“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


To continue following Trader Dan, please sign up for Trader Dan's World at the link on the sidebar to receive a 1 month, no obligation, trial membership



Saturday, March 29, 2014

USDA March 2014 Quarterly Hogs and Pigs Report

As some of you know who have read this blog for some time now, my area of expertise in the commodity markets is particularly in the livestock markets, where I cut my teeth as a trader many, many years ago and where I still tend to concentrate my time and energy.

That being said, I wanted to give you a perfect illustration of how our government agencies that distribute data to the marketplace can be consistently wrong and rarely if ever are taken to task for so doing.

Some of you are aware of a virulent disease has been affecting the US hog herd. It is called Porcine Epidemic Diarrhea or PED for short. This virus has a mortality rate somewhere north of 90% on young piglets. Adult pigs can contract the disease, which by the way does not impact the meat in any way or render it unfit for human consumption, but they generally can be treated and recover. The baby piglets however are usually lost however due to fluid loss from severe dehydration and other associated effects of the virus.

Hog and pork prices have been soaring this year as the disease has devastated the herd here in the US. Heading into this report on Friday  (yesterday) estimates of losses due to the virus were ranging on average of up to 6%. Other private firms had forecasted losses upwards of 10% with some running as high as 30%.

Here is where things get interesting. The March report from USDA yesterday showed losses no where near the average of analyst estimates. As a matter of fact, the report showed the impact from the disease was not nearly as widespread as most in the industry expected.

The problem is that all of the recent hard data that we have been getting completely contradicts the USDA numbers from yesterday.

At the risk of boring the reader with the data breakdown ( I am hopeful that some of my readers are hog producers however ) here is what the pencil pushers at the USDA gave us when it comes to the various weight categories.

Market hogs under 50 pounds  96%
50 - 119 pounds                     97%
120 - 179 pounds                   97%
180 pounds and over               95%

A quick guide to interpreting this: this is the percentage of hogs compared to the previous year at the same time. In other words, the number of 50 pound and under pigs is 4% lower than last year at the same time.

Hogs are generally slaughtered when their weight reaches near 270 - 275 pounds ( this will vary considerably but is a good average ). Since it takes time for hogs to grow to this weight, one can generally gauge the available supply of market ready hogs that will be coming in any one period by looking at the weight numbers and calculating the time for the hogs in that bracket to reach maturity.

Now, let's take a closer look at this and see where things go awry with the USDA.

Many of the readers here are precious metals guys and could care less about pigs or cattle or corn or beans, etc. But laying that aside for the moment, if you look at these numbers not knowing anything else, what would you say that the MAXIMUM REDUCTION in the number of slaughter ready hogs is going to be over the next few months according to the USDA? Answer - 5%. If you said this, go to the head of the class. There will be a period during which one could look for the reduction in the number of slaughter ready hogs to be down nearly 3% from last year and another period in which it will down nearly 4%. But the maximum reduction that the market can expect, based on USDA's numbers is 5%.

Here is where the problem begins... this same USDA also issues, every single week, week in and week out, the total number of hogs that are under inspection by USDA inspectors. The report is usually dated two weeks behind us but it is the industry standard for keeping track of the number of cattle and hogs killed for meat production here in the US. It is based off of hard, on-the-ground data

For the first two weeks of March alone, guess where hog slaughter numbers are running in comparison to last year... The first week they were down 5.75%. The second week they were down 7.77% and estimates over the third and fourth week continue to run near 7%! In other words, we are already EXCEEDING the maximum reduction in hog slaughter numbers that USDA just told us to expect in their report this Friday.

What accounts for this glaring difference? Answer - The Quarterly Hogs and Pigs Report is based off a census taken by USDA of various hog producers. It is essentially a snap shot of the industry. USDA contacts various hog producers, both large and small, and surveys them to get their intentions, numbers, etc. and then uses that data to put together the quarterly report. This is crucial - they do not survey every single hog producer out there although they do the best that they can with the manpower that they have. It is a snapshot but it is an incomplete snapshot.

On the other hand, the weekly slaughter data is tabulated from real live data every single week. We know exactly how many hogs were killed on a single given day based off of those reports. There is no extrapolating - it is actual data.

In effect, what we have is a contrast between facts and estimates drawn from incomplete data.

If that were not bad enough, this is the very same USDA that a mere 3 months ago, in their December Quarterly Hogs and Pigs Report gave us the following weight breakdowns:

Market Hogs under 50 pounds      99%
50 - 119 pounds                        100%
120 - 179 pounds                       100%
180 pounds and over                  100%

That report essentially told the market that any sort of impact from the PED virus was going to be minimal. Take a look at the following continuous hog chart and tell me, that USDA was anywhere near to being close as to impact from the disease!


Herein lies the crux of the problem. Hog producers and other commercial interests who need to institute risk management programs to secure profits and mitigate price risk depend on the accuracy of the data being furnished to them by these various government agencies, in our case here, USDA. Any hog producer who three months ago, used the data given them out of the USDA December Hogs and Pigs report to begin implementing hedges for their expected hog production and put on those short positions has been absolutely obliterated as a result. They have forfeited a large profit ( a once in a lifetime profit I might add ) that could have been theirs had the data actually reflected what the true reality of the impact of the disease was going to be. Not only that, they have been met with large margin calls. Failure to meet those necessitated them having to close out the hedge incurring a large paper loss in the process. All this because the data that came out of the USDA was inaccurate. Please note that I am being kind here by employing the word, "inaccurate". What comes to mind is more akin to horse excrement.

So here we are, some three months later than the last USDA report, and that agency has had to come back and issue another revision to try to bring their previous data more into line with the reality of what has occurred on the ground. Never mind the fact that many producers have been seriously harmed financially as a result. Yet for some bizarre reason, this same USDA, issuing another Hogs and Pigs report, with data that is already at odds with other data from within that same agency, is lent credibility by the various analysts and such in the industry. My question is "WHY?"

Had the agency actually picked up something, anything, of the impact that this disease was going to have three months ago, an impact that many of us said was indeed going to be the case, then, and only then, would I lend it some credibility. But for an agency to miss the mark by such a large extent three months ago, to now come out with yet another report, that is at such great odds with the majority of estimates from many other seasoned and experienced traders and analysts, is further proof that the data coming out of it is next to useless.

Some will argue that it is what it is and that the data is what we have to go by until shown otherwise, but that is missing the point entirely. The point being that it is easy for USDA to come back AFTER THE FACT and issue their revisions but that does no good to those who have made marketing or risk management decisions based off of data that has a notorious track record of being so far off of the mark.

One last thing, here is a chart, courtesy of the fine folks over at Urner Barry (drawn from the American Association of Swine Veterinarians ), of the number of reported and diagnosed incidents of the PEV virus. As you can clearly see, the number has increased sharply since the fall of last year. It was in late September/early October that we began to see the incidents of new cases really pick up -  Impact from the disease will not be seen until about 6 months later. Look at the huge spike in cases in late January which continued to increase until it seems to have topped out in late February. The case number TRIPLED from the September/October levels.


Again I ask you reader, without knowing much if anything about the livestock markets, if the impact from the disease is not generally felt until about 6 months later, during what time frame would you expect to see the greatest impact on the number of slaughter ready hogs this year? Answer - in the late June - August time frame. However, if we base our view on the data that the USDA just gave us this past Friday, the worst impact from the disease is already behind us...

The reason given is that USDA suggested that more hog producers farrowed their sows during the December 2013 - February 2014 period than the market expected ( + 3%). That may be true, but even if it is, and I have my own reasons for doubting this, it still does not deal with the rapid spike in the number of cases breaking out during the depth of winter ( Tripled the case during the fall) nor does it explain how slaughter can currently be down by 7% already when USDA tells us that 5% is the absolute maximum reduction we can expect.

I suspect that the USDA is going to be once again, way off base with their numbers and that by the time the next Quarterly Hogs and Pigs report is released at the end of June, they will once again be revising their numbers.

We'll come back and revisit this at the end of June - of that you can be sure.

Quod est demonstratum.









16 comments:

  1. but Dan, I am from the government and am here to help you. sparks

    ReplyDelete
  2. Dan,

    I have a magic 8 ball that I'll sell you cheap that might be more accurate.

