DTN Early Word Opening Livestock

Look For Meat Futures at Midweek to Open Moderately Higher

(DTN file photo)

Cattle: Steady-$2 HR Futures: 25-50 HR Live Equiv $131.60 + .01*

Hogs: Steady-$1 HR Futures: 25-50 HR Lean Equiv $ 85.79 + .59**

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

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

GENERAL COMMENTS:

The cash cattle trade should remain generally slow Wednesday. A scattering of initial bids is possible, but it seems extremely unlikely that anything will come within tempting distance given substantial higher asking prices around $122 in the South and $195 in the North. If the board gives producers no serious reason to question their leverage, significant trade volume will most probably be delayed until Thursday or Friday. Live and feeder futures should open moderately higher thanks to follow-through buying and cash optimism.

Hog buyers are expected to pursue procurement chores at midweek with bids ranging from steady to $1 higher. At that point, Saturday kill plans are expected to total around 240,000 head. Lean futures seem set to open moderately higher, girded by spillover buying and positive fundamentals.

BULL SIDE BEAR SIDE
1)

New showlists distributed in feedlot country Tuesday were generally smaller than last week with only Colorado offering more ready steers and heifers.

1)

The appreciation of the beef carcass value continues to lag far behind the soaring cost of live cattle inventory. Such unattractive packer margins will surely cause them to throw wet blankets over the feedlot trade as much as possible.

2)

Cattle futures have returned from the long weekend reflecting bullish energy and renewed cash optimism. Nearby live contracts landed their highest closes since last March.

2)

Though we haven't yet seen concrete evidence of the expected trend, few doubt that the next big swing in placement activity will be toward larger in-movement, especially as stockers on winter wheat start to move through the first quarter. Such expectation should continue to check the potential of deferred live futures.

3)

The pork carcass value closed moderately higher on Tuesday as stronger demand for processing items overshadowed softer demand for fresh cuts.

3)

Early hog slaughter guesses for the week seem to average a little below 2.4 million head. If in the ballpark, this figure would represent a slight decrease from last week and a 3.5% increase from last year. In other words, chain speed seems to be confirming the bearish supply implications of the Dec. 1 quarterly inventory.

4)

Strength in the cash hog market continues to support nearby lean contracts, and expectations of strong first-half pork exports are maintaining a firm tone to the spring and summer period.

4)

While the wholesale pork trade is not falling apart, the cutout continues to experience difficulty building a shelf of support over $80. Until that happens, market numbers may not shrink enough in the near term to push cash prices much higher than we are now seeing.

OTHER MARKET SENSITIVE NEWS

CATTLE:(cattlenetwork.com) -- Cattle prices are still considerably lower than the highs of two years ago. However, Holstein cattle appear to be facing their own price pressure as buyers push discounts and some packers shut the door.

Step into the Lake Odessa Livestock Auction in Lake Odessa, Mich. where Holsteins are up for bid.

"The expansion is underway and it will not stop," said Tom Rademacher, a producer in Eagle, Mich.

Rademacher is talking about the state's dairy boom. The USDA's latest milk production report says Michigan is continuing to see growth in milk cows and production, growing more than 5 percent over the same month a year ago.

"The herds were 250, and are now 1,000 or 3,000 head," said Rademacher.

While the state's dairy herd expands, the prices at auctions shrink. Producers say Holsteins seem to see larger discounts than normal.

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"The Holstein steer market has just gone all to pieces," said Verne Lettinga, owner of the Lake Odessa Livestock Auction. "The fellas feeding colored cattle and black cattle are not too bad yet. They're holding up at $1.10 and $1.20 in that range, but these Holstein steers are 80 to 90 cents."

"Typically, you have your Holstein prices $10 or $15 below the standard animals, and there's talk of $20 or $25 below because they need to go further to find a home to be slaughtered," said Bryan Doherty, senior market advisor with Stewart-Peterson.

Some major packers are cutting back or not accepting dairy cattle for slaughter, and producers say it's not helping.

"There is a bigger discount with Holsteins Wednesday because some of the packers are not killing Holsteins," said Lettinga. "They just quit and all they're killing is colored cattle."

Some truck drivers at the auction say they've already reduced their trips to Tyson in Joslin, Ill.

"All of the cattle now are pretty much going to different packing houses besides Tyson," said Tom Wiskow of Wiskow Trucking and Livestock. "They don't want Holsteins. They want all colors down there."

Sale barn owners and producers have told AgDay the squeeze is mainly felt at Tyson plants in the Midwest.

Tyson says the company cannot comment on its buying practices, they consider it proprietary.

Doherty says the impact of packers scaling back is hard to determine at this point.

"The packer industry continues to look for high efficiency and profit margins," said Doherty. "It looks like the dairy steer, the Holstein steer is on the short end of the stick again. The industry is going to have an issue with supply."

