DTN Early Word Opening Livestock

Look For Cattle Futures to Open Moderately Lower

(DTN file photo)

Cattle: Steady-$2 LR Futures: 25-50 LR Live Equiv $135.53 - .18*

Hogs: Steady-$1 LR Futures: Mixed Lean Equiv $ 99.64 - .33**

* based on formula estimating live cattle equivalent of gross packer revenue

** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Specific bids and asking priced in feedlot country Tuesday will probably remain few and far between. We don't expect to see much cash potential until Wednesday or later. Preliminary asking prices are likely to be around $115 in the South and $184 to $185. Live and feeder futures seem likely to open moderately lower, pressured by follow-through selling and further long liquidation.

The cash hog trade should open with bids steady to $1 lower. Processing margins remain attractive and packers are likely to kill as many hogs as they can practically find. Lean futures are expected to open on a mixed basis with nearby issues gaining on the back.

BULL SIDE BEAR SIDE
1) New showlists distributed in feedlot country Monday were generally smaller than last week with only Nebraska offering a few more ready steers and heifers. 1) According to the World Board, 2018 beef production forecast has been raised from the previous month (i.e., from 27.13 billion pounds to 27.43 lbs), as expected higher placements in late 2017 and early 2018 result in higher steer and heifer slaughter.
2) Live cattle open interest declined by more than 25,000 contracts last week, ending a little under 312,000 on Friday. This is the lowest level since the first week of January and 28% below the record levels at the beginning of May. At the very least, the threat on long liquidation has been greatly depleted. 2) Look for weekly slaughter to continue climbing this week, probably reaching as high as 640,000 head, the biggest total seen in months.
3) The unusually large discount of new spot October lean futures to the mid-August cash index should soon invite stronger spec buying interest as they consider risk/reward opportunities through the second half of the third quarter. 3) At the same time, the weekly hog kill could total as much as 2,312,000 head, 1.75% increase from last week and nearly1% greater than last year.
4) Some analysts see a bullish difference between the estimated increase in last spring's pig crop and the potential hunger of increased slaughter capacity waiting in the fourth quarter. 4)

The pork carcass value closed moderately lower on Monday, pressured by softening demand for hams and bellies.

OTHER MARKET SENSITIVE NEWS

CATTLE: (foodmarket.com) -- USDA recently released two reports estimating July 1 cattle inventories ― the July Cattle report (also referred to as the midyear cattle inventory report) and the July Cattle on Feed report. July is one of USDA's larger months for providing surveyed cattle numbers; the responses confirm that U.S. cattle inventories are growing.

Midyear cattle inventory data identify changes in size of the breeding herd, update cattle and beef availability expectations for the next 12 months, and provide the first estimate of the current year's calf crop. The July survey isn't as comprehensive as the one done in January. The January survey is the larger of the two surveys and includes about 38,000 cattle operations of all sizes. Estimates are made for all states. The July survey includes a list sample of about 10,000 of the larger cattle operations. Estimates are made at the U.S. level only.

The July survey asks producers to report the calf crop for the entire year of 2017. It came in at 36.3 million head, up 3.5% from 2016 (which was reported in the January report). The ratio of the July beef cow inventory to the January level was the highest since 1993, the last period of full-fledged expansion in the industry and a level that confirms expansion is continuing in 2017. The ratio of July beef replacement heifers to the January number was the lowest in the data series, suggesting that heifer retention is slowing. It almost certainly had to slow after several years of historically high heifers held for replacements. The total inventory of all cattle and calves for July 1 was 102.6 million head, the largest since 2008.

Cattle on feed for slaughter in all feedlots July 1 totaled 12.8 million head. The estimated July 1 feeder supply outside feedlots was 37 million head. In relation to the USDA July Cattle on Feed report, surveyed feedlots with capacity of 1,000 or more head indicated cattle on feed were up 4.5% from July 2016.

The most influential, and surprising, information from the Cattle on Feed report was June 2017 placements topped June 2016 placements by 16.1%, fully 10% higher than pre-report expectations. The important question is whether the placement surge resulted from pulling feeder cattle ahead or whether feeder supplies are larger than earlier thought. The answer is important for anticipating market impacts of larger placements. The most likely scenario is that a few more cattle are out there than anticipated, but most of the surge came from feeders being pulled forward.

Feedlots have placed more lightweight cattle. In June, placements of feeders under 600 pounds were up 29.3% year over year. Placements at 600 to 699 pounds were up 23.5%, and placements 700 to 799 pounds were up 26.5%. Placements over 800 pounds were up only 1.6% in June.

Heifers on feed July 1 totaled 3.86 million, up 10.6% from 2016 and the largest since 2012. That rise supports the idea that cow-calf producers are retaining fewer heifers as replacements. Heifers not going into cow herds boost feeder cattle supply and placements.

According to the Iowa State University Estimated Livestock Returns, yearling to finish returns averaged $259 per head for the first six months of 2017. Profits enabled feedlots to aggressively buy feeders. Higher placements, especially lightweights as of late, have been encouraged by price differences between heavy and lightweight feeders. For example, combined Iowa auction calf prices peaked in late April and have trended gradually lower since then. Heavier-weight feeder cattle prices have continued a gradual climb.

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The lightweight placements in June will not be on top of earlier heavyweight placements. Larger placements now from producers pulling feeders ahead imply relatively fewer cattle will be available to place later.

The considerably larger June placements in feedlots with capacity of 1,000 or more head are only part of the story. Iowa is the only state that conducts a monthly survey of less than 1,000-head-capacity feedlots and reports these estimates. Trends in cattle feeding become clearer when looking at this whole picture. In Iowa, June placements were up 33.3% year over year in 1,000-head or more capacity feedlots but were down 29.4% in less than 1,000-head-capacity feedlots. In total, Iowa placements were up only 2.9% in June compared to year ago levels.

Smaller feedlots may be responding to economic signals from the marketplace, as estimated yearling to finish returns are projected at a loss of $119 per head in the fourth quarter of 2017, with continued negative returns projected for 2018. Farmer feeders are more flexible. They tend to feed cattle when the market conditions are favorable. When conditions are less favorable, they leave lots empty and sell calves and corn.

Feeder cattle prices tend to advance seasonally from now through fall. The feeder cattle market will be sensitive to how the 2017 corn crop develops, as well as whether profitability prospects return to cattle feeding.

Missing from the data are the July 2013 and 2016 Cattle reports. USDA suspended the midyear survey and subsequent report in these years after reviewing available fiscal and program resources.

Pre-report estimates of the 2017 midyear report were not readily available this year. Analysts rely heavily on previous reports, especially the most recent one, to make projections. Missing data make projecting difficult. Also, not having the most recent report complicates making year-over-year comparisons, a standard measuring stick for quantifying changes.

Continuity in reports is critical for conducting market analysis and evaluation. With the dramatic adjustments in cattle prices in recent years, producers are understandably very interested in the status of herd rebuilding as they make decisions that will position them for production in 2018 and beyond. USDA conducted the survey this year, and the results were published on July 21. Let's hope this starts another run in continuity of the report, which dates back to 1973.

HOGS: (World-Herald Service) -- A large new pork processing plant set to open next month 100 milesnorth of Omaha is expected to add more fuel to the Nebraska pork industry's recent growth spurt.

The plant in Sioux City, Iowa, will give Nebraska farmers another buyer for their growing numbers of hogs. And it could drive them to build more hog barns on their farms in eastern Nebraska, in hopes of adding income that's hard to come by Tuesday through row crop farming.

The plant, run by Seaboard Triumph Foods, is one of five opening around the Midwest, adding a total of about 10 percent more processing capacity for the industry. The growth may not lead any existing plants to close, though, because U.S. hog numbers are expected to keep growing fast enough to keep the plants productive, observers said.

