DTN Early Word Opening Livestock

Live and Feeder Contracts Set for Firm Opening

John Harrington
By  John Harrington , DTN Livestock Analyst
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Cattle: Steady-$2 HR Futures: 50-100 HR Live Equiv 140.32 +1.62 *

Hogs: Steady-$1 LR Futures: 50-100 LR Lean Equiv $86.24 + .79 **

* 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-market watchers should see more cash bids tossed on the table. Opening bids should be around $123 to $124 in the South and $192 to $193 in the North. Some cattle are priced around $127 plus in the South and $195 to $200 in the North. Significant trade volume could easily be delayed until Thursday or Friday. Live and cattle are geared to open moderately higher, supported by short-covering and impressive carcass strength.

The cash hog trade is set to open with bids steady to $1 lower. For the moment, the country offering appears to be fully adequate, allowing packers to steadily lower the cost of live inventory. Saturday's kill is estimated to be around 170,000 head. Look for lean hog futures to start out moderately lower, checked by residual selling and long liquidation.

BULL SIDE BEAR SIDE
1) The beef trade has suddenly caught fire this week with the choice and select box surging another $2 higher on Tuesday. Furthermore, movement was described as "moderate to good." 1) Though the market test seemed fairly light on Tuesday, some southern cattle were marked $1 lower at $124. This crack may be big enough to weigh on cash business through the balance of the week.
2) September beef export volume improved 2% from a year ago to 103,552 metric ton. Export value topped $600 million for the fourth consecutive month at $616.9 million, up 16% from a year ago. 2) December live cattle closed below a key support point Tuesday, and now there is the technical target of the gap between $121.62 and $122.32 from the market jumping higher on Oct. 30.
3) The pork carcass value closed solidly higher Tuesday, supported by all primals except the ham. 3) The cash hog trade continued to drift lower Tuesday and buyers are beginning to anticipate larger supplies and greater country leverage, assumptions that could be easily safe to make for another four to six weeks.
4) Thanks to the healthy combination of lower hog costs and appreciating carcass value, pork processing margins are improving, a reality necessary to promote current marketing, aggressive chain speed and manageable carcass weights. 4) Pork exports totaled 183,481 mt in September, no better than flat with both the September 2016 and August 2017 volumes.

OTHER MARKET SENSITIVE NEWS

CATTLE: (New China) -- Though it is the home of U.S. billionaire investor Warren Buffett, Omaha was little known to Chinese a few months ago.

But now this city in the midwestern Nebraska state is poised to become a household name in China since its Greater Omaha Packing company sent about 40 boxes of its products to China on June 14, soon days after the United States and China reached a deal to re-open Chinese markets for U.S. beef as part of their 100-day action plan to boost bilateral economic cooperation.

That was the first export of U.S. beef to China in more than 13 years. China banned U.S. beef in December 2003 after the mad cow disease struck U.S. cattle. Before the ban, the United States used to be China's top foreign supplier of beef.

"The secret is to be very lucky," chuckled Henry Davis, the third-generation chief executive officer of the nearly century-old Greater Omaha, in response to Xinhua's question how it shot past the "big four" in the United States -- Tyson, Cargill, JBS and National Beef -- and became the first to export beef to China after the hiatus.

The grey-haired CEO attributed the success to the hard work of the staff: "We would not have been the first company to get our beef into China if everybody in this plant, all 1,150, weren't doing their job properly."

When the company saw a possibility that China could resume the beef trade, everyone worked round the clock and made calls to the industry people to find out what they needed to do.

"It takes a lot of work," he emphasized. "We need to be compliant to all the regulations and standards of China. We need to prove ourselves... and to the U.S. Department of Agriculture, to the inspection services of China."

Fortunately the company has rich experience in developing new markets. It was the first U.S. company to ship beef to Japan when Tokyo re-admitted American meat packers.

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"The fact that at that time we were already exporting to 68 countries (meant) we (had) met a lot of those criteria that the Chinese government wanted to be part of their import program," he added. "We export to more than twice as many countries as other beef packing companies."

