DTN Early Word Opening Livestock

Livestock Futures Staged for Lower Opening

John Harrington
By  John Harrington , DTN Livestock Analyst
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(DTN file photo)

Cattle: Steady-$2 HR Futures: 50-100 LR Live Equiv $129.88 - .26*

Hogs: $1-2 LR Futures: 50-100 LR Lean Equiv $ 84.48 -1.10**

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

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

GENERAL COMMENTS:

Cattle buyers and sellers will soon have to put-up-or-shut-up. Look for at least light to moderate trade volume to finally develop sometime between late morning and mid-afternoon. Asking prices should be restated around $108 in the South and $170 plus in the North. Live and feeder futures are likely to open moderately lower, pressured by residual selling and pre-cash long liquidation.

You might think that hog buyers might be tired of swinging the bearish hammer. Maybe if carcass value showed real signs of stabilizing, they might stop pressing the cash trade and simply concentrate on accelerating chain speed. Yet there are no such signs. To the contrary. As long as packer revenue continues to erode, buyers will be motivated to steadily lower the cost of live inventory (as long as country receipts permit). So given Thursday's combination of sinking product sales and large country run (e.g., 15,901 negotiated sales basis the national report), no one should be surprised if packers start out Friday with another round of lower bids. Assuming a Saturday hog kill close to 180,000 head, we appear to be on the verge of a weekly slaughter right at 2.42 million. Lean futures should open moderately lower based on negative fundamentals.

BULL SIDE BEAR SIDE
1) There are some signs that cattle buyers remain quite short bought right before the weekend break. We've heard some reports of previously purchased steers and heifers being rescheduled (i.e., pulled sooner rather than later). Additionally, some northern cattle traded on Thursday as high as $168 (even after the board crashed), $2 better than last week. 1) For the week ending Sept. 2, cattle carcasses jumped higher: all cattle averaged 823 pounds, 2 lbs. bigger than the previous week; steers averaged 890 lbs., 3 lbs. more than the week before and 8 lbs. less than last year; heifers averaged 811 lbs., 4 lbs. heavier than the prior week and only 1 lbs. below a year ago.
2) The choice/select beef spread continues to aggressively widen. Though some seasonality is involved, this is nonetheless an encouraging sign that feedlots will remain current and are avoiding the danger of backing up ready cattle. 2) The failed attempt by live cattle futures to rally Thursday (i.e., most contracts reversed to close 100 to 200 points below session highs) worked to reinforce overhead chart resistance and poison the well of feedlot psychology.
3) Between the extreme discount of late-year, lean hog futures and the fact that negative news regarding fundamentals is already sounding old, risk/reward analysis by speculators may soon see the long side of the hog board as more promising. 3) The pork carcass value tripped lower more than a buck on Thursday, further pressured by softer demand for ribs (off $10.44), bellies (off $2.92), and butts (off $2.07).
4) If new plants increasingly compete for hogs, then the recent price descent from the summer highs should at least begin to slow in the weeks ahead. Another possible scenario is that price could weaken in the next few weeks, but then move back higher as the new plants begin to pick up steam. 4) Net pork export sales last week decreased to 15,100 metric tons, down 41% from the previous week and 33% from the prior four-week average.

OTHER MARKET SENSITIVE NEWS

CATTLE: (Friday's Producer) -- Oklahoma cattle producers have an important date to add to their calendar.

They'll be voting on implementing a state beef checkoff on Nov. 1.

The vote came after a successful petition drive to get the issue put before producers. State law requires at least 10 percent of the total number of producers to sign the petition and the Oklahoma Cattlemen's Association turned in almost 5,200 signatures to the State Department of Agriculture.

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After the Department of Ag validated the signatures, the OCA was allowed to put the referendum before the state's producers.

"The referendum is for the creation of a state-based checkoff for beef cattle," said Oklahoma Cattlemen's Association Executive Director Michael Kelsey.

"The checkoff will be one dollar per head sold, and will go to promote beef, positioning beef positively before consumers and industry influencers."

The proposed checkoff would have the same restrictions as the federal checkoff. There are no lobbying activities allowed with this money and no donations to various political campaigns, either.

Anyone directly engaged in the business of beef production is encouraged to cast their votes. There's no age limitation either, so if a young person is raising cattle, they're eligible to vote, too.

