter the behavior of cattle producers. At the same time, an outbreak of a disease in cattle herd around the world could cause wild price volatility as we witnessed in past years when mad cow disease and African swine fever cause the meat markets to move dramatically for periods. Q1 ended with the live cattle futures close to the lows for the first three months of the year.

Feeder Cattle Review

While live cattle futures contracts have a physical delivery mechanism, feeder cattle contracts are cash-settled instruments. Feeder cattle futures tend to attract more speculative interest. Feeder cattle marginally outperformed live cattle prices in Q1 as they fell by 16.10%. Feeder cattle futures fell 2.37% in 2019. In 2018, feeder cattle futures gained 1.95% compared to their closing price at the end of 2017. Feeder cattle gained 11.92% in 2017 after moving 21.84% lower in 2016. Feeder cattle posted a decline of 23.2% in 2015, but in 2014 they gained 29.65% on the year. During the first quarter of 2020, the range in nearby feeder cattle contracts was from a low of $1.07475 to a high of $1.51475 per pound, and they closed Q1 just below the $1.22 level. The same fundamentals affecting the live cattle futures are at play in the feeder cattle futures contract. At times the feeder cattle contract leads the live cattle contract as speculators can push the price of the cash-settled contract because of less liquidity when it comes to volume and open interest. Nearby feeder cattle futures settled on March 31, 2020, at $1.21925 per pound.

Source: CME

The forward curve in the feeder cattle futures market is in contango from April 2020 through November 2020 and then shifts to backwardation from November 2020 through January 2021.

Source: CME

The weekly chart in feeder cattle futures displays that the animal protein has been trending lower. Relative strength and price momentum were both below neutral territory. Open interest fell from 49,684 contracts at the end of Q4 2020 to 32,767 at the end of Q1 2020 or 34.05% over the period. Feeder cattle fell slightly more than live cattle futures over the first quarter of this year.

Lean Hogs Review

In 2015, lean hogs shed 26.35% of value. Lean hogs moved 10.62% higher in 2016. In 2017, lean hog prices moved 8.50% to the upside. In 2018, the price of pork posted a loss of 15.05% for the year, but in 2019 the price rose by 17.14%. In Q1, volatile hog prices moved 26.92% lower despite global supply concerns over the 2019 outbreak of African swine fever in China. The range in the pork market was a low of 52.10 cents to a high of 90.175 cents per pound for the quarter that ended on March 31. The hogs were the worst-performing meat in Q1.

In the latest March WASDE report the USDA told markets:

The 2020 forecast of total red meat and poultry production is raised from last month. Beef production is raised from the previous month as higher expected steer and heifer slaughter more than offsets lower non-fed cattle slaughter. Heavier carcass weights are also expected to support increased beef production. Pork production is increased on higher first-quarter slaughter.

The 2020 beef import forecast is raised from last month on higher expected imports of processing grade beef, while the export forecast is reduced on weaker anticipated demand in several markets. Pork exports are raised from last month on recent trade data and strong international demand for U.S. pork products. The fed cattle price forecast is reduced from last month on recent price weakness and increased production. The hog price forecast is reduced on pressure from large hog supplies.

Source: USDA March WASDE report

The WASDE was bearish for pork. However, the report did not consider the potential for US exports to China in the aftermath of the “phase one” trade deal. The African swine fever outbreak in China and other Asian countries continues to present a challenge for the pork market. However, Coronavirus has weighed on markets across all asset classes, and lean hogs were no exception.

In 2014, lean hog futures rose to their highest price in history at $1.33875 per pound when PED killed over seven million suckling pigs. In May 2019, the price of pork was over the 90 cents per pound level on the active month futures contract in a sign that the outbreak had significant consequences. However, as the peak season ended, hog futures moved lower as they reflected the oversupply conditions in the US. Over the first quarter of 2020, prices continued to move to the downside.

China is the world’s leading pork consumer, so trade issues between the U.S. and China weighed on the price of the meat throughout much of 2019. The agreement with the Chinese could eventually move the price of pork to move higher in 2020. The outbreak of the African swine fever in Asia changed the dynamics of the global pork market. The disease could be one of the reasons for the outbreak of the virus that threatens a global pandemic as Chinese consumers could have set the stage for Coronavirus in “wet markets” that offer a wide range of proteins that are far from standard in the west. China had significant strategic inventories of frozen pork, but they have declined. Meanwhile, the African swine fever spread to neighboring counties, as has Coronavirus.

Nearby lean hog futures settled on March 31 at 52.20 cents per pound on the nearby futures contract at the bottom end of the trading range.