Beef exports to China must come from cattle that are under 30 months, are born in the U.S., Canada or Mexico, and can be traced back to a U.S. birth farm or first U.S. port of entry. The meat must be free from residues of growth promotants, feed additives and other chemical compounds prohibited by Chinese law.

Testing occurs at the point of arrival. If a shipment were to include a prohibited substance, it would be rejected and returned to the United States or destroyed.

Greater Omaha was founded by Davis' grandfather, who got his start in the cattle business in 1920. Unlike many other large meatpackers, which have relocated outside Omaha's traditional stockyards districts into the rural Midwest, Greater Omaha has stayed where it was, said Davis, who joined the company in 1973.

With an estimated annual sales of 1.7 billion U.S. dollars, Greater Omaha has been called a "small giant" among U.S. beef producers by Forbes. Wednesday the company slaughters 2,400 heads of cattle a day, and about one-fifth of its sales are exports to nearly 70 countries.

Self-funding, innovation, dedication to food safety and high-end products are factors that have helped Greater Omaha ride out the storm for decades, according to Davis. Also, the plant is "perfectly situated" in the "center of the highest quality cattle" in the United States.

The company has invested heavily in food safety equipment. A lot of those are proprietary. Greater Omaha has either developed them or is operating them in a special way.

According to executive vice president Angelo Fili, a butcher-turned businessman, Greater Omaha is the only major packer to sell individually cut fresh steaks directly to consumers, as opposed to frozen cuts.

The company guarantees a 30-day refrigerated shelf life, thanks to a new type of "skin-packed" air-tight packaging increasingly used in meat retailing. A QR code on the package lets customers see when it was packed and by which date they should eat or freeze it.

The packing plant uses a system of cameras and computers to grade beef, and takes its direct-to-consumer product from the top 20 percent of its prime cuts.

Davis, who has a computer science degree, wrote the software to process all the plant's data and is now heavily involved in the robotic control cold storage facility to be completed in six or seven months.

"It will add a lot to our ability to deliver individual boxes and track each box and load up 10 trucks sequentially," he said.

The China market for Great Omaha is "still in the development stage", but the second largest importer of beef in the world means a lot to the company as well as Nebraska and the U.S. economy as a whole, given China's rapidly expanding middle class.

"We like the fact that it stimulates the economy. The cattle-consume-grain agriculture market is a very big part of the Midwest economy and it's good for them," he said.

There is a strong demand from China since the imports resumed and the company has hired a Mandarin-speaking analyst to help handle the overwhelming number of calls and email inquiries from China.

"China is the world's fastest-growing beef import market," Joe Schuele, vice president of communications at the U.S. Meat Export Federation, told local media. "It has grown tenfold in the last five to six years."

China currently imports an estimated 2.6 billion U.S. dollars of beef annually.

Beef exports will complement Nebraska's current success in the Chinese marketplace with soybeans, distillers' products and pork, Nebraska Governor Pete Ricketts said.

Nebraska's share of worldwide U.S. beef exports has grown steadily over the past decade, going from less than 4 percent in 2005 to more than 18 percent in 2016, according to the Department of Agriculture.

"We raise what we consider very high quality product that we hopefully can put into the Chinese market," Bill Pellett, who runs a cattle feedlot about one hour's drive from Greater Omaha, told Xinhua. "It's something that we've been working on for 20 years or more to make it a better product."

Pellett added that it costs more to produce beef according to China's specifications but it is worthwhile doing so. He has sold cattle free of artificial hormones to Greater Omaha for years.

"I think it's good for all of us to understand each other and to share the resources that we have available. Each country ... has different resources, they need to trade to make the world a better place," Pellett said.

