DTN Early Word Opening Livestock

Live and Feeder Contracts Set to Open With Follow-Through Strength

(DTN file photo)

Cattle: Steady w/Wednesday Futures: 50-100 HR Live Equiv $132.91 - .46*

Hogs: Steady-$1 HR Futures: 25-50 HR Lean Equiv $ 88.76 + .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:

Here's the eye-opening question for feedlot managers Friday: Did we trade enough cattle on Wednesday to call it a week? We think there is still inventory on the late-week shelf, but given Thursday's stiff recovery in futures, leftover steers and heifers are probably priced on a firmer basis (e.g., $122 in the South, $192 to $194 in the North). Maybe the bigger question concerns the real depth of packer hunger and how they feel about next week's beef demand. Our guess is that further business is more likely in the North than the South. Live and feeder futures seem likely to open solidly higher, boosted by residual buying interest and late-week short-covering.

Friday's cash hog trade should be well supported with firm bids, much as it has been throughout the week. Assuming that Friday's kill totals close to 430,000 head with the Saturday effort right at 135,000, the week's total slaughter should be close to 2.33 million. Lean futures should open moderately higher with buyers continuing to focus more on nearby than deferred.

BULL SIDE BEAR SIDE
1) For the week ending Jan. 21, all cattle averaged 822 pounds, 9 lb. lighter than the previous week and 13 lbs. below 2016; steers averaged 889 lbs., 9 lbs. less than the prior week and 10 lbs. smaller than last year; heifers averaged 822 lbs., 10 lbs. short of the previous week and 15 lbs. lighter than 2016. 1) While Thursday's cattle board rally was nice to see, it didn't prove much in terms of erasing the technical damaged suffered through the first half of the week. It may have been nothing more than a short-covering rally, momentarily correcting oversold conditions.
2)

Actual beef exports last week totaled 15,364 metric tons, up 20% from the previous week.

2) Beef cutouts continued to struggle Thursday, reflecting the typical "poor demand" billing of early February.
3) Nearby lean hog futures closed over 70 Thursday for the first time since last July. New interest in bull spread suggests that more traders believe the board is eager to lead cash higher. 3) Net pork export sales last week totaled 24,800 metric tons, down 32% from the previous week.
4) The pork carcass value climbed moderate higher on Thursday, once again powered by red-hot belly demand (i.e., the belly primal jumped another $4.17). Since the much publicized Cold Storage report of Jan. 24 (i.e., documenting the smallest Dec. 31 stockpile in 50 years), the belly primal has exploded by nearly $35. 4) Although spot February lean futures have surged significantly higher over the last week or so, most contracts remain stuck in relatively narrow ranges. The fact that open interest really hasn't changed much since mid-January suggested that we've seen more short-covering (and not new spec buying) than anything else.

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OTHER MARKET SENSITIVE NEWS

CATTLE: (foodmarket.com) -- This week's retail meat and poultry promotions are naturally focused on Super Bowl events and include numerous finger foods, fixings for sandwiches, party trays and beverages for the parties that have become a tradition for many Americans as the National Football League prepares to crown this season's championship team.

The game will be played Sunday evening. Grocers have been looking for ways to drum up more business and store traffic throughout the balance of the month.

February for the most part is a sluggish period for retail sales since the weather, especially in the northern half of the country, is not conducive for backyard grilling, except for those few hearty folk who fire up their grills year-round. Other factors also weigh in on limiting meat sales, particularly the premium cuts, in February, including higher heating bills, credit card payments coming due from holiday gift shopping in December, and no major holidays in the month that pull family and friends together.

Valentine's Day is coming up soon and grocers will be advertising cards, candy and flowers along with some meat and poultry products for those who prefer to stay home and prepare a meal. But that holiday is a dine-out event for many couples. Valentine's Day ranks second only behind Monday's Day for dining out, according to consumer surveys, and approximately one quarter of Americans go out to eat at that time.

Retailers hope to pull in more shoppers and boost sales for the balance of the month by featuring attractive prices on those products that most families commonly use to stretch their food dollars. They also hope that shoppers will pick up additional items that are not being featured in the advertisements and that have higher sales margins.

Beef cuts captured 28.4% of the promotional activity this week, the highest percentage since the second week of January, according to the Urner Barry retail survey. Chicken slipped to 16.8% this week from 18% last week. Pork cuts gained against recent weeks and had a 25.9% share. Seafood came in at 22.8%.

Price points for beef and pork cuts were nearly all below year-ago levels. Retail prices for fresh and frozen chicken cuts on average were up slightly from a year ago, while turkey parts and ground turkey were down considerably from this time last year. Fish and seafood prices were mixed compared with year-ago levels.

HOGS: (Iberoamerican Business Development, Genesus) -- Mexican pork prices have shown a slight negative trend over the last four weeks, decreasing about 2.50 MXN pesos/kg liveweight. However, over a longer period of time (last 8 weeks), the decrease is about 2.90 MXN pesos/kg liveweight as shown in the table below. Producers in Mexico believe that it could be due to a lower domestic consumption in Mexico and probably seasonality effect as well.

In terms of the US Dollar-Mexico Peso exchange rate, the peso has a lower rate of 20.67 versus the high of 22.01 from last month. As we have mentioned on past reports, Mexico's currency devaluing by over 30 per cent is detrimental, but it could be worse. In the worst case scenario, producers are buying more costly imported grain than before (even when grain prices are lower in price than in the country of origin). Since the price of a country's currency affects the price of their products on world markets, the currency's exchange rate can have a big effect on national exports and costs of imports.

On the other hand, Mexican pork exporters are earning more margins by putting their product overseas. With the rise of the dollar, Mexico has enjoyed a surge in exports, especially to the US.

With about 1.4 million tons of pork production projected for 2016 (USDA projection), Mexico is still far from being self-sufficient. It is estimated that the consumption of pork in Mexico would increase 3.3 per cent during 2016 (even though right now we are seeing a small drop), to stand at 2.2 million tons (carcass).

Since 2012, Mexico has expanded pork exports about 30 per cent (2012, 70,000 tons -- 2015, 100,000 tons). Mexico's pork imports is about 1 million tons a year, for a value of more than $1.785 billion US dollars, representing 14 percent of imports of pork (meat and by-products) worldwide. The main supplier is the US, which accounts for 84 per cent of sales, over $1.5 billion US dollars. It is followed by Canada, with $250 million in value. Between both, they account for 98 per cent of the volume and value of pork imports to Mexico. Imports of pork increased one quarter in 2015, compared to the previous year; the same happened with exports, which increased by 8.6%. Japan is the main importer of Mexican pork: it buys four out every five tonnes exported.

After recent announcements from the Trump administration concerning trade, the National Pork Producers Council (NPPC) has stated Friday that they will work to preserve tariff-free market access for U.S. pork exports to Canada and Mexico.

"As far as pork is concerned, the trade deals with Canada and Mexico have been tremendous for U.S. pork producers," said NPPC President John Weber. "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."

"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."

The National Pork Producers Council has 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.

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.

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.

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

Follow John Harrington on Twitter @feelofthemarket

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