"There's a very important difference between the proposed state program and the national beef checkoff," Kelsey said. "By law, the state program is refundable. Should the referendum pass, after a producer pays into the checkoff, they have 60 days to request a refund. They don't have to give a reason why they want the refund. Just provide information that proves they paid the checkoff and then the full refund is sent to them."

He said the OCA views this potential system as a good check and balance on what they're doing with the funds. If the refund requests are high, that's a good indication that producers aren't happy with the beef promotion strategies. Conversely, if the refund rate is low, that's a good sign producers are happy with how things are progressing.

The most obvious question is why the OCA feels the need to have a state checkoff in addition to the dollar-per-head that producers already pay into the federal beef checkoff. Kelsey didn't shy away from the question at all and said there were several reasons a state checkoff has become necessary.

"One reason is we've seen such an erosion in the buying power of the dollar," Kelsey said. "Back when we created the federal checkoff in the late 1980s, through inflation and regular economics, the buying power is less than 40 cents and it's less than 30 when you consider advertising costs. We need the additional funds because of that adjustment lower.

"If you consider the immense negativity toward the beef industry Friday," Kelsey said, "especially from special interest groups and animal rights organizations, it's vitally important to beef up the promotion, no pun intended. We need to tell consumers our product is safe, it's healthy, and nutritious too."

He points to the failure of a right-to-farm amendment before Oklahoma voters in 2016. Kelsey said the Humane Society of the United States poured money into the election to fight the amendment. He said HSUS duped voters into defeating the amendment by a wide margin.

"That really opened our eyes here in Oklahoma, where we consider ourself a beef state," he said. "Cattle numbers seriously outnumber humans. HSUS was able to leverage misinformation and outright lies about who we are. Our members thought we needed to step up to the plate because of it and increase our efforts to educate the consumer."

Kelsey also didn't back away from the fact that there are always going to be folks not in favor of an idea like this. He didn't back away from this question either, saying they took into account people who might not like this idea when the OCA put the checkoff idea together.

"First, we had to go through a petition drive, so this wasn't something the legislature mandated or folks in the ivory towers of government initiated," he said. "We did the petition and now there's an opportunity to vote on the idea. If producers don't support the idea, they can certainly go and vote 'no.'

"The other important thing to remember is the refund," he added. "If a producer doesn't like the idea of the checkoff, or even can't afford it, they can certainly request a refund and 100 percent of their investment will be returned to them."

Nov. 1 is the official date for producers to head into their local Extension offices and cast votes. Should it go through, Kelsey estimates the results will be known sometime in November, but that's dependent on how long it takes the third-party verification to be completed.

After that, should it pass, notifications have to be sent out about the collection process and he said early 2018 is most likely to be the start of the state checkoff.

HOGS: (Pork Network) -- Exports and domestic consumer demand for pork will be key to maintain producer profits for the remainder of 2017 and for the first half of 2018, say industry analysts. Arguably the largest expansions in pork capacity came last week when the Triumph --Seaboard plant in Sioux City, Iowa, and the Clemens Food Group plant in Coldwater, Minn., came online. Together they add an unpresented amount of packer capacity for the industry—an additional 22,200 head per day.

While not all of that capacity is up to full operation, and likely won't be until 2018, it has opened the door for expansion. "As long as the consumer demand is there and the export demand is there, we just need to process those hogs so we're glad to have the new plants in place," says Arlan Suderman, chief economist, INTLFCStone.

As processing ramps up in the new facilities, its likely producers will keep lock-step with additional head.

"By the third quarter, we're going to have supplies up 2% over one year ago," said Dan Roose in a video interview with AgDay. "The fourth quarter, we're going to be up 4% over a year ago."

Demand for pork has been increasing globally and domestically, Suderman adds. "Particularly, the bacon craze has been the big driver," he says. "I think we're approaching the place where we'll start to see that demand start to open up again and provide some underpinning."

Continued analysis will come later this month. The quarterly hogs and pigs report will likely show herd growth in the Iowa and Minnesota areas.

John Harrington can be reached at feelofthemarket@yahoo.com
Follow John Harrington on Twitter @feelofthemarket

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John Harrington

John Harrington
Connect with John: