DTN Early Word Opening Livestock

Lean Hog Futures Set to Open on a Firm Basis

John Harrington
By  John Harrington , DTN Livestock Analyst
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Cattle: Steady Futures: Mixed Live Equiv $132.42 + .24*

Hogs: Steady-$1 HR Futures: 50-100 HR Lean Equiv $ 78.02 - .55**

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

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

GENERAL COMMENTS:

Expect a typically slow Tuesday in the cattle market with bids and asking prices poorly defined. Packers seem both short-bought and well-margined, factors that should start shaking out bids by midweek. Yet both sides will be closely monitoring the board, and if the vigil stays on the choppy side, significant trade volume may not surface until Thursday or Friday. Our guess is that asking prices will start out around $110 plus in the South and $174 plus in the North. Live and feeder futures should open on a mixed basis thanks to a combination of follow-through selling and short-covering.

Look for hog buyers to resume work Tuesday with bids steady to $1 higher. Processing margins are decent and market hog numbers clearly remain generous. Yet the pace of slaughter growth may slow for a bit. This week's kill should be very close to unchanged with last week, somewhere close to 2.53 million head. Lean futures should open with a firm undertone, supported by residual buying and signs of a stabilizing cash market.

BULL SIDE BEAR SIDE
1) Demand for out-front boxed beef sales (i.e., with delivery of 22 days or greater) continues to be impressive with 1,287 loads reported last week. 1) Although cattle futures opened in a steady/firm basis, live and feeder contracts closed sharply lower on Monday with December live closing back below its 100-day moving average (thereby girding overhead resistance near last Monday's gap).
2) For the week ending Sept. 26, noncommercial traders increased their net-long position in live cattle futures by 5,200 to 98,400 contracts. 2) New showlists distributed in feedlot country may be mixed, but overall the offering of ready cattle looks somewhat larger than last week.
3) The cash hog market appears to be stabilizing after an extremely rough September. The national dressed base moved nearly a buck higher on Monday without generating impressive trade volume (i.e. only 10,329 head). 3) The pork carcass value closed moderately lower on Monday, pressured by softer demand for loin and picnic cuts, as well as the rising tide of production and tonnage in general.
4) Aggressive follow-through buying in lean hog futures Monday seemed to move the post-report reaction from short-term knee jerk to something more significant. For example, the December contracts surged over its 100-day moving average for the first time since mid-August. 4) Still mindful of the likelihood of record pork production over the year ahead, commercials will be hiding in the weeds, ready to aggressively pounce on the short side of lean hog futures the moment the post-report rally runs out of gas.

OTHER MARKET SENSITIVE NEWS
CATTLE:

(Xinhua) -- Two months after China and the United States reached a deal to reopen Chinese markets for U.S. beef in July, as part of the 100-day action plan to boost economic cooperation, American beef was back on China's menu.

"By getting our foot in the door we hope to develop a long lasting and mutually beneficial relationship with China," said Craig Uden, President of the National Cattlemen's Beef Association.

The year after the 2003 ban took place amid concerns over mad cow disease, American beef exports to China dropped from 3 billion U.S. dollars to 1.1 billion U.S. dollars.

By 2018 - market insiders predict beef sales will be 3.8 billion U.S. dollars to China alone - with no limit in sight.

"It's impossible to overstate how beneficial this will be for America's cattle producers," Uden said.

Out of the nearly 170 billion U.S. dollars in U.S. exports to China in 2016, food, feed, and drinks made up only 20 billion U.S. dollars, according to the USDA, revealing lots of room for growth in the food sector.

"Quality beef is what the Chinese consumer wants," Richard Phillips told Xinhua.

Phillips, General Manager of Agri-Product and Foods Department of China Certification & Inspection Group (CCIC) North America, is busier than ever these days inspecting and certifying U.S. beef farms to do business with China.

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"Fourteen years ago, China's economy was still developing - and we've grown at such a rapid rate that lots of people have money and have become rich," Phillips told Xinhua Friday, adding "they want good products from the United States."

Currently, China is importing most of its beef from Australia, according to Phillips.

Quality concerns and a consumer demand that exceeds domestic production by 25 percent in China give a good chance for U.S. President Donald Trump.

U.S. Commerce Secretary Wilbur Ross claimed last month that, "President Trump is doing more to improve the U.S.-China relationship than any president in decades," and cited the beef deal as "even more concrete progress."

"The Trump government doesn't want a trade imbalance," Phillips said, noting that U.S. soybean exports to China currently total 13 billion U.S. dollars and the sky is the limit with beef.

So in a headline last week, Agri-Pulse, a company based in Washington D.C. providing weekly report of the latest in agricultural information said, "meat packers are lined up to do business with China."

But some producers told Xinhua they will proceed with caution.

"Our product is very perishable and it poses a big impediment to ship to China," Taylor Smith with the Kansas City Steak Company told Xinhua.

Kansas City currently only ships inside American borders, but the prospect of selling to China is alluring, despite the potential complications, Smith said.

"I think the Chinese-American beef relationship will work," said California businessman Glenn Nemhauser.

Texas is the largest producer of beef in the United States, followed by Nebraska, Kansas, and California.

Interestingly, Phillips has been busy inspecting facilities in 10th-ranked Montana, where many cattle ranches have expressed interest in selling to China.

"It's a really smart place for China to put in investment and to partner with Montana to have a really good packing industry and processing plant here," Fred Wacker vice president of the Montana Stockgrowers Association said at a roundtable meeting early September organized by U.S. Senator Steve Daines in Bozeman of Montana.

Wacker argued that would help bring down logistic costs and guarantee stable supply of high quality beef to China, a win-win deal for both sides.