Source: CME/RMB

The forward curve in lean hogs is in contango from April 2020 through August 2020, after which a backwardation is present from August 2020 through December 2020. There is a contango from December 2020 through July 2021. The forward curve in hogs reflects seasonal factors. It is difficult to get a reading on the outbreak from China as their statistics can be suspect as they are when it comes to Coronavirus. Since China is the world’s leading consumer of pork, the nation is likely to treat supply and medical data as a matter of national security. The “phase one” trade deal has the potential to cause demand for US exports to China to rise.

The path of least resistance for the price of lean hog futures will depend on events surrounding trade and the disease outbreak over the coming weeks and months. However, hogs were at a low level going into the season of peak demand that will begin in late May on the Memorial Day weekend in the United States.

China is the world’s largest pork producer, but at the same time, the nation is the world’s biggest consumer of the meat. China bought the United States’ largest hog producer and processor, Smithfield Foods, in 2013. Given the current administration’s posture on trade with China and other nations around the world, we could see changes when it comes to food supplies raised, grown, and manufactured in the US even when ownership is by foreign entities. Food supplies are a matter of national security. The Trump Administration has already rolled out restrictions on Chinese ownership of technology companies in the US. While a Chinese entity already owns Smithfield Foods, their location in Virginia and position as the largest pork processing company in the U.S. could present the administration with a conundrum in the case of a prolonged trade war when it comes to exports of pork products produced in the USA. Smithfield shipped pork to China in 2019 as the Asian nation paid the tariffs given the decline in local supplies.

Meanwhile, the technical position of the lean hog futures markets at the end of Q1 2020 highlights a market that was in oversold territory.

Source: CQG

As the weekly chart highlights, lean hog prices moved lower in Q1. We are now coming into the peak season for demand. Even though the trade war de-escalated in with the January 15 “phase one” deal, the price of lean hog futures moved lower during the offseason as the Coronavirus weighed on the prices of markets across all asset classes.

Technical resistance on the weekly chart is at the December 2019 high at 72.60 cents per pound. Support on the weekly and monthly chart is at the October 2016 low at 40.70 cents. The open interest metric moved from 282,389 contracts at the end of Q4 2019 to 229,366 at the end of Q1 2020, a decrease of 53,023 contracts, or 18.78% during the first quarter of 2020. Falling open interest alongside falling price does not typically validates a bearish price trend in a futures market. The price was at a level that could limit the downside potential going into the peak season for demand in Q2. However, the deflationary spiral took a toll on the price of pork.

Source: CQG

The daily chart of June futures shows that lean hog futures were in deeply oversold territory at the end of Q1 2020.

Source: CQG

Meanwhile, the monthly chart of lean hog futures shows price momentum and relative strength reached oversold territory at the end of Q1. The hog market had been under pressure until swine fever broke out in Asia, but it failed to rise to challenge the 2014 peak. If pork shortages continue to develop around the world in the future, the critical level to watch is at the $1.34 per pound area, which is the record high from 2014. As Q1 ends, Q2 2020 will be a time when the market reflects the peak season for demand that runs from late May through early September 2020. Lean hogs are limping into the 2020 grilling season as deflationary pressures trump seasonal influences.

The prospects for animal proteins in Q2 2020

As we move into Q2, the prices of cattle and hogs will continue to be sensitive to the news cycle on trade and Coronavirus, but the approach of the peak season for demand and low inventories in China because of African swine fever could inject volatility into the futures markets during Q2. When it comes to hogs, lower global supplies could keep some degree of a bid under the price of pork. In the cattle market, consumers could purchase more beef over the coming months if fears of pork shortages rise. However, risk-off conditions because of the global pandemic is pushing meat prices lower with all other assets and agricultural products.

Cattle and hogs are both sensitive to feed prices, so changes in the grain markets could impact price action in meats during the second quarter of 2020 as the weather in the US during the planting season could cause lots of volatility.

Both meats are always susceptible to other diseases like PED and mad cow issues or other conditions that can wipe out supplies in very short periods. The African swine fever is just the latest example of how diseases can wreak havoc with commodity supply and demand fundamentals as well as with technical analysis. Therefore, the animal protein sector can be highly volatile and full of surprises when it comes to the path of least resistance of prices.

