DTN Early Word Opening Livestock

Cattle Paper to Open Mixed in Cautious, Pre-On Feed Report Business

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

Cattle: Steady-$2 HR Futures: mixed Live Equiv $133.61 +$1.21*

Hogs: Steady-$1 HR Futures: mixed Lean Equiv $ 79.44 + 0.44**

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

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

GENERAL COMMENTS:

Backed into the late-week corner, cattle buyers and seller will have to come to terms sometime today. Look for bids to be renewed around $109-110 live and $172-173 dressed. Asking prices should also be restated around $112 plus in the South and $175-plus in the North.

CME officials announced on Thursday afternoon the posting of 27 deliveries against spot October live, 14 new and 13 for $2 (which were demanded). The October 1 on feed report will be released at 2:00 CDT. Here are average guesses: on feed, up 4-5 percent; placed in September, up 7-8 percent; marketed in September, up 2-3 percent. Live and feeder futures should open on a mixed basis thanks to pre cash and on feed report positioning.

Look for cash hog buyers to start work this morning with another round of higher bids. Saturday's slaughter should total close to 195,000 head, enough to push the kill total for the week close to 2.53 million head. Lean futures are also likely to open with uneven price action with nearby gaining on deferreds.

BULL SIDE BEAR SIDE
1) Beef cut-outs exploded higher on Thursday with box movement described as "good." Packer margins seem attractive enough to support at least steady/firm feedlot sales. 1) Given deferred live cattle premiums, the board seems more vulnerable to a bearish on feed report (e.g., larger than expected September placement) than a bullish one..
2) The large premium of soon-to-be-spot December live cattle should encourage feedlot managers to hold for higher prices and thereby tighten the spot supply of ready cattle. 2) December live futures remains at roughly a $5 premium to spot October, which is a wider than normal spread for this time of year. This fact could attract longer feeding period, heavier carcass weights, and a surge in selling interest is market psychology suddenly sours.
3) The pork carcass value closed moderately higher yesterday, boosted by better demand for fresh cuts and hams. 3) Net pork export sales last week dropped to 11,400 MT, down 28 percent from the previous week and 51 percent from the prior 4-week average. Increases were reported for Mexico (3,400 MT), Japan (2,600 MT), Colombia (1,200 MT) South Korea (1,000 MT), and Canada (900 MT).
4) While ready hog numbers were expanding at a faster rate than kill capacity through the late summer period, it is now clear that kill capacity is expanding at a faster rate than marketable barrows and gilts. 4) Over just the course of 13 business days, Iowa carcass prices have gained more than 24 percent in value. During that same period, the pork cutout is up only 3.6 percent. Processing margins have declined by more than 42 percent as a consequence. How much longer will hog buyers allow this trend to continue?

OTHER MARKET SENSITIVE NEWS

CATTLE: (kticradio.com) -- Sens. Charles Grassley, R-Iowa, and John Tester, D-Montana, asked U.S. Secretary of Agriculture Sonny Perdue to move forward on implementing Grain Inspection, Packers and Stockyards Administration, or GIPSA, rule, in a letter to Perdue on Wednesday.

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Grassley was livid earlier this week when told by agriculture journalists about USDA's proposal to withdraw the rule.

"We vehemently disagree with that decision," the senators said in the letter.

"The lack of economic opportunities in rural America creates real challenges for growth and economic development. For the economy in rural America to prosper, people who live, work, and invest there must be able to survive and thrive so they can reinvest earnings into their communities. That is the most effective way to create additional jobs and lasting opportunities for the next generation.

"Many of our constituents believe the current practices of multinational livestock corporations, one of which is being investigated for unprecedented corruption, allow them to exploit farmers and ranchers. The industry has consolidated for decades into its current structure that enables a handful of companies to have extraordinary market power

"The department of agriculture was called 'the people's department' by President Lincoln because of the important role it plays every day in the lives of farmers and the American people. We look forward to working with you and the department to ensure everyone in agriculture is getting a fair shake so rural America can thrive again."