HOGS: (National Hog Farmer) -- In a decree issued Oct. 27, the Russian government expanded its food import embargo on certain products from the United States, the European Union, Canada, Australia and several other countries to include pork and beef offal and animal fat, as well as live animals imported for slaughter. The embargo, which was enacted in 2014 in response to economic sanctions imposed on Russia due to the conflict in Ukraine, already included pork and beef muscle cuts from these countries. The decree states that this restriction will remain in force through the end of 2018.

Because most U.S. pork products were already ineligible for Russia, the decree will have a limited impact on U.S.-Russia pork trade. The United States had exported about 300 metric tons of pork offal and 2,600 mt of pork fat to Russia through August of this year.

All pork products (including offal and fat) and live pigs from the European Union-- historically Russia's largest pork supplier-- are currently ineligible for export to Russia due to restrictions related to African swine fever. This year Russia has reported no pork offal or pork fat imports from any of the other countries covered by the embargo.

So if the Russian government's decree has so little effect on current product flow, why is it a significant development for pork trade? To answer this question, it is important to review the status of Russia's ASF-related ban on pork imports from the EU.

The ban dates back to January 2014, before the economic embargo was imposed in August of the same year. Shortly after the ban went into effect, the EU challenged it at the World Trade Organization. In 2016, a WTO Dispute Settlement Panel ruled that Russia's ASF-related restrictions are inconsistent with its sanitary and phytosanitary obligations under the WTO and that they constitute a disguised restriction on international trade. In February of this year, the WTO Appellate Body confirmed the panel's findings, and gave Russia until early December to come into compliance with the Appellate Body ruling.

While these events may have raised hopes that European pork would soon return to Russia, informed observers felt that Russia would simply expand its economic embargo to prevent the resumption of offal and fat imports-- and those predictions proved to be correct. Now even if Russia lifts its ASF-related restrictions on EU pork, as it has agreed to do, the embargo will still prevent any trade from occurring.

"The ASF-related impasse between Russia and the EU has been the most disruptive event in global pork trade that we've seen in many years," explains Thad Lively, U.S. Meat Export Federation senior vice president for trade access. "It forced European suppliers to redirect the large volumes of pork previously going to Russia to other markets and further intensified competition in several of the world's major destinations for imported pork-- including China, Japan, South Korea, Australia and the Philippines. While the economic embargo is an entirely separate issue, once Russia removes its ASF-related restrictions, the embargo will continue to block EU pork exports to Russia. So the closure of the Russian market to EU pork is a situation that USMEF does not see changing anytime soon."

In 2013, Russia took more than 480,000 mt of pork and pork variety meat from the EU-- down from the 2011 peak of 520,500 mt, but still accounting for 18% of the EU's total exports. At that time, the EU held about two-thirds of Russia's imported pork market, followed by Brazil (18%), Canada (10%), Belarus (3%) and Chile (2%). The United States held about 11% of the Russian market in 2012, but shipped only a minimal volume of pork to Russia in 2013 due to beta agonist-related restrictions. U.S. exports to Russia resumed on a limited basis in the spring of 2014, with exports reaching 35,000 mt ahead of the August embargo.

Wednesday the Russian pork import market obviously looks quite different, with Brazil holding nearly 90% of the market with the remainder split between Chile, Belarus and Serbia. But Russia is also a substantially smaller destination for pork, with its total imports in 2016 reaching just 276,000 mt-- down 63% from 2013 and nearly 70% below the 2012 peak of 891,000 mt.

Prior to 2014, Russia's imports of pork fat were dominated by the EU and peaked at 290,000 mt (valued at $475 million) in 2012. In January through August of this year, Russia's pork fat imports totaled just over 15,000 mt, and were mainly from Chile, Argentina, the United States and Brazil.

"This really underscores the impact of Russia closing its doors to most of the world's major pork suppliers," says Lively. "While Brazil is shipping more pork to Russia than in the past, it doesn't begin to make up for the volumes lost from the EU, U.S. and Canada — making Russia's pork processing industry far more reliant on domestic production and spurring continued expansion of the Russian pork industry."

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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John Harrington

John Harrington
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