DTN Early Word Opening Livestock

Look for Cattle and Hog Futures Seem Set This Morning to Open 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 $134.21 - 0.17*

Hogs: Steady-$1 HR Futures: mixed Lean Equiv $ 81.53 - 0.11**

* 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 buying interest should gradually start to improve with opening bids around $111 in the South and $175 in the North. Asking prices should be stated around $116 in the South and $180-plus in the North. Unless we see an early narrowing between bids and asking prices, significant trade volume will probably be delayed until Friday. CME officials announced on Wednesday 10 loads retendered against October at $1 (all at West Point). These 10 loaded were reclaimed. Live and feeder futures should open on a mixed basis as specs and commercial slowly position ahead of the development of cash business.

Hog buyers should resume work this morning with bids steady to $1 higher. The spread between the pork cut-outs and the nation lean base is just shy of $11, implying packer profits close to $15 per head, That's smaller than early fall margins but still decent. Saturday's kill should total close to 200,000 head. Lean futures seem likely to open mixed as well with nearby probably outperforming deferreds.

BULL SIDE BEAR SIDE
1) Though nearby live contracts lost some ground on Wednesday, they easily held on the lion's share of Tuesday's surge, Furthermore, the unrelenting premium of December will certainly encourage bullish feedlot managers to dig in their heels in terms of higher asking prices. 1) Although the aggressive fed cattle harvest levels of late September likely tempered the expected seasonal increase on carcass weights, weights are expected to continue increasing throughout October.
2) Open interest in live cattle futures have jumped to the highest level seen since late September, underscoring the bullish significance of recent technical progress. 2) For the week ending October 21, U.S. hatcheries set 215 million eggs in incubators, up 2 percent from a year ago. At the same time, chicks placed totaled 172 million chicks; up 2 percent from 2016.
3) Lean hog contracts issues to barrel higher at midweek with Feb through Jun actually setting new contract highs. Between accelerating kill capacity and strong domestic and foreign demand, the trade seems confident about new year's market to handle increasing tonnage. 3) If we hit a record hog slaughter this week (even though it was boosted by the unusual Sunday kill), boosted the total over 2.54 million head, it could pressure the wholesale pork trade next week.
4) For the week ending October 21, Iowa barrows and gilts averaged 281.7pounds, 0.3 pound lighter than the previous week and 0.1 pound smaller than 2016 4) Furthermore, there's a good chance that early December hog kill could reach as high as 2.6 million head.

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OTHER MARKET SENSITIVE NEWS

CATTLE: (Bloomberg News) -- McDonald's is preparing to up the ante in the fast-food price wars. The world's largest restaurant chain, facing heavy competition in the U.S., will launch a new value-priced menu nationally next year. The lineup will offer items for $1, $2 and $3, the company said on Tuesday.

The rollout will provide a long-awaited replacement to the Dollar Menu, which was popular with customers but less so with McDonald's franchisees. The company has experimented with various discounts -- including McPick 2 for $5, which let customers choose two items -- in a bid to find something that wasn't too hard on the profit margins of restaurant operators.

Almost 100 percent of franchisees have signed up to participate in the new value program, McDonald's said. The stakes are high to get the formula right. Wendy's and Burger King, McDonald's closest competitors, have heavily promoted their discounted menus. And many U.S. consumers have retained a thrifty attitude in the years since the last recession.

But McDonald's is adding the new menu from a position of strength. It has seen U.S. restaurant traffic grow for two consecutive quarters, following years of declines. With the new value lineup, the company is trying to lock in those gains, said Michael Halen, an analyst at Bloomberg Intelligence.

"You have to have some everyday value because a decent portion of that business is very price-sensitive," he said.

HOGS: (Bloomberg News) -- After years of fighting for an Obama-era rule that would help farmers sue the mammoth companies they work for, advocacy groups for America's small poultry, pork, and beef growers may have been dealt a final blow by the U.S. Department of Agriculture.

The fight was about whether small farmers can sue if they feel they've been mistreated by big companies. Poultry farmers, for example, often get their chicks and feed from big meat producers, which in turn pay the farmer for the full-grown product. If a farmer wants to sue a company for retaliating against him because he complained about his contract—say, by sending him sick chicks or bad feed—the farmer needs to show the company's actions hurt not only him, but the entire industry.

Under President Obama, that high bar would have been lowered. Under the interim final rule, a showing of harm to only one farmer would suffice to support a claim. The Trump administration last week threw out the Obama-era rule in a move hailed by lobbyists for the big agriculture companies.

"I can't tell you how disappointed I am," says Mike Weaver, a West Virginia poultry farmer and president of the Organization for Competitive Markets, who voted for Donald Trump. "Rural America came out and supported the president, and if it weren't for us, he wouldn't be where he is now. What they did was wrong, and it shouldn't have happened that way."

Farmer groups—including the National Farmers Union, Rural Advancement Foundation International-USA, Farm Aid, R-CALF USA, the U.S. Cattlemen's Association, and the Organization for Competitive Markets—supported the Obama-era rule. Many farmers and ranchers thought Trump would allow it to take effect, citing his support for small business and rural Americans. Industry lobbyists, such as the National Cattlemen's Beef Association, the National Pork Producers Council, and the North American Meat Institute, hoped the Republican president would undo the rule, citing fears over increased litigation from farmers. They also thought they'd found a champion for their cause in Trump, who had vowed to cut federal regulation.

"When Trump was coming in with the mantra of reduced regulation," says Jeremy Scott, a protein research analyst at Mizuho Securities USA LLC, "there was relief." In the end it was industry, not farmers, that guessed correctly. National Chicken Council President Mike Brown publicly praised the USDA decision.

Meanwhile, farmers and ranchers are left with few options to challenge huge companies over allegedly anti-competitive behavior. "This gives the meatpacking industry the ability to do whatever they wish in terms of retaliation against an individual," says Jay Platt, a cow-calf rancher in Arizona, who also voted for Trump. "It leaves the cattle producer absolutely punchless."

In addition to Democrats on Capitol Hill, at least one member of Trump's own party sees it that way, too. "They're just pandering to big corporations. They don't care about family farms," Senator Chuck Grassley, an Iowa Republican, told reporters upon hearing the news of the USDA decision. "This is an example of a swamp being refilled."

Although the Trump administration has faced litigation opposing other attempts to undo Obama-era regulations, lawsuits are unlikely to succeed in this case because the USDA took public comment on the possibility of withdrawing the rule, which itself was based on an interpretation of existing federal law, before doing so.

"If there's some ambiguity, the agency responsible for carrying out the rule is given deference," says Cary Coglianese, a law professor at the University of Pennsylvania and director of the Penn Program on Regulation. "It may have been reasonable to interpret the statute the way the Obama administration did, but that doesn't mean the Trump administration's isn't reasonable."

For now, farmer groups are looking at other avenues. Weaver has sent a letter asking Trump to issue an executive order reversing the USDA's decision. He still lays part of the blame, however, with the Obama administration, whose rural agenda was largely stymied by Congress.

"Obama had the opportunity to do the right thing, and he didn't," says Weaver. "He made a lot of promises to the farmers about the things he was gonna do and never followed through on them."

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: