DTN Early Word Opening Livestock

Cattle: Steady-$2 LR Futures: mixed Live Equiv $130.92 - 0.39*
Hogs: Steady-$1 LR Futures: mixed Lean Equiv $ 89.83 + 0.90**
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Thanks to the long weekend, the cattle market is off to a slow start this week. So Tuesday will be as slow as a typically Monday with packers limiting their efforts to the collection of new showlists. Last week's country seemed relatively slow, perhaps causing feedlots to carry over a few more ready steers and heifers.

Our guess is that the post holiday offering will be somewhat larger than last week. Asking prices are likely to start out around $107 in the South and $168-170 in the North. Significant trade volume could easily be postponed until the second half of the week. Live and feeder futures should open on a mixed basis with both bulls and bears cautiously waiting to get a handle on weekend clearance and early month cash potential.

Open cash hog bids will probably range from steady to $1 lower this morning. Late summer/early fall supplies are expected to remain ample despite the fact that two new plant are expected to begin work this week (see article below). With a $12 spread between the cash and index and pork carcass value, processing margins remain very good.

Profit-minded packers have plenty of incentive to fund aggressive chain speed. Lean futures set staged for uneven price action in the early rounds with nearbys holding up better than deferreds.

	BULL SIDE		BEAR SIDE
1)	The wholesale beef trade should be well supported over the next few days as retailers and food managers return from the Labor Day weekend and move to replenish depleted inventories.	1)	Given last week's relatively slow country movement and relative large spring placement activity, feedlots are likely to distribute larger showlists than last week.
2)	Short-bought cattle buyers face a short week to gather enough numbers to fund the first fill production week of September. Such a reality should be supportive to the cash market.	2)	For the week ending August 29, noncommercial traders accelerated the liquidation of their net long position in live cattle futures, dropping by 6600 to 86,400 contracts.
3)	As September dawns, packer appetite for ready barrows and gilts should increase as two new processing plants move to start their engines (see article below).	3)	The short-term trend and the long-term lean hog market trends are negative as is the structure of the market, with the October contract trading at a sizeable discount to the cash market. Indeed, the discount in the market reflects trader expectations of a larger than seasonal decline in nearby futures hog values in the fall and winter.
4)	The pork carcass value finally managed to renew buying on Friday, closing solidly higher thanks to better demand for all primal (especially the ham and belly) except the rib.	4)	Canada's all hogs and pigs on July 1, 2017 was 14.1 million head. This was up 2% from July 1, 2016, and up 6% from July 1, 2015. This means more feeder pigs available from Canada in the next 12 to 18 months.

OTHER MARKET SENSITIVE NEWS

CATTLE: (hpj.com) — The most discussed trends in United States agriculture is likely the declining number of U.S. farmers and ranchers. This trend, combined with ever-growing global demand, has set the wheels into motion for U.S. farming and ranching operations to become larger over time. With operations expanding, many wonder just "how large" farm and ranch operations have become.

To understand the questions of "how large?" a bit more, it is helpful to look at the distribution of U.S. beef operations. To do this, U.S. Department of Agriculture Census of Agriculture data were considered. "Cows" will be used to describe the USDA's specific data category of "cows and heifers that have calved."

The distribution of U.S. beef operations in 2012 is shown by two measures. In 2012, 57 percent of beef operations had fewer than 20 cows. The fact a majority of U.S cattle operations are small-scale probably comes as a surprise to many.

On the other end of the spectrum, fewer than 9 percent of U.S. beef operations have herds of 100 or more cows.

While a majority of operations have fewer than 20 cows, these operations account for less than 12 percent of the total U.S. cowherd.

The 9 percent of beef operations with herds of 100 or more cows collectively account for a majority of the U.S. cowherd (53 percent).

Concentration is most evident with operations having 500 or more beef cows.

Collectively, they account for less than 1 percent of all beef operations but account for 17 percent of all beef cows.

While the distribution is interesting, it is helpful to consider how these data might have shifted in recent years. To do this, data from the 1992 Census of Agriculture was evaluated.

At a high level, things have not changed too much over the 20 years of data. In 1992, there were an average of 42 beef cows per beef operation. In 2012, this stood at 41.

Digging into the data deeper shows a shift by herd size.

In general, smaller herd sizes accounted for a smaller share of total cows in 2012. More specifically, those with fewer than 100 cows accounted for 47 percent of total cows in 2012, down from 52 percent in 1992.

On the other hand, the larger herd sizes have accounted for a larger share of total cows.

Operations with 100 or more cows accounted for 48 percent of all cows in 1992 but accounted for 53 percent in 2012. The share of total cows that operations with more than 500 head increased from 14 percent in 1992 to 17 percent in 2012.

When looking at any industry, the distribution of production is typically insightful. For U.S. beef production, a majority of beef operations have fewer than 20 beef cows while a small number of large-scale producers (the 9 percent of total operations that have 100 or more cows) manage a majority (53 percent) of U.S. beef cows.

From 1992 to 2012, small shifts in the distribution of beef cows were observed. While the average head per operation was slightly lower, larger operations accounted for a larger share of total cows.

Operations with fewer than 100 cows accounted for a majority of cows in 1992 (52 percent), but this shifted by 2012 when operations with 100 or more cows represented the majority of U.S. beef cows (53 percent).

While the U.S. beef herd has shifted to larger operations, many would likely be surprised to realize these have been rather small changes for 20 years. Furthermore, many would also be surprise to learn a majority of beef operations have fewer than 10 head.

Looking ahead, the USDA will be conducting its 2017 Census of Agriculture early in 2018.The results of this Census will be important for monitoring and tracking trends such as these.

HOGS: (nationalhogfarmer.com) —Tuesday, September 5, 2017, will be a red letter day in the history of the U.S. pork industry. The industry will see its harvest capacity grow by more on that one day than it has seen it grow and ANY SINGLE YEAR within the memory of anyone alive today -- and perhaps ever. The only reason I [Dr. Steve Meyer] am not more certain of an "ever" designation is that we don't have records of when the old plants opened in the late 1800s and early 1900s. Given those plants' relatively small size, I think the statement is safe. The only other year that is close was 1995 when Smithfield Foods opened its mammoth plant in Tarheel, NC. But that plant had a capacity of "just" 16,500 head per day on opening day and was not expanded to its full capacity of 32,000 per day for another three years.

The Triumph-Seaboard plant in Sioux City and the Clemens Food Group plant in Coldwater add 22,200 per day. Not all of that capacity will be operational on day one, of course, and I don't expect either plant to be at full one-shift operations until sometime in late winter or early spring but congratulations to both firms for successfully navigating the construction process. Clemens has planned on September 5 as an opening day since construction started. TSB's plant was delayed from its originally-announced July opening, but it beat a number of predictions from just a few weeks ago.

So what does this mean?

First, it means room to grow. But the question is "Grow from what point?" The owners of these two plants all have sows and have been adding sows to supply these plants for some time. So the growth baseline is perhaps as much as two years ago. At least a portion of the growth in hog numbers witnessed in 2016 and 2017 is the result of these plants and the smaller ones in Missouri and Minnesota opened in the past 12 months.

My calculations suggest that we may already have enough hogs on the way to fill these new plants. Assuming an average of 5.4 full workdays per week, the new plants would leave the U.S. packing sector with the ability to harvest 2.632 million head per week "comfortably."

The new plants will almost certainly not be in full operational mode by November so this 2.6 million per week will not be comfortable but neither will it be disastrous or, in my opinion, very negative. Last year's slaughter versus capacity situation was MUCH worse than what we will see this year.

On the other hand, hog supplies this fall will not leave packers scrambling to keep lines running at optimum speed, so I do not expect much positive pressure on prices either. Packer margins have been very strong all year. Their recent decline stopped last week, and I expect them to begin growing seasonally. I do not expect them to get anywhere near last fall's record levels, but I do expect them to remain healthy.

Second, it means a lot more pork in both the short run and long run. While competition for hogs will, I think, be relatively benign, the amount of pork that packers will need to sell is swelling and will continue to swell next year. Getting them processed efficiently and in a timely manner does not mean you will like the price the product fetches. We've seen some of that pressure lately as the cutout value has fallen by roughly $20/cwt (19%) since July 15. Not all of that is due to higher hog supplies (a "falling back to earth" for bellies has been a big reason, too) but hog numbers have certainly been a factor.

It is important to note that the slide for hog prices has been almost precisely the same as for the cutout value -- from $90 in July to just over $70 for the average price across all purchase methods on Thursday, August 31.

Are the recent cutout value and hog price and futures price collapses just the beginning for this fall? I don't think so. I believe the cutout and hog price declines reflect a necessary correction of the bellies market. The bellies price decline of last spring and very tight bellies inventories lit off another bellies price explosion much as we've seen periodically over the past three years.

This one was decidedly louder than its predecessors, but the resulting record prices eventually strangled bellies featuring and usage and started the downward plunge.

Bellies below $130 will attract some attention and add value to the carcass and hogs over the next few weeks. There will be some pressure on other cuts, but we think the worst is behind us.

As for the futures, readers of this column know that I consider the futures market to be a very emotional entity. Teenagers have nothing on the futures market, especially in this day of electronic trading. October and December Lean Hogs appear to be oversold.

The bounce of the past three days supports that conclusion (or bias). My big concern is that funds (Swap Dealers and Managed Money) still hold large long positions in lean hogs. I have feared a big and fast selloff that would push fall Lean Hogs contracts even lower. This week's bounce might slow such liquidation down. It still has to happen. The question is whether it will be orderly or a rush for the exits.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

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