The livestock marketing rules under GIPSA date back to language in the 2008 farm bill. The rules were controversial throughout President Barack Obama's administration.

Early proposals from USDA drew fire from major industry groups and Congress. The rules were then blocked by Congress. Lawmakers refused to fund any efforts to advance the rules. Congress relented in the fiscal year 2016 funding bill and USDA advanced the rules again.

The three rules were dubbed as the "Farmer Fair Practices Rules."

The rules included an interim final rule on how USDA wanted courts to interpret a provision of the Packers and Stockyards Act. Courts have ruled in cases between poultry growers and poultry companies that a grower has to demonstrate a company's action against the individual grower harmed the entire poultry market.

Since the 1980s, USDA used the standard in beef or pork cases that a livestock producer doesn't have to show harm to competition to bring a Packers and Stockyards case against a company. USDA has pushed to apply the same language to poultry contracts.

Another proposed rule would have given producers more rights when dealing with marketing contracts. The rule would ensure packers can't retaliate against producers who show their contracts to attorneys. The rule also would have prevented packers from giving undue price preferences in marketing contracts.

The final proposed rule would have restructured the tournament payment system by giving USDA authority to determine if a ranking system for poultry growers' prices is fair or unjustly discriminatory, or deceptive. The poultry industry has opposed any USDA rules that could create problems with the company tournament systems.

HOGS: (Wallaces Farmer) -- The hog market is a reasonably good example of what economists call a "competitive market," where forces of supply and demand interact to determine the price. Even with larger pork supplies, hog prices have been profitable recently because of the prevailing demand situation.

Looking forward, the three pillars that will need to continue to bolster pork demand are exports, domestic consumption at supportive prices, and packer competition. For the last to materialize, the first two must continue.

Pork exports are having a good year. Through August, pork exports are up 9% on a carcass weight basis, led by Mexico up 21% and South Korea up 29%. Exports are tracking toward absorbing 22% to 23% of 2017 U.S. production.

Mexico became the top destination for U.S. pork in 2015 and reminds the industry that NAFTA trade negotiations are especially important to U.S. agriculture and to the pork industry in particular. International trade agreements have helped greatly in keeping the cost of U.S. pork competitive in foreign ports. Political chatter about renegotiating trade agreements injects a degree of uncertainty into the hog market, which is increasingly dependent on exports.

Per capita consumption is simply production (net volume of domestic production, cold storage adjustments and international trade) divided by population. Strong pork exports have moved much of our higher pork production into markets abroad. This means that the amount of pork available for U.S. consumers is about the same as last year. Per capita pork consumption in the U.S. is expected to remain steady, thus, the vast majority of production increases must go to export markets.

The steady U.S. per capita pork consumption has a positive component. If you've been to the supermarket lately, you've noticed higher retail prices on pork. Consumers paying higher prices for the same or slightly larger consumption point to strong demand.

Often, rising hog production and how much more pork is available is the headline. But this increased supply of pork we are now producing has a market destination and is getting used up. Somewhat lower prices may be needed to clear the market as hog production rises. But lower pork prices still could be profitable for producers, depending on their cost structure.

Packers don't entirely control weekly hog slaughter; producers do so as well by how many hogs they collectively market. When hogs are plentiful, demand for packer services is high, and packer margins get large. When fewer hogs are available, packers have to bid up to get hogs, and so their profit margins decline. The packing industry expansion that is now taking place will almost certainly push margins lower eventually — but for now, things are still good in the packing sector.

Another factor that can widen margins is the price of pork as reflected through the cutout value. Cutout is a calculation representing the approximate value of a carcass based on the prices received for its respective parts. The cutout price gives an indication of the overall supply- and-demand situation of the wholesale pork cuts market. Strong pork prices and favorable margins for packers would be expected to contribute to stronger bids for hogs.

Essentially, current inventories are pretty much locked in place already — all that can be done is a reaction to pricing opportunities. Long term, continuing to grow the demand for pork will be key.

John A. Harrington can be reached at john.harrington@dtn.com

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: