DTN Early Word Opening Livestock
Cattle Complex Futures Geared to Open Moderately Lower
GENERAL COMMENTS:
Cattle: Steady-$2 HR Futures: 10-30 LR Live Equiv: $138.09 + .14*
Hogs: Steady-$2 LR Futures: 10-30 HR Lean Equiv: $ 82.87 - .53*
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue
Bids and asking prices in feedlot country should begin to take on some shape at midweek. Look for initial bids to start out around $174 in the North and $111 in the South. Yet significant trade volume may not develop until Thursday or Friday. Live and feeder futures should open moderately higher as traders wait for a greater sign of cash potential.
Look for hog buyers to resume work Wednesday with bids steady to $2 lower. Saturday's kill is currently estimated at 192,000 head. Lean futures should open modestly higher in light volume.
| BULL SIDE | BEAR SIDE | ||
| 1) | Fed cattle prices are expected to increase going through the fall as supplies tighten on a seasonal basis. | 1) | Should open moderately higher Friday's Cattle on Feed report was also a quarterly report, revealing on-feed inventories by class. Heifers on-feed, reported at 4.3 million head, were the largest since 2001, representing 38% of total cattle on feed. Fourth quarter heifers on feed were up 11% from the year prior and likely imply further aggressive heifer harvests through at least the remainder of 2018. |
| 2) | The beef composite cutout is now back above $206 for the first time since early September. Further strength is anticipated into late October or early November. | 2) | The seasonal rise in cattle carcass weights was more muted in 2017 than the season would have suggested, leaving expectations for this year's weight increase to leave a rather wide gap before finding peaks in late October to early November. 
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| 3) | Cash hog markets are likely to weaken at a stronger pace than the cutout, elevating packer margins successively into the last portions of this fall and winter. | 3) | The pork carcass value closed moderately lower on Tuesday, pressured by softer demand for loins and bellies. |
| 4) | Hogs gaining weight is common this time of year, but what will be critical to watch over the next few weeks, is the weight gain while the additional packer capacity continues to wake up. A second shift opened this week in Iowa, hitting about one-third of its capacity, with the understanding and intent that it will continue to ramp up over the next few months. | 4) | This week is likely going to find a new single-day, hog-slaughter-high, with this week's harvest level on par with last week to slightly higher. Hog harvests likely will exceed 2.5 million for the next few weeks and continue to push new record highs into the fall and winter. |
CATTLE:(Dow Jones) -- McDonald's Corp. is still struggling to attract more U.S. customers but it eked out higher sales this quarter by charging more for its food. The company has been trying to revive traffic growth in the U.S. by upgrading restaurants, serving burgers made with fresh rather than frozen beef and offering drinks for a dollar. The chain also has been trying to make its food healthier by removing preservatives from its burgers.
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However, the 2.4% growth in same-store sales in its home market, which was roughly in line with analysts' expectations, was largely driven by higher-priced menu items.
Globally, the restaurant chain did better, beating expectations for same-store sales growth, with a 4.2% increase, resulting in its 13th consecutive quarter of positive same-store sales growth globally.
"The strength in markets outside the U.S. is encouraging when considering broader concerns about slower economic growth," said Baird analyst David Tarantino.
Shares in McDonald's rose by more than 5% in midday trading. The chain's U.S. franchisees, who own roughly 95% of the country's more than 14,000 restaurants, say the only way to grow is to attract more customers into the restaurants.
But rival fast-food chains have been offering low-priced meals at breakfast, which have been stealing share from McDonald's in the critical morning hours, which account for about 25% of the chain's U.S. sales. McDonald's is not only competing for diners with other restaurants but also with food purchased for at-home consumption.
"It continues to be a battleground. It's a market share fight on traffic, "McDonald's Chief Executive Steve Easterbrook told investors on Tuesday. "We want to do better at breakfast."
The company said it plans to introduce new breakfast items later this year and to offer more regional breakfast deals.
A group of some 400 franchisees met recently to discuss forming an independent association to address concerns about profitability. The franchisees say they are worried about not seeing a return on their investment from efforts to remodel restaurants, which the company is accelerating. McDonald's franchisees have been remodeling restaurants throughout the U.S. to be more modern. Some stores have been completely rebuilt while others have been upgraded with features such as touch-screen order kiosks, mobile order pickup areas and digital menu boards at the drive-through.
Mr. Easterbrook said the company is open to having discussions with its franchisees about what it can do better.
McDonald's said it expects to add 600 new restaurants this year and to have about $2.5 billion in capital expenditures for the year. Of that amount, $1.6 billion will be for the U.S., up from the $1.5 billion it had forecast in July. The company also said it expects to complete about 4,000 additional remodeling projects in the U.S. this year resulting in half of the total U.S. restaurants being upgraded by the end of the year.
Closures or disruptions due to construction have resulted in lost sales for many restaurants, according to franchisees. A report from research firm Gordon Haskett found that once restaurants completed the upgrades, customer traffic increased considerably.
McDonald's Finance Chief Kevin Ozan acknowledged that the pace of remodeling has been aggressive and that it represents the largest construction project in the company's history. He said the company is working to minimize the amount of time restaurants are closed for remodeling.
McDonald's revenue fell 6.7% from the year-ago quarter to $5.37 billion due to the sale of more company-owned restaurants to franchisees. The figure beat analysts' estimates. The company has spent the past few years moving its business model toward one that is owned mostly by franchisees, which it said gives it a more stable and predictable revenue stream.
The company's third-quarter profit fell 13% to $1.64 billion. It said earnings were $2.10 a share, down from $2.32 a share a year ago. Excluding the impact of a prior year gain and restructuring and impairment charges, earnings per share increased 19%. Earnings beat analyst expectations.
HOGS: (The Pig Site) -- The announcement of the new voluntary inspection system for pork processing plants received both criticism and praise from the pig industry. Now the USDA Food Safety and Inspection Service (FSIS) will finalise the updated system in coming months
The proposal, first put forward in February 2018, was to enforce new rules in processing facilities that would allow hog slaughter plants to voluntarily join an inspection system which would put plant employees in charge of determining which animals are unfit for processing. Government inspectors who currently perform this function would be moved to other areas of the plant focused more on food safety.
The cap on processing line speeds would also be removed, with packers responsible for maintaining animal welfare and employee safety rules.
Currently, pork plants process an average of between 950 and 1,000 hogs per hour; new line speeds could reach an estimated 1,295 hogs per hour, according to test processing facilities in operation since 1997.
This proposed change has been rejected by processors, animal welfare bodies and some food safety groups: the risks associated with increasing line speeds will quite possibly outweigh the benefits. In July (2018), a report was published by The Bureau of Investigative Journalism (TBIJ) indicating that even at current line speeds, the dangers of working in a slaughter plant are high. On average, two amputations a week are recorded across US processing plants.
John Harrington can be reached at harringtonsfotm@gmail.com
Follow him on Twitter @feelofthemarket
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