DTN Early Word Opening Livestock

 
Cattle: Steady-$2 HR Futures: 25-50 HR Live Equiv $134.08 + .57* 
Hogs: Steady-$1 LR Futures: 50-100 LR Lean Equiv $ 86.25 + .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 feeders are expected to return from the holiday still in jolly good spirits. Our guess is that any negative suggestions contained in Friday's Cattle on Feed report (e.g. somewhat larger-than-expected November placement activity) will be quickly forgotten. Many were surprised by the generosity displayed by packers last Thursday and will be eager to pay them back by pricing showlists significantly higher (e.g., $118 to $120 in the South, $185 to $188 in the North). Yet early-week bids and asking prices will be poorly defined Tuesday with the delayed start focused on the distribution of new showlists. We think the late-year offering should be about steady with last week. Look for live and feeder issues to open moderately higher, supported by the premium status of recent feedlot sales and appreciating carcass value.

The cash hog trade is expected to open cautiously with buyers initially trying bids steady to $1 lower than the pre-Christmas settlement. Some of the early-week reserve will be tied to the Dec. 1 weight breakdown of market hogs and the suggestion that January supplies may be more ample than previously assumed. Lean hog futures broke hard immediately after Friday's report, and both packers and producers will be anxious to learn if the board remains on the defensive on greater, post-holiday volume (perhaps a question not fully addressed until next week). On the other hand, processing margins remain very lucrative, such that packers may be morehappy about the potential for a larger offering early next year thanworried. Lean futures should open moderately lower, checked by follow-through selling and signs of greater than expected herd expansion.

	BULL SIDE		BEAR SIDE
1)	Ignoring the typical pattern of lackluster cattle spending just before Christmas, packers really turned up the country heat just before breaking for the holiday (e.g., Northern dressed sales on Thursday surpassed the prior week by $6 to $7). Such unusual spendthrift ways point to extremely tight late-year fed supplies.	1)	The USDA documented November feeder cattle placement at 1.843 million head, 15% larger than last year and somewhat greater than the average trade guess. Furthermore, most believe that December will also eventually be reported to exceed 2015 by double-digits.
2)	Trade volume totals stitched together in feedlot country seemed little more than moderate. Packers should be hungry again this week, especially given the need to buy inventory for the first full production week of January.	2)	Board bulls have managed to turn the short-term cattle trend higher, the longer-term downtrend remains intact. Additionally, a key reversal in spot February live at the end of the week, overbought oscillators, looming more formidable overhead resistance in lower $120s, and a stronger basis could all represent potential caution flags regarding market direction.
3)	Although finishing floors are currently more crowded than expected, it's tough to argue that pork producers have kicked expansion into high gear, with the sow herd only 1% above last year, and winter and spring farrowing intentions unchanged from the first half of 2016. You can bet that packers currently busy expanding chain speed are still wondering where the hogs will come from over the next 12 to 18 months.	3)	The Dec. 1 Hogs & Pigs report confirmed significantly more market hogs than previously expected thanks to both greater efficiencies and upward revisions of past estimates. Specifically, the fall pig crop turned out to be much larger than expected.
4)	Total red meat supplies in freezers as of the end of November were down 8% from the previous month and down 4% from last year. Specifically, frozen pork supplies were down 13% from the previous month and down 7% from last year. Stocks of pork bellies were down 8% from last month and down 54% from last year.	4)	For the week ending Dec. 20, commercial traders used additional strength in lean futures to forward sell more hogs as they increased their net position by 13,000 contracts to the 90,000 contract level. Furthermore, it is possible that the speculative community will liquidate additional longs based on the bearish hog report that was issued Tuesday.

OTHER MARKET SENSITIVE NEWS

CATTLE:(Greeley Tribune) -- Struggling cattle feeders and beef packers need an expansion of the U.S. herd, but cattle numbers aren't expected to reach pre-drought levels until 2018, according to new U.S. Department of Agriculture's 10-year projections.

Luckily, the USDA's long-term forecast, released Monday morning, wasn't an all-doomsday outlook for the many local feeding and packing operations — the cornerstone of an agriculture industry in Weld County that's worth $1.5 billion.

Corn prices, "normal weather" permitting, are expected to drop below $5 per bushel within two years and stay there through the next decade, helping with feed costs.

And — although U.S. beef consumption is expected to drop due to high prices at the grocery store, and beef exports are expected to decline during the next couple years — total red meat and poultry consumption is expected to increase throughout the next decade, with customers expected to purchase more chicken and pork.

The latter will help JBS USA — a Greeley-headquartered subsidiary of JBS S.A. in Brazil, with beef-, chicken-, pork- and lamb-packing operations — weather the storm of tight cattle supplies, according to industry experts.