    Cedric

    ReplyDelete
    Replies
    1. Goldtrader;

      Cedric;

      You are giving away your age buddy - half the readers on this board probably are too young to know what that silly thing was. Then again, I think you are right - it is has as much predictive capacity as some of these USDA reports.

      Working for the government is a real hoot - sort of like being a weather forecaster. There are never any consequences for screwing up. "WE WILL JUST FIX IT NEXT TIME" seems to cure everything.

      Delete
  3. Probably has nothing to do with other commodities, like the PMs(?), since the market data there is so much more accurate and reflective of actual supply conditions, knowledge of market participation and liquidity flows. Right?

    ReplyDelete
  4. All I can think about right now after that is warm weather, a pig roast and cold beer!
    Thanks again Dan. }:^)

    ReplyDelete
  5. Goverent incompetence seems to be more the rule than not.

    ReplyDelete
    Replies
    1. When even the leader is not held accountable for lying, no one beneath him even cares whether the numbers they put out are accurate or not. There are no consequences. And that is the sad truth.

      Delete
  6. Dan -

    A question about commodities indexes and inflation expectations. The $cci index bottomed at the start of the year. And has shot up dramatically. But if you look at the relationship between the 7 - 10 year bond/ in relation to the 20 year bond, inflation expectations keep getting lower and lower. How do you interpret this? Think ief:tlt on stockcharts.com.

    ReplyDelete
    Replies
    1. jmsvett;

      yes, the overall sector ( commodities) has been steadily moving higher since January as you point out. It peaked in early March but has been holding up fairly well.

      The tricky thing is that the key industrial metal, copper has been losing ground since the beginning of the year and only recently appears to be forming a temporary bottom.

      It is difficult to say how much of the commodity sector rally is really due to issues relating to currencies. Most of the big rises have been weather related or other factors. For example - coffee and sugar prices moved higher on drought fears in Brazil ( those are temporary spikes in price). Cattle prices have been rising due to shortages brought about by back to back droughts in 2011 and 2012. Hog prices are soaring higher due to a virus. Crude oil prices were spiking higher over geopolitical events and until recently heating oil and natural gas were soaring because of a record setting polar vortex. In other words it has not so much been a big flow of hot money into the sector in general but rather individual markets being shoved higher in response to short term weather events or geopolitical issues. Those things tend to be viewed in a different light than an overall rush into the sector such as what happened when the first QE was unleashed back in late 2008. That set off a big crash in the US Dollar and that is what brought the hot money flows into commodities ( and everything else).

      The big difference this time around is the Dollar because it is holding up. If you compare what happened to it back then. It fell nearly straight down for most of 2009 as QEI was being implemented. Then it rallied back up until the Fed announced QEII whereupon it proceeded to plunge for the bulk of 2010 and into early 2011.

      While it has not exactly been a stellar performer, it is closer to 80 that the levels that it had sunk to back then.

      Traders look at that and see a Dollar that is not imploding lower and that tends to keep inflation pressures somewhat tame in their view. If the Dollar were to weaken dramatically from this point, I am fairly confident that the bond relationship you described above would reflect that rather quickly.

      Delete
  7. ok so where do futures open tomorrow morning?

    ReplyDelete
    Replies
    1. Clutch Cargo;

      It depends on whether anyone believes the report but the knee jerk reaction to the report will be selling pressure, especially in the distant 4th quarters.... whether things stay that way is anyone's guess however.
      If the slaughter numbers do not confirm the report as the week wears on, many traders are going to ignore the report at that point.

      Delete
  8. Dan,

    Thanks for your commodity insights.

    The USDA report certainly gives new meaning the word "hogwash" and their credibility, well..."when pigs fly".

    Sorry, could not resist...

    ReplyDelete
    Replies
    1. Trader Garrett;

      Always a treat to have a posting from you my friend.

      That is a good quip!

      What is really sad is that no matter how often we get bad data out of the USDA, whether with the grains or the livestock end of things, nothing ever changes. The market acts on the data, the price moves, the computers take over and the rest is history.
      Sort of the same thing we see all the time with the rest of the economic data we get, especially the payrolls numbers. They are mostly BS and I think many know that but they trade it like it means something.

      Just part of the financial system and the way things are any more. Wish I could wave a magic wand and change it but alas, that ain't gonna happen!

      Delete

Note: Only a member of this blog may post a comment.