DTN Early Word Opening Livestock

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Cattle: Steady to $2 HR Futures: 25-50 HR    Live $142.00  - 0.02*
Hogs:   Steady          Futures: mixed       Lean Equiv ___FCKpd___0nbsp; 86.02  + 0.47**
 
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Activity in cattle country will be typically limited to the distribution of new showlists. The early month offering is expected to be about steady with last week. Feedlot managers may not be in a hurry to price ready cattle, at least momentarily pausing to check out the strength out carcass value and the ability of spot April live to shake some of its deep discount. Our guess is that producers will eventually show asking prices of around $128 in the South and $202-204 in the North. Live and feeder futures are expected to open moderately higher, supported by cash premiums and recognition of oversold charts.

Hog buyers are expected to resume procurement chores this morning with basically steady bids. The pork cutout is not forecast to move lower than $80. Expect sideways to slight improvements in the cutout as most other primals are inching upward, seasonally. The cutout has mostly risk to the upside at this time. Lean futures should open on a mixed basis tied to residual selling on one hand and short covering on the other.

	BULL SIDE		BEAR SIDE
1)	Thanks to surging carcass value over the last two weeks, beef packers are starting the week with the best margins held since early January. Such a reality should be supportive of both chain speed and recent price levels.	1)	Though higher beef cut-outs last week seems impressive, extremely light box movement (i.e., only 517 loads of daily business reported, 20 percent below the previous week and the slowest non-holiday round seen since mid May 2016) suggested the wholesale trade was a forced affair lacking longer term stability.
2)	Given first-of-month paychecks and generally open weather conditions, the odds seem good that retail meat clearance over the weekend was fairly decent.	2)	The prospects for rising interest rates are increasing, potentially girding the value of the U.S. dollar further and making meat export more expensive for foreign customers.
3)	The pork carcass valued rebounded moderately higher as stronger demand for hams and loins offsetting further weakness in bellies.	3)	The fall quarter pig crop was record large and up 4.8% from year prior and those are the hogs the market will be harvesting in the next 90-100 days. Such numbers certainly do not suggest any shortage of pork coming to market.
4)	Citing underreported problems with PRSS over the last quarter, some believe that market hog numbers over the next 30-60 days will turn out to be surprisingly short.	4)	Ignoring the premium status of the cash index, lean hog futures broke with triple digit losses on Friday and seem eager to lead the country makes lower.

OTHER MARKET SENSITIVE NEWS

CATTLE: (Beef Magazine) -- Drought can change things, often in a big way. Consider the recent drought that gripped much of the nation from 2011 to 2014, for example. The liquidation it caused, particularly on the Southern Plains, and the movement of cows that weren't liquidated, was a game-changer.

But here's the thing: Not all of the effects of that devastating period were bad.

Initially, the drought put a dead stop to herd expansion, says Oklahoma State University ag economist Darrell Peel. "We continued to place heifers on feed" -- no grass for them to join the herds -- "but because of the drought, we were forced to liquidate cows off of the old end of the herd," he explains.

When expansion finally began in 2015, it was with a large influx of heifers. "As a result, we made the herd very young."

That gives way to higher quality because of genetic progress.

"The 2015 cow culling rate was very low for as far back as I have data; 2016 is still below average," says Peel, who suggests 2017 will continue below average. "Eventually, as you add more cows, you get back to normal culling for physical reasons, but I would imagine we are still a year away from that at this point."

The share of heifers in the USDA reported fed-cattle harvest is a good indicator of expansion trends, says Paul Dykstra, beef cattle specialist for the Certified Angus Beef brand.

"As we retain heifers to expand or replace the cows culled from drought, those heifers never show up in the fed cattle harvest tabulated weekly at USDA-inspected plants," Dykstra says. Historic data shows the share of heifers in that mix has been more than 36% for 20 years, except for a slight dip in 2006. Dykstra says a heifer percentage of the fed-cattle harvest mix shifting to higher than 35% indicates cow herd expansion is slowing or reaching equilibrium.

"There's been a dramatic build-up in the past two years as heifers in the fed-cattle mix dipped to 32.5% in 2015 and 31.9% in 2016," Dykstra notes.

The most rapid years of expansion are behind us, he says, but cattle producers have made gains. "Genetics have been upgraded more rapidly with the higher rate of replacements from the drought," Dykstra says.

Simply based on supply and demand, a larger supply of beef means a softening cattle market. But for beef producers with the genetics to produce high quality carcasses, the steadily higher demand for quality beef despite its increasing supply indicates a strong future.

