DTN Early Word Opening Livestock

Cattle: Steady-$2 LR Futures: mixed Live Equiv $135.71 - 0.41*
Hogs: Steady-$1 LR Futures: mixed Lean Equiv $ 99.97 - 0.75**
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Feedlot country will be typically slow to start the week with buyers and sellers focusing exclusively on the distribution of new showlists. We expect the mid month offering to be somewhat larger than last week. Asking prices will no doubt remain hidden until producers get a better handle on board prospects. Live and feeder contracts seem likely to open on a mixed basis tied to follow-through buying on one hand and renewed long liquidation on the other.

Hog buyers should remain on the defensive today as cash trading resume around the circuit. Look for country numbers to slowly increase as we move toward Labor Day. Once we get passed the late summer holiday, market hog receipts should accelerate at a faster pace. Lean issues this morning should open mixed with nearby firming faster than deferreds. Spot August is scheduled to expire as 12:00 p.m. (CDT)

	BULL SIDE		BEAR SIDE
1)	Good beef packer margins got a little better last week. Additionally trade volume total seemed a bit small last week. Short-bought packers should have initial incentive to support least steady cash levels.	1)	Despite Friday's dead cat bounce, spot August live contracts will start out this morning more that $5 below last week's cash market. Such extraordinary basis strength will work to impede feedlot leverage.
2)	Beef's farm-to-retail spread in July jumped to $3.515, nearly 21 cents greater than June and the largest spread since last October. Retailers have plenty of room for aggressive late summer featuring.	2)	For the week ending August 8, noncommercial traders reduced their net long position in live cattle futures by 2,200 to 105,400 contracts. This was the eighth straight week of declines.
3)	For the week ending August 8, noncommercial traders were net buyers of lean hog contracts, increasing their net long position by 1,000 contracts (i.e., to 56,000).	3)	The average retail price of pork last month jumped to $3.833, 7.7 cents greater than June and the highest seen by consumer since December 2015.
4)	With spot August lean futures set to expire today at high noon, the $16 plus discount of spot-to-be October should look at least a little attractive to new bullish specs.	4)	October lean hogs tend to trend lower into Labor Day before turning back higher into contract expiration with convergence with cash coming from below not above cash values.

OTHER MARKET SENSITIVE NEWS

CATTLE: (beefmagazine.com) -- One of the best barometers of the general state of the cowherd in the U.S. is the number of heifers in the fed cattle slaughter mix. So far in 2017, heifer slaughter is up 10.5%, says Derrell Peel, Oklahoma State University Extension livestock marketing specialist. This compares with a 4.7% year-over-year increase in 2016.

Further, the July 1 heifer on-feed inventory was 10.6% higher than one year earlier, he says, and heifer slaughter is likely to remain elevated for the rest of 2017. "Increased heifer slaughter and heifer on-feed inventories likely indicate a slower pace of heifer retention in 2017," he says in his weekly Cow-Calf Corner column.

"However, average steer-to-heifer slaughter ratios are still very large compared to historical averages. It will be some months before heifer slaughter increases to typical levels compared to steer slaughter. Seasonally, heifer slaughter decreases from a spring peak to lower summer levels before increasing slightly through the third quarter."

So far in 2017, beef cow slaughter is running 10.4% above 2016 levels. This follows a 13.7% year-over-year increase in 2016. "Although increased beef cow slaughter is consistent with slower herd growth, it does not indicate herd liquidation or even zero herd growth," Peel says. "If beef cow slaughter continues at the current pace (as projected) through the end of the year, net culling for the beef herd will still be under 9% and less than the long-term average culling rate."

The sharp increase in beef cow slaughter in 2016 and 2017 is mostly the result of very low culling during herd expansion since 2014, Peel explains. "More cows in the herd plus previously delayed culling mean that a substantial increase in beef cow slaughter is inevitable. By 2018, herd culling rates may return to typical levels."

Beef cow slaughter typically increases sharply in the fourth quarter to a seasonal peak but is projected to maintain the current year-over-year levels for the remainder of the year. Dairy cow slaughter has increased recently, bringing the current year-to-date level up to 3% above last year. This follows a 1% year-over-year decrease in 2016.

"Total cattle slaughter is up 5.9% year-over-year for the year to date. This follows a 6.4% year-over-year increase in 2016. However, steer slaughter, which makes up more than half of cattle slaughter, is growing more slowly in 2017 and is up 3.5% so far this year compared to 2016," he says.

The year-to-date increase is declining as weekly steer slaughter has averaged just 1.1% year-over-year increases since late April. Steer slaughter peaked seasonally in June and will trend lower week to week for the remainder of the year, he says.

"On July 1, the number of steers in feedlots was 1.4% above last year and is projected to keep steer slaughter growth relatively low for the remainder of the year. Total annual steer slaughter may be limited to less than a 2% year-over-year increase in 2017."

Total cattle slaughter in 2017 is projected to increase 4.5 to 5.0% year over year. Cattle slaughter will likely increase another 3.5 to 4% in 2018 with larger feeder supplies, less heifer retention and increased cow culling all pushing slaughter higher through 2018, Peel predicts.

HOGS: (tsln.com) --There is always plenty of discussion concerning packer capacity and more often than not, capacity is discussed with regard to livestock prices. Capacity is important to market performance in agriculture regardless of the industry or the sector being considered and is tied to economies of scale which in turn directly impacts per unit costs. The interaction of pork packer capacity and hog supplies over the past year has been a great example of the workings of a competitive market driven by the profit motive and sound business decisions.

In a short one and half years, the industry has gone from the capacity to harvest and process 116.2 million hogs annually to being within earshot of bringing that annual figure up to 130.4 million. Six percent of the increase will be reality next month with the Clemens Foods plant opening in Michigan (8,000 head / day) and the Triumph-Seaboard Foods plant in Sioux City, Iowa (10,500 head / day).

By second quarter 2018, Prestage Foods will open a new plant in Wright County, Iowa (10,000 head / day), Clemens will bring capacity up to 10,000 head / day in Coldwater, and Triumph-Seaboard Foods plant add a second shift in Sioux City bringing the total plant capacity 20,000 head per day.

While this rapid capacity increase may be a story in itself, I [John Nalivka] think the more instructive aspect is that this 11 percent increase in harvest capacity has likely represented half of the incentive to expand the hog herd so rapidly over the last 2 years. Producers know that new capacity increases demand for their finished hogs. The business motivation is to build herds into that capacity. And while it may not always be the case, both the sharp increase in packer capacity and herd building are occurring when both packers and producers are profitable. We can attribute that largely to sharp gains in export demand. But, at the same time, capacity utilization for the pork packing industry has been running on average about 98% this year as hog numbers surpass capacity before the new plants come on line. This is clearly an advantage to packer margins.

So, the question arises on how this discussion regarding this recent buildup of pork packer capacity applies to or perhaps more importantly, affects the beef industry. In many respects, the economics are the same and the best example would be the new CS Beef cow plant in Kuna, Idaho owned by Caviness Packers and Simplot Company. However, as a general statement, the differences in production and industry structure are vast and these differences are compelling as new beef packer capacity comes on line. I would submit, adding this much capacity to the beef industry would lead to a different outcome than I have described for the pork industry.

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

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

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