DTN Early Word Opening Livestock

 
Cattle: Steady w/Thurs Futures: 25-50 HR Live Equiv $132.66 + .86*
Hogs: Steady Futures: 25-50 HR Lean Equiv $ 88.08 + .41**
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Moderate cash cattle trading surfaced on Thursday as sharply lower futures and unique basis strength prompted feedlot managers to lower asking prices. Live deals in the South were tagged at $122, fully steady with last week. On the other hand, most dressed business in the North was done at $194, which is $1 lower than last week's weighted average basis Nebraska. Another round of light to moderate movement is possible Friday, especially in the North. The balance of show lists are probably priced around $122 to $123 in the South and $195 plus in the North. The Jan. 1 Cattle on Feed report will be released Friday afternoon at 2 p.m. CST. Average trade guesses look like this: on feed, off 1%; placed in December, up 8% to 9%; marketed in December, up 6% to 7%. Look for cattle futures to open moderately higher, supported by late-week short-covering and positioning ahead of the feedlot inventory.

Hog buyers are expected to resume work Friday with basically steady prices. If the Saturday kill totals close to 140,000 head, the weekly slaughter is expected to approach 2.35 million, roughly 3.5% greater than last year. Lean futures seem likely to stage at least a modest rebound on the opening thanks to pre-weekend short-covering and the large cash premium.

	BULL SIDE		BEAR SIDE
1)	For the week ending Jan. 14, cattle weights to fall in the face of punishing winter temperatures: all cattle, 831 pounds, 6 lbs. below the prior week and even with 2016; steers, 898 lbs., 7 lbs. lighter than the week before and unchanged from last year; heifers, 832 lbs., 4 lbs. smaller than the previous week and 1 lb. below 2016.	1)	Cattle futures crashed big time on Thursday with triple-digit losses driving the board well under last week's highs (and reinforcing those price levels as tough overhead resistances). Given the distinct impression that the board wants to lead cash lower, market psychology is beginning to really soar.
2)	Beef cutouts on Thursday jumped sharply higher as retailers and food managers reacted positively to recent discounting.	2)	The reassertion of an unusually strong basis level is clearly working to erode feedlot leverage and bargaining power.
3)	For the week ending Jan. 19, net pork export sales surged to 36,200 metric tons. Increases were reported for China (15,100 MT), Mexico (12,600 MT), Japan (2,700 MT),Hong Kong (1,600 MT), and Canada (1,500 MT). At the same time, actual exports totaled a respectable 21,900 MT.	3)	In one fell swoop, bears seized back the initiative in lean hog futures Thursday, completely offsetting Wednesday's briefly impressive gains with triple-digit losses. The board posted both a daily and a weekly key reversal.
4)	The pork carcass value closed moderately higher Thursday, this time powered by a big surge in belly demand (i.e., the belly primal gained $7.34).	4)	Deferred lean futures seem to be losing some of the premium relative to spot cash, possibly tied to uncertainty over pork trade based on developments in the White House.

OTHER MARKET SENSITIVE NEWS

CATTLE: (Bloomberg News) -- The U.S. beef boom is probably over.

Thanks to tightening animal supplies and tepid demand, companies including Tyson Foods Inc., the largest U.S. meat processor, and Cargill Inc. are facing plunging profits on every head of cattle they slaughter.

That's a sharp reversal of fortune from last year, when the fastest expansion of the American cattle herd in four decades increased margins for packers. But, the herd growth didn't last long. As a result, cattle futures in Chicago have rebounded 23 percent since bottoming in mid-October, while the price packers get for wholesale beef has tumbled in the past year amid stiff competition from chicken and pork.

"It posts a pure squeeze on packer margins lower," said Bob Wilson, a founding partner at industry researcher HedgersEdge.com LLC in Greenwood Village, Colorado.

Losses for U.S. beef packers expanded to $67.15 a head on Jan. 25, according to data from HedgersEdge.com. Profit per head reached an all-time peak of $147.20 on Oct. 18 and averaged $43.79 in 2016, the highest for any year in records going back to 1990.

The margin reversal may be a blow to Springdale, Arkansas-based Tyson. In fiscal 2016, its beef segment rebounded to an operating profit of $347 million from a loss of $66 million a year earlier, with former Chief Executive Officer Donnie Smith calling it "a great turnaround story," according to a statement on Nov. 21. The company's shares have jumped 22 percent in 12 months, closing at $62.63 on Wednesday.

But, it doesn't look like the beef turnaround is certain to last.

Analysts have lowered their consensus one-year target price for Tyson's stock by 1.1 percent in the last month, data compiled by Bloomberg show. Heather Jones, a Richmond, Virginia-based analyst for Vertical Group, cut her rating on the shares to hold from buy in a report on Wednesday, citing a "rough start" for beef this year.

