DTN Early Word Opening Livestock

Cattle Futures Set to Surge Higher on Opening

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

Cattle: Steady-$2 HR Futures: 200-300 HR Live Equiv $135.31 + .49*

Hogs: Steady-$1 LR Futures: 50-100 HR Lean Equiv $ 82.67 + .12**

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

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

GENERAL COMMENTS:

Even the most dedicated bulls in the room were shocked late Friday by the way feedlot sales soared higher. Steers and heifers sold from $117 to $119 on a live basis in most areas, $6 to $8 higher. At the same time, dressed sales were marked at $182 to $185, $7 to $10 higher. The late hour made it difficult to assess total volume, but we assume Livestock Mandatory Reporting will document moderate to fairly good movement later Monday. Activity Monday will be typically limited to the distribution of new showlists. Our guess is that the new offering will be about steady with last week. Live and feeder futures should open higher as the nearby contract aggressively chases the new cash reality.

The cash hog market seem staged to open with bids steady to $1 lower. Last week's kill popped back over 2.5 million head, if only because of the odd boast of last Sunday's kill. Nevertheless, it will be interesting to see how well the wholesale pork trade holds up under the additional tonnage. Lean futures seem set to open a firm basis thanks to the premium of the cash index and spillover buying from the cattle complex.

BULL SIDE BEAR SIDE
1) The cash cattle trade exploded late Friday with live sales rocketing $6 to $7 higher in most areas. In a flash, the extraordinarily large board premium has vanished, and with it the threat of delayed country marketing. Indeed, such a surge speaks highly of manageable supplies and decent beef demand. 1) Forced to pay sharply higher for live inventory last week, beef packers are starting the week with much tighter margins. They will be looking for ways to regain leverage (e.g., reduced chain speed, lower bids).
2) During the week ending Oct. 24, noncommercials continued to increase their net-long position in live cattle futures, hiking the total by 6,600 to 119,600. 2) The December/ February live cattle spread is pushing out over $5, and continues to imply remarkable strength into the first quarter of next year despite the prospects of larger and larger meat supplies into early spring. Such an extremely bullish move could prove to be entirely too risky.
3) At the same time, big specs increased their net-long position in lean hog futures by 2,300 contracts to 46,000. 3) Given the way the cash market began to falter late last week, the unusual fall rally may now be history with a more typical bearish price resuming as we move toward Thanksgiving.
4) The U.S. economy unexpectedly maintained a brisk pace of growth in the third quarter. Gross domestic product increased at a 3% annual rate in the July-September period after expanding at a 3.1% pace in the second quarter. 4) Non-holiday hog slaughter over the next six weeks should easily record a steady increase and significantly tax seasonal pork demand.

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OTHER MARKET SENSITIVE NEWS

CATTLE: (the cattlesite.com) -- The American Farm Bureau Federation is calling on the Trump Administration to move forward with improvements to the North American Free Trade Agreement but to ensure the United States remains part of the deal, Bruce Cochrane reports.

The American Farm Bureau Federation is one of a group organizations that's come together to raise the alarm over the potential negative consequences for agriculture of withdrawal from NAFTA, one of several such US based ad hoc coalitions representing food and agricultural trade groups, manufacturers and agriculture and food commodity organizations.

American Farm Bureau Federation Senior Director for Congressional Relations Dave Solmonsen says, since the beginning of the year, there has been a very active effort to promote trade focusing on NAFTA.

"We want to continue to grow our opportunities in the North American market and we need to stay in the agreement but also we do want these negotiations that began in August and now are expected t continue into the first quarter of 2018 to succeed, to make some necessary changes to NAFTA.

"Several parts of US industry and parts in agriculture want to see some changes, want to see improvements in the agreement to make it work better for everybody so that's what we really want to do but, at the same time we want to make sure that we stay in the agreement.

"Before NAFTA, US agriculture was selling to Canada and Mexico together about 8.9 billion dollars a year in ag products and now we're almost 40 billion dollars a year in exports.

"All three countries have grown together but you put Canada and Mexico together it's almost a third of all US agricultural exports so again the thing is to try and keep that going."

Mr Solmonsen acknowledges it's a good time to modernize the agreement but everybody knows the positives NAFTA has brought.

HOGS: (Rabobank) -- Looking into Q4 2017, global pork supply is expected to increase further, mainly driven by China, the US, Canada, and Brazil. While China's pork imports have slowed down recently, they are likely to pick up again later this year, according to RaboResearch's latest global Pork Quarterly.

"The most significant story in global pork markets has been the substantial decline in China's imports in recent months, which creates a risk of over-supplied global markets," says Chenjun Pan, RaboResearch Senior Analyst -- Animal Protein. "However, we do expect China's imports to pick up somewhat over the rest of the year." While the Rabobank Five-Nation Hog Price Index suggests a stronger pricing trend, the major importing countries will likely maintain steady import growth.

China's pork farming structure has been impacted by stricter environmental policy enforcement. Despite the exit of many small farms, we maintain our forecast for 2017, with production increasing by 2%. Prices will continue the downward trend, after holding at strong levels in summer. Pork imports were down by 27% in the first eight months, but may rebound over Q4 2017.

China's import demand has been one area of distortion in global pork markets over the past one to two years, and a diversion in prices for certain cuts has been another. "Pork bellies have reached record levels in the US and some other markets, driven by strong demand, especially from foodservice," says Justin Sherrard, RaboResearch Global Strategist -- Animal Protein.

Other highlights from the Pork Quarterly Q4 2017 include:

EU: exports continue to decline-- While high prices in 1H 2017 contributed to declining exports as they reduced the EU's competitiveness in trade flows, they also triggered an expansion in the sow herd. The slight dip in production in 2017 is likely to reverse in 2018. The EU will seek export opportunities for additional production.

US: prices under pressure as production grows-- US pork production will continue to expand over the remainder of the year. Prices are expected to soften under supply pressure. Strong currencies will put extra pressure on the export business (see Figure 2). With weaker demand from China offset by stronger demand from Mexico, we still expect total exports for 2017 to be higher than in 2016.

Brazil: export to China declined significantly-- Brazilian pork exports increased around 18% by value in the first nine months of the year. By volume, they declined around 4%, particularly due to the slowdown in Chinese pork imports. Given favourable feed costs, we expect Brazilian production to continue rising in Q4 2017.

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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