The changes are out of the producer's control and soggy markets have the dairy industry nervous about the prospects for finding profits beyond the milk parlor.

Some packers are scaling back while others are maintaining the numbers. Cargill told AgDay the company "has not changed its cattle procurement practices."

JBS also says, "The JBS Regional Beef business remains dedicated to the calf-fed Holstein steer market. As part of our business model, our plants in Green Bay, WI, Tolleson, AZ, and Plainwell, MI, will continue to actively participate in Holstein steer slaughter. We purchase cash cattle every day to support our strategic investments in JBS Holstein-based beef brands."

Despite dairy growth, Lettinga believes the dairy industry is seeing some consolidation with smaller dairies in Michigan. He also says there's a need for more packing houses in Michigan because of the Holstein steer market.

HOGS: (nationalhogfarmer.com) -- Over the last five weeks, hog slaughter has been up 2.9% and hog prices have been up 8% compared to a year ago. Slaughter weights have been down a bit over 1%, so pork production is not up as much as hog slaughter. During these five weeks, pork production was up only 1.5%, but pork cutout value was up 12%.

More hogs at a higher price is a desirable, yet unusual, combination. Why is it occurring?

Tighter packer margins could be the answer, but it isn't. Packer margin was greater during this five-week period than a year ago. A 12% year-over-year increase in pork cutout value and a 10% increase in hog prices gave a boost to packer margins. Pork packer margins were outstanding this fall, but have tightened some in recent weeks.

The strong hog and pork prices in recent weeks are due to improving demand.

Pork exports are increasing. During November (December data is not yet available) U.S. pork exports were up 18% compared to a year ago and pork imports were down 4%. Exports have been above the year-ago level each month since April, and imports below year-ago each month since July.

November pork imports equaled 4.2% of production while exports were 22.7% of production, the second highest in the last 18 months. November export demand was up 15%, year-over-year.

USDA's January World Agricultural Supply and Demand Estimates report 2016 pork exports were up 4.4% and is predicting 2017 exports will grow another 4.0%.

How long will we see a year-over-year increase in hog slaughter plus a year-over-year increase in hog prices? There are two parts to that question and the first part is easy. If USDA's December hog inventory survey is close to right, hog slaughter will be up most all year.

USDA's WASDE says 2016 pork production was up 1.8% and is predicting that 2017 pork production will be up 3.6% in the first quarter, up 6.7% in the second quarter, up 5.2% in the third quarter, and up 4.9% in the fourth quarter. For the entire year this is an increase of 5.1%.

Other than their forecast for the first quarter, I [Dr. Ron Plain] think USDA's 2017 production numbers are too high. The principle argument in favor of a large increase is the two new, large slaughter plants coming on line later this year.

If hog weights rebound in the coming year, which seems likely after declining in both 2015 and 2016, hog slaughter will be up a bit less than pork production.

It is difficult to say how much longer hog prices will stay above the year-earlier level. If cash hog prices hold steady, we will make it until the first of February with prices above the year-ago level. If the futures market is right, we might make it to mid-February. The answer will depend on pork demand, both domestic and export. Consumer confidence has been increasing, which should be positive for meat demand.

USDA is predicting that 2017 per capita consumption of red meat and poultry will be 217.7 pounds, up 3.4 pounds from 2016 and the highest since 2007. A larger per capita meat supply usually means lower prices.

USDA's price forecasters expect more hogs to mean lower prices in 2017. The midpoint of USDA's price forecast has first quarter hog prices down 10.4%, second quarter down 27.4%, third quarter down 12.7%, and fourth quarter down 5.5% compared to 12 months earlier. For the year 2017, they are predicting 5.1% more pork and 14.4% lower hog price.

As one would expect, given record hog slaughter, raising hogs was unprofitable in 2016. Calculations by Lee Schulz at Iowa State University estimate the average profit per hog marketed in 2016 at a negative $1.26 per head, down $9.19 from 2015. The primary reason for the decline in profits was an 8% drop in hog prices driven by a 2.4% increase in 2016 hog slaughter. As is often the case, spring and summer months were profitable, but the red ink was deep during the fourth quarter.

Hog production was unprofitable in 2008 and 2009, profitable in 2010 and 2011, unprofitable in 2012 and 2013, profitable in 2014 and 2015, and unprofitable in 2016. This pattern implies red ink again in 2017. Currently, there are no indications that a cutback in hog numbers is occurring. Thus, financial loss in 2017 for the average producer is a reasonable forecast.

The week ahead has two important monthly market reports. On Wednesday morning, USDA releases the retail meat price data for December. On Thursday afternoon, we'll get December slaughter totals.

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

Follow John Harrington on Twitter @feelofthemarket

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