The Texas drought of 2011 and the dryspell across the U.S. in 2012 caused feed shortages and forced ranchers and dairymen to liquidate some of their herds.

The U.S. beef cattle herd — having dropped from 92.7 million head in 2011 to 90.8 million in 2012 — is now at its smallest in 61 years, 89.7 million head this year, according to the USDA.

That tightened cattle supply has increased competition and the prices feedlots are paying for cattle, while the drought also has increased their feed costs.

And because of the small cattle herd, there's less cattle going from the feedyards to slaughter at packing plants.

Packing plants are now over capacity; production isn't keeping up with operating costs.

The tight cattle supply has caused red ink for feeders and packers for several months, and in January, it led to the decision to close a Cargill Inc. beef-packing plant in Texas.

The need for a larger U.S. cattle herd is huge for many in Weld County, where some of the nation's largest feedlots and one of the largest U.S. beef packers operate.

"It's certainly our most pressing issue," said Cameron Bruett, a spokesman for JBS USA, adding that, while times will be tough, "JBS does not foresee the closing of any of its packing or feeding operations."

"We're going to look closely at what we can control … our efficiency, our production expenses, strengthening our relationships with buyers," Bruett added. "Just doing the day-to-day things to make us the most-efficient operation possible."

While more cattle are needed to help the situation, cattle numbers aren't expected to get back to 2011 levels until 2018 — dropping to a low of 89 million in 2014, then gradually increasing to nearly 93.5 million in 2018.

In 2022, the U.S. cattle herd is expected to reach 94.8 million head.

Those projections are based on "normal" weather conditions.

If drought persists, it would take longer to get cattle numbers back up — although, herd rebuilding could take place faster than expected with above-average moisture.

In the meantime, the tight cattle supply is helping ranchers get high prices for their cattle — although, they, too, are paying a pretty penny for feed, with pastures across the country dry and offering little to eat.

For feedyards and beef packers, there are only two things that will get them back to making a profit — one of them being more rain, noted Steve Kay, editor and publisher of Cattle Buyers Weekly, who has followed North America's beef-processing industry for 25 years.

Moisture is needed to improve pastures and give ranchers confidence to expand the U.S. cattle herd.

Precipitation would also increase crop production and decrease feed prices for feed yards.

If normal weather patterns return, corn prices are expected to drop from about $7.60 per bushel in recent times to $5.40 next year, $4.10 the following year, and staying under $5 through 2022, according to the USDA's projections.

Aside from rain, the other solution to make packing plants profitable is shutting down more beef-packing plants and feedyards and consolidating operations.

However, Kay, like Bruett, said he doesn't expect JBS operations to be the ones that close.

HOGS: (agebb.missouri.edu) -- USDA's December Hogs and Pigs report said the nation's hog inventory was larger than most expected. USDA says the breeding herd inventory was up 1.5% and the market hog inventory was up 4.0% compared to December 1, 2015. The total hog inventory was up 3.7%. The average of pre-release trade forecasts was for the breeding herd to be up 0.2%, market hogs up 2.0%, and the total herd up 1.7%. The futures market closed lower on the news. USDA said the number of litters farrowed was up 3.9% during the fall (Sep-Nov) quarter. They said farrowing intentions for December-February were up 1.4% and March-May farrowing intentions were up 1.0%.

The report said pigs per litter during September-November averaged a record 10.63, up 0.9% year-over-year. The fall pig crop was up 4.8% from a year ago. The market hog weight groups were: 180+ pound market hogs up 2.5%, 120-179 pounders up 4.0%, 50-119 pounds up 4.5%, and market hogs weighing less than 50 pounds up 4.4% compared to December 1, 2015.

Last week's hog slaughter totaled 2.154 million head, down 13.9% from last week, but up 26.8% from the same week last year which included Christmas Day. The national negotiated barrow and gilt carcass price averaged $51.77/cwt on the Friday morning report, down 11 cents from a week earlier, but up $4.37 from a year ago.

Friday morning's pork cutout value was $80.59/cwt FOB the slaughter plants, up $2.41 from the week before and up $10.75 from a year ago. Friday morning's national negotiated hog carcass price is 64.2% of the cutout value.

The average slaughter weight of barrows and gilts in Iowa-Minnesota-South Dakota for the week December 10 was 279.8 pounds. That is down 0.9 pound from the week before and down 3.9 pounds from the same week last year.

Hog futures closed lower this week following news of the hog inventory report. The February lean hog futures contract ended the week at $63.20/cwt, down $1.50 from the preceding Friday. April hogs settled at $65.875/cwt, down $2.425 from last Friday.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

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