DTN Early Word Opening Livestock
Meat Futures Staged for Mixed Opening a Midweek
GENERAL COMMENTS:
Cattle: Steady-$2 LR Futures: Mixed Live Equiv $160.38 - $1.30*
Hogs: $1-2 HR Futures: Mixed Lean Equiv $104.34 + $2.28**
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue
The cash cattle market should begin to take on greater definition Wednesday as bids and asking prices slowly become more definite. Both sides will be monitoring FCE results on one hand and board stability (or lack of) on the other. Opening bids should start out around $122 live/$195 dressed in the face of asking prices close to $127 plus live and $200 plus dressed. Live and feeder futures are expected to open on a mixed basis tied to short-covering and long liquidation.
Look for hog buyers to continue to push for inventory Wednesday. Expect opening bids to range from $1 to $2 higher. Before Tuesday, pork processing margins seemed to be slowly eroding as the cost of live inventory advanced at a faster rate than carcass value. Yet it looks like seasonal belly demand is starting to come alive. Sizzling bacon demand over the next month could work to boost the cutout over $100. Lean futures should begin with uneven price action tied to bull spending and profit-taking.
P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]
| BULL SIDE | BEAR SIDE | ||
| 1) | Although cattle futures closed mostly lower on Tuesday, most contracts did reverse from extreme early lows to finish 200 points or more above these levels. Such bottom-picking could signal that greater board stability is close at hand. | 1) | Beef cutouts closed sharply lower Tuesday, possibly reflecting typical pressure tied to increasing production and hot summer temperatures. |
| 2) | Between oversold charts, cash premium and the likelihood of pre-Cattle on Feed report positioning, live and feeder futures may be ripe for some kind of corrective rally. | 2) | The cattle basis remains very strong heading into the latter part of June, with the spot contract about $10 discount to the bulk of last week's cash sales. Given that the more typical basis is in the area of par to $1 to $2 below cash, risk managers may be eager to pull the country trigger. |
| 3) | The pork carcass value jumped more than $2 on Tuesday, largely powered by a $6.84 surge in the belly primal. At $98.85, the cutout is currently as high as it's been since late October 2014. | 3) | Although market numbers are currently tightening along with the season, the untenable fact remains there are lots of hogs out there. April-June will be the third consecutive quarter with record slaughter. The odds are good that hog slaughter during the next two quarters will also be record high. |
| 4) | In May, harvest levels were sometimes 7% larger than year-ago levels, but the harvest level this week was less than 2%, higher than a year ago. This narrow spread over last year is expected to continue throughout the rest of June as well as July. | 4) | Given the persistence of cheap feed and the carrot of increasing slaughter rates waiting in the third quarter, next week's Hogs & Pigs report seems more likely to contain a bearish surprise (i.e., greater than expected herd expansion) than a bullish one. |
CATTLE: (GLOBE NEWSWIRE) -- Tuesday, the JBS S.A. Board of Directors reviewed and approved a proposal to commence a divestiture process for certain assets. The divestment program is intended to further sharpen the focus of the business on key strategic areas, protect core assets and allow the Company to reduce net debt as it works on plans for future growth.
Following a careful assessment, the Company has decided to proceed with the sale of JBS Five Rivers Cattle Feeding assets.
Selling these assets is central to a strategy designed to reinforce JBS' competitive advantage in the global food industry. The sale of feed yard assets will more closely align the JBS business model with key U.S. competitors and allow the Company to concentrate its efforts on its core food and value-added products businesses.
An orderly sales process will be conducted to ensure business continuity. JBS Five Rivers will continue to operate as usual, including the purchasing of cattle and commodities in the ordinary course of business, until the closure of a transaction. In addition, JBS USA intends to continue agreements to purchase cattle from feedlots associated with Five Rivers Cattle Feeding operations.
HOGS: (National Hog Farmer) -- USDA will release the results of their June hog inventory survey on the afternoon of June 29. The trade predictions should come out next week. One question that is not asked in the trade survey is about revisions to past Hogs and Pigs reports. USDA bases revisions primarily on actual hog slaughter. It looks like slaughter of U.S. raised barrows and gilts during March-May was a bit lower than implied by the March inventory survey (up 4.88% versus up 5.26%). Therefore, don't be surprised if USDA revises down the September-November 2016 pig crop and number of sows farrowed by an equally small margin.
The March report implied summer hog slaughter would be roughly 3.8% higher than last year.
The day after the Hogs and Pigs report is released, USDA will release their June acreage estimates. How many acres of corn and soybeans farmers got planted this spring is obviously of great importance to pork producers. According to USDA-Economic Research Service, the farm-to-wholesale price spread was 80.3 cents per retail pound in May. That was the highest ever for May and the fourth highest for any month. This is a major change. Over the last 10 years, May has had the lowest average farm-to-wholesale price spread of any month.
The farm-wholesale spread is one of the commonly used proxies for the profitability of hog packers. Typically, the wider the spread, the more profitable hog packers are. As the chart implies, hog packers have done well recently. That is why three big new hog slaughter plants are being built. Both the Seaboard-Triumph plant in Sioux City, Iowa, and the Clemens Foods plant in Coldwater, Mich., are expected to start operations in September. The Prestage Foods plant in Eagle Grove, Iowa, should open about a year and half later. This huge increase in slaughter capacity is likely to squeeze packer profits and bring the farm-wholesale price spread back down.
Retail pork prices tend to lag farm level hog prices by one or two months. Hog prices bottomed in November and retail pork bottomed in January. Hog prices peaked in February and retail pork prices peaked in March. Hog prices bottomed in April, and it looks likely retail pork bottomed in May. Hog prices appear likely to peak this month or next. Look for grocery store pork prices to peak in August or September.
Retail pork prices continue to be boosted by bacon. Bacon prices in grocery stores have averaged above $5 per pound for 48 of the last 49 months. Boneless pork chops and boneless ham have both been under $4 per pound for each of the last seven months. Pork chops used to sell at a consistent premium to ham. That has not been the case during the last four years.
The surge in bacon prices most likely reflects a steady increase in bacon demand as bacon has become popular as a condiment on other foods. It is not clear whether the decline in pork chop prices relative to ham prices reflect a change in consumer preferences or the impact of a big increase in the tonnage of hams being lost to the export market.
Slaughter weights have been below both the one and two year-ago levels for 14 of the 24 weeks thus far this year. Weights will move lower as summer weather heats up and then rebound when the weather cools this fall. Weights during the fourth quarter of 2016 were unusually low, likely because hog prices were exceptionally low. With more slaughter capacity coming online, look for higher hog prices and heavier slaughter weights this fall compared to last.
The Federal Reserve Bank increased the federal funds target interest rate by another quarter point last week. This was the third increase in the last seven months. This is not particularly good news if you have variable interest rate debt. Rates on many credit cards will automatically increase. The move indicates the FRB is confident the U.S. economy is getting stronger. As a general rule, the faster the economy grows, the stronger meat demand is.
John Harrington can be reached at feelofthemarket@yahoo.com
Follow John Harrington on Twitter @feelofthemarket
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