DTN Early Word Opening Livestock

Cattle Paper to Launch New Week with Mixed Prices

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

Cattle: Steady-$2 HR Futures: mixed. Live Equiv $130.44 + .04*

Hogs: $1-2 LR Futures: 50-100 LR Lean Equiv ___FCKpd___0nbsp; 77.97 - .34**

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

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

GENERAL COMMENTS:

We're in for a typically quiet Monday with efforts limited to the distribution of new showlists. Look for ready numbers of steers and heifers to be about steady with last week. Between the bullish momentum over the last several week and the premium structure of the board, it seems like a good bet that asking prices will start out around $2-3 higher (e.g., $110-112 live basis). Live and feeder futures should open on a mixed basis with nearby holding up better than deferred. More specifically, December live should initially catch some selling thanks to the larger than expected August placement confirmed on Friday.

Look for the cash hog trade this morning to remain in the bearish groove with opening bids of $1-2 lower. It seems reasonable to assume that the new plants will continue to slowly grow toward full capacity. Such a curve to production means that the product demand market will continue to be taxed. Lean futures should open at least moderately lower, pressure by follow-through selling and negative fundamentals.

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BULL SIDE BEAR SIDE
1) Once again, cattle feeders won the late-week contest of cash leverage, forcing short bought packers to rise live bids from $2 to $3.50. Clearly, the early fall supply/demand force remains price friendly. 1) August placement activity was confirmed up Friday to be larger than expected (i.e., up 3 percent versus off 2-3 percent). Furthermore, fourth quarter fed supplies were especially underscored by the fact that placement weights were skewed to differ feeders placed last month (i.e., 800 pounds and up total 8 percent more than 2016.
2) For the week ending September 19, noncommercial traders increased their net long position in live cattle futures by 5,400 to 93,200 contracts. 2) Beef stocks in cold storage as of August 31 were reported at 476.3 million pounds, up 44.5 million, or 10.3 percent, from July and well above the average of analysts’ expectations.
3) Lean hog futures start out this morning extremely oversold and due for some kind of correction. Furthermore, some short covering can probably be expected as specs and commercials position ahead of Thursday's H&P report. 3) Ending August pork stocks in the freezer were reported at 575.7 million pounds, an increase of 3.8% from the previous month. The month-on-month increase in pork stocks was 20.8 million pounds. The five-year average change for pork in August is an increase of 16.6 million pounds.
4) Though the clock is ticking down, there is a seasonal tendency for October lean hog futures to rally into contract expiration. 4) For the week ending September 19, noncommercial traders were net sellers in the lean hog market, reducing their net long position by 2,400 contracts to 26,300.

OTHER MARKET SENSITIVE NEWS

CATTLE: (Rabobank) —Brazil is expected to increase its beef production by around 2% per year over the coming decade. This will be supported by an increased use of systems that rely on pastures in combination with grains in order to accelerate growth and reduce time to market. These emerging systems, along with the traditional feedlot, are the key to improving productivity and mitigating risks, and are likely to be present in 45% of Brazil’s beef production by 2026, whereas today less than 30% of total beef production in Brazil uses these systems.

Historically, Brazil’s beef sector has benefited from abundant grazing land (estimated at around 170m hectares) for calf and grass-fed cattle production, enabling Brazil´s output to grow solidly over the last decades. However, Brazil currently has around 75m hectares of underused pasturelands. Given that large amounts of these underused pasturelands are likely to be converted into grain production areas, the trend towards intensification is welcome and needed (see more details in Reap the Beans for China: Beyond the Sino-Brazilian Soy Trade). However, Brazilian producers are using other types of systems—with improved rates of productivity—besides feedlot, which has faced different challenges over the past three years.

Rabobank believes that grain producers will continue to take the lead in this process, and that grain producers entering the beef sector have actually been more than welcome because they are more open to adopting new technologies.

HOGS: (nationalhogfarmer.com) —The North American Free Trade Agreement, when enacted in 1994, created the world’s largest free trade area, encompassing 450 million people and a gross domestic product of more than $20 trillion. That

progress in trade is in jeopardy as trade officials from the member-countries of the United States, Canada and Mexico are at the negotiating table.

During his campaign, President Donald Trump had threatened that the United States would pull out of NAFTA altogether. Negotiators have had two rounds of discussions, with a third round beginning in Ottawa on Sept. 23.

According to a Reuters article, NAFTA trade accounts for 39% of Canada’s GDP and 49% of Mexico‘s, but just 5% in the case of the United States, the world’s largest economy. Both Canada and Mexico sell more than three-quarters of their exported goods to the United States. The 23-year-old trade deal encompasses agricultural and industrial goods to intellectual property and environmental regulation.

The National Pork Producers Council says since NAFTA implementation, U.S. trade with Canada and Mexico has more than tripled, growing more rapidly than U.S. trade with the rest of the world. These countries are the two largest destinations for U.S. goods and services, accounting for more than one-third of total U.S. exports.

Pork producers rely on export markets for adding value to their product as about 26% of U.S. pork produced ends up in foreign markets. Exports added $50 — representing 36% of the $140 average value of a hog — to every U.S. hog marketed in 2016, when $5.9 billion of U.S. pork was exported. Mexico and Canada are particularly important export markets.

As U.S. pork production is on the rise, the Canadian and Mexican pork sectors are also forecast to show continued growth through next year. The Daily Livestock Report, citing USDA’s Foreign Agricultural Service Global Agricultural Information Network Report, says “for (Canadian) pork, both increases in slaughter levels and carcass weights are forecast, resulting in tonnage produced in 2017 up 2.5% year-over-year. In 2018, pork output is expected to continue to uptick (rising 2.0% from 2017).”

According to the GAIN Report on Mexico, “For the first time, Mexico is exporting live swine, and the pork sector continues to vertically integrate. However, Mexico depends on imports of pork to meet domestic demand.”

The Mexican pig crop production for 2018 is forecasted at 19.9 million head, up from the revised 2017 figure, as genetics introduced in the domestic herd are reportedly propelling growth. Production continues to be bolstered by domestic demand. The vertical integration, as noted in previous reports, is happening at a higher rate than in the beef sector. Recent growth by the larger players in the swine industry is supporting further production, according to the GAIN Report.

According to the Daily Livestock Report, “Exports of hogs and pigs to the United States should post year-over-year gains driven by new U.S. slaughter plants. Canadian pork exports worldwide are forecast to continue growing. To meet Mexican domestic pork needs, imported tonnage from the United States is forecast to continue higher.”

Reuters recently polled economists who say Mexico and Canada will come out of the NAFTA talks relatively unscathed. “Any changes will likely be incremental,” Brett Ryan, economist at Deutsche Bank in New York, says in the Reuters article. “U.S. corporations, particularly automakers, would be at substantial risk of supply chain disruptions. The U.S. farm lobby would also be opposed.”

Changes are likely to encompass dispute settlement mechanisms, labor and environmental standards, supply-management protections and rules of origin, among other areas, and may have the biggest impact on the auto and agriculture industries, Reuters poll respondents say.

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

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John Harrington

John Harrington
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