DTN Early Word Opening Livestock

 
Cattle: Steady-$2 HR Futures: Mixed Live Equiv $130.49 - .44* 
Hogs: Steady-$1 HR Futures: Mixed Lean Equiv $ 84.65 -1.31**
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Those monitoring the cattle basis this week have worn out their radar guns. Talk about wild swings. The basis has gone from extreme strength to near normal back to extraordinary strength. Such volatility has made it extremely difficult for buyers and sellers to find common ground to trade cattle. In part, that's why we're kicking out on a Friday morning with virtually no cash business on the books. Late-week basis strength could play in the favor of packers who have been watching margins implode this week. On the other hand, fed numbers remain very tight, perhaps lending feedlot managers extra leverage anyway. Look for moderate trade volume to develop sometime between late morning and midafternoon. Bids are likely to open around $116 in the South and $186 to $187 in the North. Asking prices are likely to be restated around $120 plus in the South and $190 to $192 in the North. Live and feeder futures should open on a mixed basis as traders position ahead of cash news.

We're on the verge of completing the second straight week of consistently impressive gains in the cash hog trade. Look for bids to open Friday steady to $1 higher. If the Saturday kill totals are close to 240,000 head, the weekly kill should total close to 2.4 million. Lean futures are set to open on a mixed basis thanks to a combination of residual buying and pre-weekend profit-taking.

	BULL SIDE		BEAR SIDE
1)	Though cattle futures closed significant lower Thursday, decent buying interest surfaced near session lows and spot February live successfully closed well above support at 117.	1)	Beef cutouts remained mired in bearish quicksand on Thursday. It's been an ugly week for product demand. For example, from Thursday to Thursday, the choice box collapsed by as much as $12.45.
2)	Short-bought cattle buyers have been backed in an eleventh hour corner. Feedlot leverage demonstrated over the last two to four weeks points to the winning of steady/firm sales.	2)	Reversing cattle futures over the last several days has caused an extraordinarily strong basis to reassert itself, thereby compromising feedlot leverage in terms of insisting upon steady/higher asking prices.
3)	Thursday's cash hog trade once again moved significantly higher, nearly capping the second consecutive week of greater packer spending and tightening supplies.	3)	The pork carcass reversed hard on Thursday, docked by more than a dollar thanks to eroding values in all primals except the belly.
4)	Lean hog prices are quickly approaching breakeven levels and producers are current so packers may find it more and more difficult to source hogs without continuing to pay up money.	4)	Incorporating the new supply assumptions contained in the Dec. 1 Hogs & Pigs report, the World Board has increased its estimated of 2017 commercial pork production to 26.22 billion pounds, 405 million lbs. more than last month's estimate.

OTHER MARKET SENSITIVE NEWS

CATTLE: (foodmarket.com) -- Beef feature volume advanced this week, taking over the top spot across proteins. Beef ads account for nearly 29% of total protein ads, while seafood comes in second with 23%. Pork and chicken features each claim 20% of ad space this week. Egg features ticked up slightly to 4%.

In the retail beef complex, 80% lean ground beef is on sale for an average $3.19 per lb., down 13% from a year ago, and lower than both boneless skinless chicken breasts and chicken tenders. Looking at steaks—which actually surpass roasts in feature volume slightly this week—the steak complex as a whole is priced on average at $6.58 per lb., down nearly 4%. The roast complex is hard to beat, however, with average feature prices at $4.23 per lb., down 9% from a year ago.

At the seafood counter, fillets of catfish, cod and tilapia average $5.39 per lb., nearly on par with year ago levels. Atlantic salmon boneless fillets average $8.32, up close to $2 per lb. from a year ago. Cooked shrimp features are roughly 40 cents lower than a year ago, averaging $8.40, while raw shrimp is featured at $7.76 on average for various counts, slightly up from last year at this time.

The pork complex is generally featured at price levels below year ago. The ham complex boasts features at an average price of $1.82 per lb., down from $2.04 a year ago. Brand label bacon features are down nearly 15% from this time last year, at $4.29. The rib complex averages $2.59 per lb., down 30 cents per lb. Pork chops are nearly on par with year ago levels, at $3.12 per lb. on average. Pork roasts also offer a value at $2.87 per lb., down roughly 5%.

Finally, boneless skinless chicken breasts are featured in circulars this week for an average $3.38 per lb., down 21 cents per lb. from a year ago. The retail chicken parts complex as a whole is priced 4% below year ago levels, with bnls/sknls breasts, drumsticks, leg quarters, and thin sliced breasts all featured at lower prices than a year ago. Chicken thighs, wings, and breast tenders are all priced above year ago levels.

HOGS: (ers.usda.go) -- China's emergence as a pork importer reflects growing resource scarcity as the nature of hog production there undergoes dramatic change. As China's pork prices rise above global prices, imported pork and other types of animal protein are becoming more attractive to consumers, processors, and food-service buyers in China.

During the 20th century, China became the world's leading pork producer by dispersing hogs in the backyards of rural households, a production model that utilized China's abundant rural labor supply. As economic growth accelerated, labor was drawn out of the countryside, and falling birth rates further tightened the rural labor supply. Improved off-farm employment prospects prompted exit from backyard hog production, and the scale and specialization of hog farms increased. Rapid improvement in labor efficiency on China's hog farms is a reflection of the rising opportunity cost of rural labor. China's hog industry is now in an era of rapid consolidation similar to that experienced by the United States during the 20th century.

Labor efficiency of China's hog farms is still much lower than that of their U.S. counterparts, and McBride and Key (2013) found that labor efficiency on U.S. hog farms continued to improve rapidly from 1992 to 2009. While wages are also much lower in China than in the United States, the withdrawal of labor from hog farming and consolidation of farms in China is likely to continue.