But none are as seasoned as Arkansas-based Tyson Foods, who started doing business with China in 1971, even before President Richard Nixon's historic 1972 visit.

In 2001, Tyson merged with Shandong Food to build a modern, cutting edge poultry processing facility in Shandong Province.

In 2008, Tyson built modern processing facilities - according to global production standards - in Jiangxi Province near Shanghai.

And the following year, Tyson initiated another joint venture in Shandong with three poultry plants - providing quick service restaurants and retail outlets with chicken, as part of Tyson Rizhao in Juxian Industrial Park.

Tyson knows how to do business in China, and company executives were ecstatic at the already increased business across the Pacific. In 2015, Tyson, hiring 115,000 people who work at more than 300 facilities worldwide including 90 in the United States, had 42 billion U.S. dollars internationally in revenues, up from 36 billion U.S. dollars in 2014.

"Our top people just returned from China, and we're incredibly busy there," a spokesperson told Xinhua Friday, not ruling out significant expansion in China for the food-processing giant.

HOGS: (agriculture.com) --There are two kinds of producers in the hog industry Tuesday -- those who are expanding and those who wish others weren't expanding. Either way, the pig supply is growing big time. The annual exclusive Pork Powerhouses 2017 ranking of the 40 largest U.S. producers shows there are 246,850 more sows among these companies than one year ago. For the first time ever, the top 40 own or manage more than 4 million sows. Almost two-thirds of the producers, 25 out of 40, have added sows. Only six companies reduced numbers. The last time the Pork Powerhouses list grew by this much was in 2006. That growth led to a market collapse and cutbacks in sow numbers by 2008. Going further back, the biggest year ever for sow expansion among the Pork Powerhouses list was in 1998 when the largest producers added a half a million sows. Remember what happened late that year?

There is one big difference in the industry Tuesday vs 10 and 20 years ago. Two new large packing plants opened in September, Clemens Food Group in Coldwater, Michigan, and Seaboard Triumph Foods in Sioux City, Iowa. A third, Prestage Foods of Iowa, and maybe even a fourth (to be announced soon) could be killing hogs in a year or three.

Never before in the pork industry has there been this kind of packing plant expansion, live production expansion, and absolute necessity of export expansion in the presence of cheap grain. Cheap grain often breaks more people than expensive grain, say industry experts, because it encourages expansion. Companies get bullish when grain is cheap.

The largest sow growth by any one firm in the Pork Powerhouses list comes from the Pipestone System, Pipestone, Minnesota. This veterinarian-based management system added 55,000 sows since last year, some through acquisition and some by new growth. The system's total of 240,000 sows jumps it to number 3 on the ranking this year.

As far as building new sow farms, the most aggressive expansion is with Iowa Select Farms, number 5 on the ranking. The Iowa company added 36,000 sows in the past year, for 207,000 total. These are the first new sow farms for Iowa Select in 12 years. The company has a 23-year relationship with JBS (formerly Swift), and with new plants coming online and the shifting of hogs to new plants, JBS needs help to fill the void.

"What's really driving the expansion are the new slaughter plants coming online," says Jeff Hansen, owner and founder. "If we didn't have the new slaughter plants, there would be no opportunity. We have a long relationship with JBS, and we are filling in for some of the volume it's going to lose to the new plants. We saw the opportunity and decided to add more sows."

The largest growth by acquiring sows in the past year is by Seaboard Foods, Shawnee Mission, Kansas, which added 35,000 sows, all by buying farms already in production. The company needs pigs for the new Seaboard Triumph Foods plant, which processes 10,000 head of market hogs a day. The second shift of that plant will start killing next spring.

Smithfield Foods, the largest U.S. producer by a long shot with 910,000 sows, picked up 30,000 sows from Hormel Foods (the Farmer John business) since last year, but otherwise hasn't added sows domestically. The company is depopulating and repopulating some farms, but has no plans to build new sow farms in the U.S., says Joe Szaloky, vice president of business development and planning for Smithfield.

Internationally it is another story. Smithfield added 15,000 sows in Mexico this year with more to come. "In Mexico, the plan is to keep growing," says Szaloky. "We are happy with our businesses in Mexico and both companies are positioning themselves well to have profitable growth." Poland and Romania combined added 10,000 sows for Smithfield this year. "Smithfield has a pretty good focus on that European business now," he says.

Not only are sow farms expanding, but each sow is more productive than 10 years ago, so the number of pigs produced goes up even more. Many people in the industry are amazed that producers have sustained this increase in output per sow for 10 years. It is phenomenal from an industry perspective, and the rate of improvement in production for the best companies is even greater.

Disease is low across the industry right now (fingers crossed), but almost nobody escaped PRRS last winter. "There has been a nasty PRRS blowing around between systems down here for a little over a year," says Mike Brandherm, vice president and general manager of Hitch Pork Producers, which has 16,000 sows around Guymon, Oklahoma. "Our vet calls it the SouthWest 1-8-4. It's pretty hard on growing pigs, and can cause abortions and sow/piglet mortality. The SW-1-8-4 hit us pretty hard in nursery and finishing last year and over the winter, but subsided this spring."

Hitch converted sow farms to batch farrowing, going to a single source by site for nursery and finishing flows to improve disease control. "We also continue to explore other ways to improve herd health, such as PRRS/Myco elimination projects combined with filtering sow farms," says Brandherm.

ßThe deadly PED virus is still around, but not causing significant problems for U.S. producers lately. "We get an occasional PEDv flare-up that pops up very randomly," says Szaloky. "PRRS has been, knock on wood, somewhat stabilized." Most producers say their animals are performing at extremely high production levels. Therein lies the problem, if you can call it that. "The pipelines are full, the animals are living well, they are growing well, they are converting well, and corn is cheap," explains Szaloky. "It's a bad combination."

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: