DTN Early Word Opening Livestock

Hog Futures Should Initially Open Under Selling Pressure Tied to Troublesome Fundamentals

(DTN file photo)

Cattle: Steady Futures: Mixed Live Equiv: $140.59 - .35*

Hogs: Steady-$1 LR Futures: 50-100 LR Lean Equiv: $ 74.48 -2.23**

* based on formula estimating live cattle equivalent of gross packer revenue

** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Cattle buyers and sellers could display a few more bids and asking prices Thursday morning, but significant trade volume may be postponed until sometime Friday. Though we didn't see many bids on Wednesday, a good number of ready steers and heifers seemed to be priced at $120 to $122 on a live basis. The. Dec. 1 feedlot inventory will be released Thursday at 2 p.m. (CST). Private guesses expect the on feed total to exceed last year by 2%; November placement to be down by 6% to 7%; and November marketing to be up by 1%. Look for live and feeder futures to open on a mixed basis as traders jockey ahead of cash and on feed news.

Pork processors still saddled with procurement chores will keep their heads down Thursday with bids steady to $1 lower. Chain speed will stay relatively aggressive through Saturday with many plants dark for the holiday on Monday. Hog market watchers will also be treated to a large serving of new USDA supply data. The Dec. 1 Hogs & Pigs survey will be unveiled Thursday at 2 p.m. (CST), and most analysts are expecting further confirmation of herd expansion. Average trade projections look like this: all hogs, up 3%; kept for breeding, up 2.75%; kept for marketing, up 3%; fall pig crop, 3.85%. Currently, the Saturday hog kill is anticipated to be around 353,000 head. Lean futures are staged to open moderately lower, at least initially checked by struggling pork demand and plentiful market hog supplies.

BULL SIDE BEAR SIDE
1)

Though live cattle futures seem to be languishing in late-year apathy, the general technical structure is promising. The December, February and April contracts have been consolidating in the top end of the trading ranges that have developed since mid-September. All of the contracts are above their respective 40-day and 100-day moving averages.

1)

The choice beef cutout lost nearly a dollar at midweek with box movement described as no more robust than "light to moderate."

2)

For the week ended Dec. 15, Iowa barrows and gilts averaged 283.4 lbs., .6 lbs. lighter than the prior week and 1.6 lbs. smaller than 2017.

2)

Midweek wholesale pork demand took a mean cut to the jaw on Wednesday, falling more than $2 bucks with all major primals struggling to find late-year demand (especially picnics and bellies).

3)

China confirmed on Wednesday the first African swine fever outbreak in southern Guangdong province, as the highly contagious disease continues to spread through the world's largest hog herd. Guangdong is a major pork-consuming region and heavily relies on supplies from other provinces.

3)

Broiler growers in the United States weekly program placed 183 million chicks for meat production during the week ended Dec. 15, 2018, up slightly from a year ago.

4)

U.S. hatcheries in the weekly program set 225 million eggs in incubators during the week ended Dec. 15, 2018, down 1% from a year ago.

4)

Not only will a trend of higher interest rates eventually be passed on to meat consumers, general public spending confidence could be compromised if Wall Street and stocks actually devolve into recession mode.

OTHER MARKET SENSITIVE NEWS

CATTLE: (APHIS) -- The U.S. Department of Agriculture's (USDA) Animal and Plant Health Inspection Service is revising branding requirements for cattle imported from Mexico. This change simplifies the branding process, while continuing to ensure Mexican cattle are easily identifiable and traceable for the rest of their lives, in the event of an animal disease detection.

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Feeder cattle will be branded with a single "M" on the right hip, and breeding bovines will be branded with a single "M" on the right shoulder. The "M" brand will be larger in size and allow for better readability. An "MX" ear tattoo is still an option for breeder cattle instead of a brand since they have not caused a readability problem and are considered a permanent form of identification. Permanent identification on Mexican cattle is important because they are known to frequently carry tuberculosis and brucellosis, two diseases that are very limited in the United States. Cattle imported from Mexico will still require an official eartag for traceability purposes.

USDA has already allowed Mexico to use these updated branding requirements which has reduced errors and uncertainty at border ports. The change has proven beneficial to both countries by decreasing the need for rebranding and reducing the incidence of cattle rejections at port-of-entry inspection.

USDA issued a proposed rule in April and received 12 comments during the 60 day comment period. After careful review and consideration of those comments, USDA is publishing this final rule, which will become effective 30 days after publication in the Federal Register.

HOGS:(AgWeb.com) -- If a bucket of water spills on one side of the room, what could it do to you on the other side of the room? Craig Morris, vice president of international marketing at the National Pork Board, says these are exceptional times in the history of the pork industry -- we no longer live in a world where what we do affects only ourselves. A huge paradigm shift is taking place, and U.S. pork producers' returns are more dependent on international markets than ever before.

"We were very optimistic going into 2018 that this would be a record year for pork exports," Morris says. "To think the trade issues we've had with Mexico and China could have popped up like they did, well, it was just unthinkable. The market has changed so much this year because of factors that really have nothing to do with the pork industry."

So, what can pork producers expect in 2019? Some experts say that despite uncertainties surrounding trade and the size of the U.S. pork supply, producers have reason to be optimistic.

I'm optimistic that we will get these trade differences settled," says Chris Hurt, Purdue University agricultural economist. "The signing of the U.S.-Mexico-Canada (USMCA) trade agreement calms trade conflicts with Mexico and Canada, although it still needs approval in each country. In addition, it leaves in place the U.S. tariffs on steel and aluminum. It was these tariffs that caused Mexico and Canada to place restrictions on U.S. pork. Those tariffs still need to come off."

Hope for a cooling of the trade conflicts with China are potentially supportive to hog prices, Hurt adds.

"China needs food, so if we come up with a big trade package with China that says they'll buy $70 or 80 billion in total goods from the U.S., some of that will be ag and some will be pork," he says. "I think that feels pretty positive right now."

But will that happen?

"There's an adage in the market that you buy the rumor," Hurt says. "The rumor is when the prices go up on the talk that we may get a negotiated package with China. The fact is that it may not be as big a package as we hoped for, so you sell the fact. Buy the rumor and sell the fact. That is providing optimism at this point on the trade front."

Rein-in the pork supply

After a boom period for grain prices from 2008-2013, pork producers finally saw feed prices drop in 2014. Since then, the pork industry has steadily increased production to the point that we are now producing as much pork as we can at levels to just about breakeven, Hurt says.

"We've been on a terror of increasing production in the range of 3% a year -- that is more than we would generally expect the demand to grow each year," Hurt says. "Demand typically grows about 1% a year -- sticking close to population growth."

Can the pork industry continue to grow supply 3% each year? The answer comes back to demand, Hurt says.

"We produce high-quality pork at an efficient price. The world has come to our doorstep to help us move that product," he says. "But we're at a point that we have to ask ourselves if we can continue to produce pork at this rate of growth."

Producers control the supply, not any one individual, Hurt says. The high supply means producers can't expect much profitability and that leaves them vulnerable to losses if the industry doesn't have a strong demand base.

Hurt believes the industry needs to get back to a 1% to 2% growth rate each year.

"Looking at 2018, we ended up with losses of about $12 per head and assigned that blame to trade conflicts," Hurt says. "Periods of profitability encourage expansion. Periods of loss encourage slowing of expansion, or in some cases, contraction. Producers are not the only ones who see the signals to slow down growth -- so do agricultural lenders. I expect they will be cautioning their producers about that next expansion."

Hurt projects that supply will remain 3% higher at least for the first three quarters of 2019 but may weaken in the fourth quarter to a 1% or 2% increase in supply.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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