DTN Early Word Opening Livestock

 
Cattle: Steady-$2 LR Futures: 25-50 LR Live Equiv $130.00 - .45* 
Hogs: Steady Futures: 25-50 HR Lean Equiv $ 85.41 +2.52**
* 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 market psychology remains in crisis thanks to an imploding board that just can't find the brakes. Our guess is that bids and asking prices will remain poorly defined for at least one more day. With futures moving this fast, neither buyers nor sellers know where to initially draw lines in the sand. Needless to say, deepening board discounts and extraordinarily strong basis levels will make it tough for feedlot managers to defend the high ground. Live and feeder futures are likely to open moderately lower, checked by residual selling interest and technical bearishness.

The cash hog trade is expected to open with near steady bids. Tuesday's country movement seemed light as the carcass value jumped significantly. It remains uncertain as to how quickly Smithfield's plant at Monmouth will be back on line. The kill should be light again Wednesday, but such delays could make Saturday's slaughter even bigger. At this time, it seems like Saturday will be no smaller than 375,000 head. Lean futures should open moderately higher, supported by short-covering and sharply higher carcass value.

	BULL SIDE		BEAR SIDE
1)	With deferred live cattle futures looking more discouraged with each passing day, the pace of feedlot placement could start to slow significantly. Not only will cattle feeders become reluctant buyers, ranchers will examine all options to keep calves and yearlings out of the replacement market as long as possible.	1)	Cattle futures quickly resumed a panicky stampede of sharply lower prices on Tuesday. Triple-digit losses dominated both live and feeder markets with the entire complex setting new contract lows.
2)	Cattle charts are extremely oversold and due for at least a significant technical rebound. Put another way, all trending markets eventually run out of cheerleaders. As board discounts look increasingly irrational, it will become tougher and tougher to recruit new sellers.	2)	Beef cutouts closed moderately lower Tuesday with box movement described as no better than "light to moderate." Furthermore, new showlists distributed on Tuesday looked generally larger than last week (i.e., some smaller in Nebraska and Kansas, but a good deal larger in Texas and Colorado).
3)	The pork carcass value resurfaced following the Labor Day break red hot. All major primals were quoted sharply higher on Tuesday, especially fresh cuts.	3)	Lean hog futures are quickly sinking to the bottom on the lateral trading range in place since late July. Seasonal pressure ahead could easily subvert early bottom-building hopes.
4)	We are hearing rumors about additional pork export business. More specifically, the ham complex appears to be strengthening and export business appears to be active both on sales to Mexico on heavier hams as well as continued chatter that China is buying.	4)	Though Smithfield's fire at Monmouth does not appear that serious per se (see article below), even this short-term threat to total packer capacity sparked a certain amount of nervousness at the CME. The board will remain jittery about the possibility of inadequate chain speed through the last third of 2016.

OTHER MARKET SENSITIVE NEWS
CATTLE:

(Bloomberg News) -- KFC's partnership with an Alibaba affiliate puts the pressure on the Golden Arches in China more than ever.

By allying with a backer of the country's top food delivery website, KFC owner Yum Brands has taken a step toward solving the dilemma of slowing growth in its biggest market outside the U.S. It's a deal that McDonald's, which is also in the throes of selling its China business, will do well to match.

Yum and McDonald's are among a clutch of Western brands that have realized they need a Chinese partner to stay on top of shifting consumer tastes in the nation. The price of not getting that strategy right has meant retreat in recent years for brands from Tesco and B&Q to Best Buy.

For McDonald's and Yum, both of whom have been hurt by food-safety scandals in China, the challenge is not only to improve their reputation but also to stay on top of a move toward healthier foods, capitalize on consumption growth in smaller cities where they have little presence, and most importantly, join the Chinese rush to perform ever more daily tasks online.

Yum's fast-food operations in China, which also include Pizza Hut, span 7,200 outlets. Yet its share of the market has dropped from close to 40 percent in 2012 to 23.9 percent last year, while McDonald's has slid from a high of 16.5 percent in 2013 to 13.8 percent, according to data from Euromonitor International. McDonald's has about 2,200 outlets in the country.

Yum and McDonald's have seen their share of the fast food market in China drop

Selling a piece of the China business to private-equity firm Primavera Capital and Alibaba's Ant Financial will move Yum up the path of online relevance faster than its U.S. competitor. Ant is the owner of China's top payments platform and holds a stake in food-delivery website Eleme, key pieces of the jigsaw needed to help Yum appeal to customers who want to order and pay for food through their mobile phones.

In Primavera, Yum also gets one of the country's top dealmakers: Founder Fred Hu is the former Goldman Sachs chairman in charge of Greater China and will serve as chairman of Yum China, which will be spun off from the parent into a separate company next month.

Admittedly, Primavera and Ant will buy only a small minority stake in Yum China -- less than 6 percent initially. Still, that emphasizes the difficulty for McDonald's, which is seeking a buyer for the whole business.

Unlike Yum, McDonald's has no plans for a listing of its China operations. In common with its rival, though, the company has realized that local partners and franchising are the way forward. Most McDonald's restaurants in China, Hong Kong and South Korea are directly owned by the company. The chain aims eventually to have 95 percent of restaurants in Asia under local ownership, it said in March.

The conundrum for McDonald's is that handing over the reins to local partners may risk its brand, already dented by a 2014 food-safety scare. The company has imposed stringent deal conditions such as a three-year ban on senior management changes, Bloomberg reported in May -- though this has had the effect of deterring bidders.

McDonald's has attracted only a few Chinese suitors and none has the online heft that Ant brings. The interested parties (their private equity partners aside) aren't known for either online consumer expertise or retail exposure. The roster so far includes bad-loan manager China Cinda Asset Management and dairy producer Beijing Sanyuan Foods. Sanyuan's largest shareholder is state-owned Beijing Capital Agribusiness Group, which runs some McDonald's restaurants in Beijing. Chinese state conglomerate Citic Group, which has only a modest retail presence, is also in the running.

There's little danger McDonald's would ever have to retreat from China. The chain has been chalking up gains in same-store sales this year, after several quarters of declines. It remains China's second-most-popular fast-food brand, according to Euromonitor. Still, both McDonald's and Yum face a mounting threat as Chinese-style fast food from brands such as Dicos, (whose fried chicken retails for a third less than KFC) and CNHLS gain market share.

The search for a partner is key. McDonald's needs one that's nimble enough to adapt not just to changing tastes but to the rise in online shopping, especially through mobile devices. Now that Alibaba is spoken for, the list of potential Internet partners is short. A do-it-yourself e-commerce operation in China hardly looks viable. That's a lesson Wal-Mart took to heart in June when it decided to sell its Yihaodian online grocer to JD.com, China's second-largest Internet retailer after Alibaba. Yihaodian's growth had withered after Wal-Mart bought the site in 2012.

Final bids for McDonald's China business are due next week, and a new-economy partner could yet emerge. The next best option would be a group with retail expertise and a nationwide reach. Anything less, and McDonald's may start looking like leftover pickings. There's not much less appetizing than fast food that's been allowed to go cold.

HOGS: (stlWednesday.com) -- Smithfield Foods Inc., a subsidiary of WH Group Ltd., on Tuesday said a hog slaughterhouse in Illinois will be operational as soon as possible after a fire halted pork production on Monday.

"(The) cause of the fire is being investigated," Smithfield spokeswoman Kathleen Kirkham said, adding that there were no injuries in the fire that occurred in a rendering section of the facility in Monmouth, about 200 miles north of St. Louis.

Smithfield says it is the world's largest hog producer and pork processor.

The company's Farmland Foods plant in Monmouth can process more than 10,000 hogs per day, accounting for only a small percentage of total U.S. hog slaughter capacity of more than 440,000 hogs per day, according to industry data.

With the U.S. Department of Agriculture forecasting record-large U.S. hog supplies this year, any prolonged outage would likely back up supplies and weigh on prices. Chicago Mercantile Exchange October lean hogs fell 2.3 percent to 59.325 cents per pound, with losses partially tied to the Smithfield outage, traders said.

One hog dealer said the fire damaged refrigeration lines for coolers at the plant. Another dealer said the facility likely will not be accepting hogs for at least two days.

(Penton) --Nipponham Foods Ltd. (NH Foods) of Osaka, Japan, officially transferred Sept. 2 ownership of its subsidiary Texas Farm LLC, a hog operation located in Perrytown, Texas, to Seaboard Foods LLC for an undisclosed amount.

Texas Farm, established in 1995, has 25,000 sows in production, with a capacity for 40,000.

"As a result of our review from multiple points of view, such as future prospects and asset efficiency, we have reached to the decision that the business transfer is the best option," NH Foods said in a notice of business transfer in a consolidated subsidiary.

The latest acquisition brings Seaboard total sow inventory to approximately 290,000 head.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

(BAS)

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