July WASDE Livestock Price Forecasts

The July WASDE report featured pork production and price forecasts adjusted to the the June inventory data for the remainder of 2017 and through the 1^st half of 2018. Minimal adjustments to quarterly production forecasts were made, with a slight increase for the 4^th quarter, while the 1^st quarter of 2018 was barely lowered. But production in both quarter are projected to be record large. The Oct-Dec average live hog price forecast was unchanged at $41-45, and th 1^st quarter forecast was increased by $3 to $48-52. The chart plots the July WASDE 1^st quarter forecast against actual prices. CME Feb/Apr hog futures adjusted to a live equivalent, with normal basis are pricing in a 1^st quarter average live price of $50/cwt ($67 lean), which is right at the midpoint of the USDA’s forecast.

The chart plots the historical error of the USDA’s 1^st quarter price forecasts in the July WASDE. Over the last 23 years, there has been a very slight tendency for the USDA to overestimate price in July. In 12 years (52%) the USDA overestimated price by an average of $6.37, and underestimated price in 11 years by an average of $4.88. The largest miss was clearly in 2014, when the forecast was too high by nearly $25, while the smallest error was in 2013, when the forecast was spot on. Based on the USDA’s track record for projecting 1^st quarter hog prices in July and an outlook for record large 1^st quarter production, that any rallies in Feb/Apr hog futures at the end of the summer should be used for sales against 1^st quarter production, and/or sales of out of the money calls. 

In the beef estimates, the USDA fractionally lowered the forecast for 2018 annual beef production, while the 1^st quarter production and price estimates were unchanged. 1^st quarter beef production is forecast at 6.55 Bil Lbs, which if realized will be the largest since 2000 and the 2^nd largest 1^st quarter production total on record. The USDA estimated the quarterly average price in a range of $115-125, with the midpoint at $120. Since July estimates began in 1995, the price forecast has been too low in 13 years by an average of $7, and too high in 9 years by an average of $7.50. A year ago, the forecast midpoint of $123 was spot on. The CME today is pricing in a quarterly average price of $116-117, or $3-4 under the USDA. We think strong rallies over $120 February should be used for 1^st quarter feedlot sales.