Jones still raised her profit estimate for Tyson's fiscal first quarter, which spanned October through December. She raised her outlook on earnings per share to $1.36 from $1.20, partly because of "strong" beef performance, though she is "somewhat more cautious" on the outlook for the segment's margins for the subsequent three quarters. Tyson is scheduled to report fiscal first-quarter earnings on Feb. 6.

Tyson and Cargill declined to comment on their beef margins.

Tyson's beef division is its largest by revenue and smallest by profit, and the company has highlighted improvement from the business as a reason not to sell the unit. The company has a goal of pushing its adjusted earnings per share up as much as 10 percent in fiscal 2017.

Beef processors have endured painful times before. Tyson and Cargill closed slaughter plants in the last several years after drought and higher feed costs forced producers to cull the national cattle herd to the smallest since the 1950s. Things started to improve as cheaper corn and better weather allowed for expansion over the last two years. A bigger U.S. cattle herd helps improve plant utilization, and processors were able to spread their costs across a greater number of animals. Demand for beef products also climbed domestically and internationally.

Tyson in November forecast beef-segment margins for fiscal 2017 would be at the upper end or above the normalized level of 1.5 percent to 3 percent. In the prior year, the margins were 2.4 percent.

Now, that goal is looking tougher based on the trend at U.S. feedlots, where 750-pound steer are placed on a corn-based diet for about five months and then sold at 1,300 pounds for slaughter.

The number of animals held on feedlots probably fell 1 percent in December, according to a Bloomberg survey of 11 analysts. The government is scheduled to release a report on the figures on Friday. The recent gains for cattle prices reflect the "increasingly tight supplies of market-ready fed" animals, Wilson of HedgersEdge.com said

At the same time, weak growth for U.S. beef demand has lowered the prices for which Tyson and other companies can sell their meat. Consumers have moved away from red meat amid health concerns, while booming supplies of chicken and pork have also made the alternative proteins more competitive.

Per capita U.S. beef consumption will be 56.6 pounds in 2017, down from a high of 94.3 in 1976, government data going back to 1960 compiled by the National Chicken Council show. The trend for chicken has been almost the mirror opposite, with per capita consumption expected to reach 90.4 pounds this year, more than double what it was four decades ago, according to the NCC website.

"When you have more meat available, unless you've got strong growth in demand, that product is going to be consumed at a lower price," said John Nalivka, the president of Sterling Marketing Inc., an industry consulting firm in Vale, Oregon. "People simply do not eat as much beef as they used to."

As lower wholesale-beef prices crimp profits for packers, consumers aren't seeing all the savings. The spread between wholesale and retail prices was $2.63 a pound in December compared with $1.62 in December 2005.

"While retail prices have been trending down, the decline is far slower than the fall in wholesale prices, allowing retailers to earn hefty margin on beef," Farha Aslam, a New York-based analyst for Stephens Inc., said in a report on Jan. 24.

HOGS: (NPPC) -- The National Pork Producers Council Friday committed to work with the Trump administration to preserve tariff-free market access for U.S. pork exports to Canada and Mexico. The administration is planning to pursue trade discussions with the two countries.

"As far a pork is concerned, the trade deals with Canada and Mexico have been tremendous for U.S. pork producers," said NPPC President John Weber, a pork producer from Dysart, Iowa. "Our exports to those nations exploded because of the trade pact we have with them. But we know that some concerns have been raised by others, so we are committed to working with the Trump administration in looking for ways to improve our trade relationships with Canada and Mexico."

Through November, U.S. pork exports to Mexico in 2016 were nearly $1.2 billion, up 21 percent from the same time last year, and to Canada they totaled $731 million, making those countries the No. 2 and No. 4 export markets, respectively, for U.S. pork.

Since the U.S.-Canada-Mexico free trade agreement went into effect Jan. 1, 1994, U.S. trade north and south of the borders has more than tripled, growing more rapidly than U.S. trade with the rest of the world. Canada and Mexico are the two largest destinations for U.S. goods and services, accounting for more than one-third of total U.S. exports, adding $80 billion to the U.S. economy and supporting more than 3 million American jobs, according to data from the Office of the U.S. Trade Representative. In fact, U.S. manufacturing exports to Canada and Mexico have increased nearly 260 percent over the past 23 years, and U.S. farm exports to the countries have grown by more than 150 percent.

"Trade in pork with Canada and Mexico has been so successful that any disruption in exports with either partner could hurt our producers' ability to compete," Weber said. "We need to make sure we maintain and even improve our pork exports to our neighbors while working to ensure that others benefit as much as we do."

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

Follow John Harrington on Twitter @feelofthemarket

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