"More cattle have been accepted into the CAB brand based on meeting the marbling parameter of our 10 specifications," Dykstra says. "So as a result, we are looking at increased sales volumes.

The cattle cycle will move ahead as expansion eventually levels off.

"Prices drive decisions to expand or cut back," he says. "If we are surprised with better-than-expected prices on these increased supplies, that could continue the heifer retention we've been seeing at the cow-calf level." HOGS: (iowafarmertoday.com) -- Pork packing capacity in the Midwest will increase significantly in 2017.

A new plant in Sioux City operated by Seaboard Triumph Foods is scheduled to open in late July, with a planned daily processing capacity of 10,000 to 12,000 pigs.

Add this to several other new or remodeled plants, and there should be enough capacity to handle anticipated huge hog supplies this fall.

"This is really an unprecedented increase in packing capacity," says Steve Meyer, vice president for pork analysis with EMI Analytics.

"It's very much needed for the long-term health of the pork industry."

Later this year, Clemens Food Group is expected to open a plant in Coldwater, Mich., with an estimated daily slaughter of 10,000 head. An additional 6,500 in capacity will be added at plants in Windom, Minn., and Pleasant Hope, Mo., in 2017.

Packing capacity should also jump with the recent Seaboard Triumph Foods announcement of a second shift starting in May 2018.

And the new Prestage Farms plant, located near Eagle Grove, is expected to open in late 2018 or early 2019. Officials estimated about 10,000 pigs could be processed daily at the plant.

This increase comes at the right time for the industry, says Lee Schulz, Extension livestock marketing economist at Iowa State University.

"Over the first half of 2017, pork production will rise based on hogs already in the pipeline," he says. "Second half output will likely top 2016's record levels.

"Additional packing plants coming on line in 2017 and 2018 will help ease capacity constraints. The additional capacity is good news for producers as more competition for their hogs will give producers a bit more leverage."

Schulz says plants prefer to work at full capacity. He says large numbers of pigs force plants to pay less as their costs mount.

"Slaughter levels that greatly push packing plant utilization above a normal capacity level force plants to offer significantly lower prices for hogs," he says. "Plants must pay overtime, cold storage becomes full, and the price of pork has to be lowered to stimulate more pork consumption."

Conversely, those fixed costs are higher when plants are operating at less than capacity. Schulz says packers also have contractual obligations to meet with their customers.

"No packer wishes to give up shelf space, food service or export markets," he says. "The result is they'll need to get after hogs, and there is an incentive to pay a higher price for hogs to secure a quantity level that captures operating efficiencies."

The packing industry worked overtime to handle last fall's record production, Meyer says. He believes the same thing will happen in 2017.

"I think whatever new capacity we have will be completely filled with this big number of hogs coming through this fall," he says. "Hopefully we have everything up and operating."

Despite lower hog prices, most analysts expect to see continued expansion in the pork industry. Meyer says the added capacity provides a tempting incentive for producers.

"Don't discount the fact that producers came into the fall of 2016 with their best balance sheets ever," he says. "They saw huge profits in 2014 and 2015. They're looking long term, and with production costs down considerably, they see an opportunity."

That growth should continue. The USDA recently released its 10-year ag projections through 2026, including 3.9 percent growth in hog numbers over the next five years and 7.4 percent over the next decade. The numbers are based on 2016 totals.

"No wonder new packing plants are under construction and the industry is in an all-hands-on-deck mode to get operational as soon as possible," Schulz says.

"The key going forward is whether packers will be able to grow sales, particularly to key export markets."

Producers continue to be more efficient, he says. Advancements in genetics as well as new management practices have boosted pig numbers over the past decade.

Schulz says feeder pig imports from Canada are also increasing, jumping by 10.2 percent in 2015 and another 7.4 percent last year.

"Several factors fuel the Canadian feeder pig import surge," he says. "One is demand. Low feed prices and profitable lean hog prices boost interest in finishing hogs in the U.S."

A second factor is the strength of the U.S. dollar when compared to Canadian currency. Schulz says the favorable exchange rate has Canadian producers looking south.

"Supply and demand fundamentals appear to be in place to keep pulling more Canadian born feeder pigs into the U.S. for the next few years," he says.

Schulz adds the largest sow herd expansion seems to be coming from Illinois and Missouri. He says the two states have combined to add 90,000 head to the nation's sow inventory since Dec. 1, 2015. --

John Harrington can be contacted at john.harrington@dtn.com
For more from John Harrington, see www.feelofthemarket.com

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