But there's a cloud threatening to rain on the industry's growth parade: the risk that the upheaval in free trade deals under President Donald Trump will dampen other countries' demand for U.S. pork. The industry is counting on those export sales for continued expansion.

"The reason that (the industry is) profitable right now, despite an increase in production, is that exports are surging," said Dermot Hayes, ag economist at Iowa State University in Ames.

That could change: Trump in January pulled the U.S. out of the Trans-Pacific Partnership, a free trade agreement with nations including Japan, which is the biggest buyer of U.S. pork by value. The deal would have improved the U.S. pork industry's terms of access to the market.

Then, in June, Japan and the European Union reached agreement on their own free trade deal. The European Union is the United States' biggest competitor when it comes to selling pork to Japan, and the deal now puts the United States at some disadvantage.

"It's disappointing to lose a potential new market; it's scary to lose an existing market," Hayes said.

The industry will try to influence the Trump administration to improve the United States' own trade standing with Japan before the EU deal takes effect next year.

"It's pretty imperative that we get the same deal done in the meantime," said Steve Meyer, pork industry analyst for Indiana-based Express Markets Inc. Analytics.

It's also important for the industry not to lose ground with Mexico and Canada, among its top four export partners, when negotiations begin this week over the North American Free Trade Agreement, said Al Juhnke, executive director of the Nebraska Pork Producers Association. "We don't want to mess that up," he said.

One of the owners of the Sioux City plant said he is watching the Trump administration's trade moves.

"We're going to have more volume, and we've got to figure that out, to move that product," said Glenn Stolt, chief executive officer of Minnesota-based Christensen Farms. Christensen is a large family-owned pork producer with operations in five states, including a growing footprint in northeast Nebraska.

But Stolt said he's optimistic because of the need to feed the world's growing population, and because Christensen Farms has established customers and presents what he sees as a compelling marketing message as a farmer-owned pork producer.

Christensen Farms is a part owner of Missouri pork processor Triumph Foods, which will co-own the Sioux City plant in a joint venture with Kansas-based Seaboard Foods.

The plant will process 10,500 hogs a day at first, making it about the same size as each of the three large pork processing plants operating in Nebraska Tuesday: the Hormel plant in Fremont, Smithfield Foods' Farmland plant in Crete, and Tyson Foods' plant in Madison, according to research by Meyer.

But by the end of 2018, the new Sioux City plant is expected to double in capacity to 21,000 hogs a day, putting it among the six largest pork slaughterhouses in the country.

The plant is on track to begin commercial operations Sept. 5, and is now hiring to meet a target of 1,100 employees, with wages starting at $15.25 an hour, said Mark Porter, chief operating officer for Seaboard Triumph Foods.

The opening of the five new plants around the Midwest — two in Iowa, and others in Michigan, Missouri and Minnesota — comes after more than a decade of no major new plant expansion in the country, Porter said.

Seaboard Triumph will source about two-thirds of its hogs from its owners, but it will be buying the other third on the market from other producers in the Sioux City region.

That could drive even more growth in hog numbers in Nebraska. After 15 years of essentially stagnant numbers here, Nebraska added about 16 percent more hogs and pigs in the past three years.

The growth comes in part because of a 2016 state law ending a ban on meatpackers' ownership of hogs in Nebraska, Juhnke said.

"People around the country look to Nebraska now and they really say 'Hey, that state is definitely open for business again in the swine industry,' " Juhnke said.

Nebraska's pork industry still plays second fiddle to its cattle industry. There are nearly twice as many cattle in Nebraska as hogs and pigs. And it doesn't come close to the amount of pork in neighboring Iowa, which leads the nation in the number of hogs it raises and slaughters, and is also in a growth phase.

The growth in Nebraska is hard to notice from the highway. Unlike cattle, which graze outdoors and are fattened in outdoor feedlots, pigs typically are raised indoors in barns, where access is tightly controlled to prevent disease outbreaks.

Juhnke sees more growth on the horizon and says that means economic development for Nebraska.

"There's a whole industry that would like to see as many barns as possible out there," he said.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

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