Feed is the largest component of production costs for China's hog farms. Concentrates like grains, oilseed meals, and commercial feeds have now largely displaced low-cost fodders traditionally used to raise hogs. This study found that feed costs for China's hog producers were about 20 percent higher than those incurred by U.S. producers during 2000, but the difference grew to 77 percent in 2014.

As a net importer of feed ingredients, growth in feed demand has prompted China to reduce barriers to imports of oilseeds and several other feed ingredients since the 1990s. Nevertheless, China's feed costs are still higher than those of pork producers in countries like the United States, where grain and oilseed prices are lower. The impact of higher production costs on pork prices in China may prompt China to import pork from countries with lower production costs, an outcome anticipated by Hayes and Clemens (1997).

Meade et al. estimated that shipping soybeans from production regions in the United States and Brazil added 17- to 29 percent to the landed cost of soybeans arriving in China. This differential is consistent with the 20- to 30-percent difference in China-U.S. soybean meal prices found in the current study. China exerts stronger control over corn by limiting imports with a tariff rate quota. A support-price policy prevented domestic corn prices from falling during years of low global corn prices. The China-U.S. differential in corn prices was much larger: 30- to 40 percent in many years and 180 percent in 2014.

Chinese authorities are now allowing China's corn price to decline, a policy change that could reduce cost pressure on the country's hog producers. Feed costs for China's hog producers fell slightly during 2015, when the support price for domestic corn was reduced by 10 percent. During 2016, authorities announced that the country's price floor for corn would be eliminated, and corn prices began to fall as that year's crop was harvested. However, China's feed costs will likely remain higher than in countries with lower grain and oilseed prices despite elimination of the price floor. For example, China's soybean meal prices remained higher than U.S. prices, despite elimination of a similar floor price program for soybeans in 2014.

Raising productivity to improve the swine industry's competitiveness is one of the themes of the 2016-20 5-year plan for swine production (China Ministry of Agriculture, 2016). The plan calls for increasing mechanization and automation on swine farms, shifting pork production to grain-abundant regions, and upgrading supporting industries that supply breeding stock, feed, and veterinary drugs. The plan set objectives that include raising the share of hogs produced by farms of 500 or more head from 42 percent in 2014 to 52 percent in 2020. Exit of small-scale farms with low productivity and high production costs is likely to continue. Expansion by larger farms with high productivity may be constrained by land scarcity, costs of complying with environmental regulations, and limited supplies of investment capital and skilled farm managers.

This study found rising costs of feeder pigs for Chinese farms in recent years, but it was not able to examine productivity in the important farrowing and nursery stages of production. Commentaries in Chinese animal science publications often emphasize the low ratio of finished hogs to sows in China, which reflects high mortality, short productive lives for sows, and vulnerability to disease in this segment of the production chain.22 Increasing the number of finished hogs per sow and strengthening disease control and prevention are also objectives of the 2016-20 5-year plan that reflect these concerns. More productive and long-lived sows reduce the cost and feed requirements of supporting a large sow population and holding back female pigs to become replacement gilts. Officials subsidize artificial insemination to upgrade and standardize breeds and reduce the inventory of boars needed to service the sow herd.

Other costs may be more significant than they appeared in the data examined by this study. For example, the data showed very low expenses for land and capital investment, but acquiring tracts of land and constructing modern facilities for large farms is clearly much more costly than rudimentary structures used by small-scale producers to house animals. Large farms have greater needs for working capital to finance feed purchases and wages that small farms often finance with cash flow or borrowing from informal sources. Anecdotal information suggests that small-scale farms often invest little in facilities for waste treatment and disposal, but large farms are more likely to make such investments given the volume of waste they produce. Large farms are less able to avoid attention from inspectors and regulators than are small, dispersed farms. More stringent regulation of hog production will reduce external costs of water pollution, disease, and other nuisances, but will raise costs for producers and constrain the expansion of the hog sector.

The 5-year plan specifically targets improvements in feed conversion and labor productivity. Improvements in feed efficiency can be achieved through various measures that include better design of facilities such as better heating, cooling, and ventilation; mixing feed to balance protein, energy, and micronutrients appropriate to the stage of production; reducing mycotoxins and other impurities in feed through better quality control; and better disease management. The large shortfall in China's labor productivity likely reflects more extensive use of labor due to low wages, but low labor productivity could also result from lack of training and high worker turnover. Johnson (2015) and Ellerman (2016) identified several avenues for improving management of Chinese hog farms, such as reducing employee turnover; optimizing temperature, lighting, and sanitation in barns; better reported that most farms he visited during 2014-15 were experiencing financial losses, but some were profitable because they managed sows well. He advised farms to focus on preventing several diseases and disorders that reduced conception rates, increased stillbirths, and piglet mortality.

China's national 5-year plan for 2016-2020 advocates strict controls on use of cropland that may restrain growth of hog production. The 5-year plan orders officials to restrict conversion of cropland to livestock farms and other uses in order to maintain production of staple food crops viewed as essential to national food security. A reform of grain subsidies announced in 2016 calls for withholding subsidy payments for cropland that has been converted to livestock farms (Central Government Web Portal, 2016).

Environmental concerns may also constrain growth in China's hog farms. China's 5-year plan for hog production calls for removing farms from major urban areas and southern regions that are vulnerable to water pollution. The plan targets the northeastern grain-producing region and traditional hog-raising areas of southwestern provinces for growth. The plan may raise costs for Chinese producers by requiring treatment facilities for manure and investment in biogas equipment.

John A. Harrington can be reached at john.harrington@dtn.com

Follow John Harrington on Twitter @feelofthemarket

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