Demographic factors continue to support demand for animal proteins as we move forward into the next quarter in 2020. At the same time, the currency markets could add volatility in the meat markets as the Brazilian and Argentine currencies could experience volatility as the real and peso are at historical lows. An improvement in the South American foreign exchange instruments would likely support higher prices for cattle, and maybe even hog futures. The recent price action in both the Brazilian real and Argentine peso has been bearish as both currencies declined over the first quarter to new lows against the US dollar. The overriding factor in animal proteins and all markets is the deflationary spiral

Volatility is a paradise for traders, but in the world of meats, it can be hazardous. Since price gaps are the norm rather than the exception in the meat markets, stop orders may not result in optimal execution for risk positions. For those who do not venture into the volatile futures markets, ETN vehicles such as the COWB or MOO products tend to replicate price action in the animal protein markets. The DBA ETF product has exposure to meat futures and is also a product that reflects the price action in other agricultural commodities. DBA could be a barometer of trade issues with the Chinese over the coming months. DBA is the product that has just under a 9% exposure to the cattle and hog markets. The fund summary for DBA states:

The investment seeks to track changes, whether positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess Return™ (the “index”) over time, plus the excess, if any, of the sum of the fund’s Treasury Income, Money Market Income and T-Bill ETF Income, over the expenses of the fund. The index, which is comprised of one or more underlying commodities (“index commodities”), is intended to reflect the agricultural sector. The fund pursues its investment objective by investing in a portfolio of exchange-traded futures.”

The most recent top holdings of DBA include:

Source: Yahoo Finance

DBA held an 8.96% exposure to February live cattle and February hog futures at the end of Q1, which declined slightly since the end of 2019.

DBA has $314.44 million in net assets and trades an average of 282,038 shares each day. The net assets of this ETF product fell by $20.30 million from the end of Q4 2019. The average volume rose by 18,735 over the past three months.

Source: Barchart

DBA moved from $16.56 at the end of Q4 2019 to $14.07 at the end of Q1 2020, a fall of $2.49, or 15.04% for the quarter. DBA fell to a new all-time low at $13.50 on March 16, 2020.

Aside from the current trade issues and seasonality, demographics continue to provide an upward bias to price on a longer-term basis. The bottom line is that more people, with more money, are competing for finite supplies of meat. In Q1, the world added around 20 million people to its ranks, and a significant percentage will likely be carnivorous.

When it comes to value, the prices of lean hogs were historically inexpensive compared to live cattle in the nearby futures contract as of the final day of Q1. Based on the closing prices of June futures on March 31, the spread moved higher on the June futures contracts and was at 1.5257:1 compared to 1.3291:1 at the end of Q4 2019. The long-term average in the live cattle versus lean hog spread, dividing the price of the cattle by hogs, is around 1.4:1 or 1.4 pounds of pork in each pound of beef. The active month spread at the end of Q1 was telling us that cattle were trading at a high historical price compared to pork.

The U.S. dollar index rose by 3.16% in Q1 compared to the closing level at the end of 2019. A stronger dollar tends to weigh on the prices of all raw materials, and meats are no exception. The dollar index made a new medium-term high in Q1 at 103.96 on the nearby futures contract and closed the first quarter of 20202 just above the 99 level. Lower interest rates from the US Fed did not weigh on the US currency because other central banks around the world have pursued accommodative monetary policies.

If you are going to trade animal proteins over the coming quarter, make sure to keep a keen eye on the trade data between the US and China as they have the potential to be a driver of the prices of hog and cattle futures. Additionally, a decline in pork supplies in China could cause US pork to show up on Chinese dinner tables as the nation has massive requirements to fulfill. However, Coronavirus poses a significant danger to the global economy, as we learned starting in late February. The continued weakness in the Argentine peso and Brazilian real could also influence cattle prices as both countries are exporters of beef to the world. As their currencies declined, their exports became more attractive in global markets, which increased U.S. supplies as export demand dropped. Any recoveries in the South American currencies could have the opposite impact and further increase beef prices, but that did not seem likely at the end of Q1.

Any diseases in cattle or hog herds always have the potential to cause increased two-way volatility. Mad cow disease sent cattle prices lower as consumers did not eat beef for a period. However, African swine fever could have the opposite effect if Chinese supplies continue to drop over the coming months. If the root cause of Coronavirus turns out to be the “wet markets,” new laws in China in response to the virus could lead to a growing demand for beef and pork from the US and other exporting nations providing support for prices.

Meats are one of the most volatile sectors of the commodities market. I tend to look at each month in the futures arena as a separate commodity because of the significant impact of seasonality on the prices of both beef and pork. Keep the seasons in mind when approaching the cattle or hog futures on the long or short sides of the market. We are moving into the peak season of the year, which commences during Q2 in late May. Many factors determine the path of beef and pork prices. Each season is always a new adventure in the carnivorous sector of the commodities market. As we move into Q2 2020, the markets could become volatile. However, cattle and hog prices are moving into the peak season at low levels, which could offer a buying opportunity for the coming months.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.