DTN Early Word Opening Livestock

Meat Futures Seem Staged to Open with Mixed Prices

John Harrington
By  John Harrington , DTN Livestock Analyst
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Cattle: Steady to $2 LR Futures: 25-50 LR Live Equiv $135.72 - 0.35*

Hogs: Steady to $1 LR Futures: 50-100 HR Lean Equiv $ 87.49 + $1.31**


* 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 buyers could slowly start to surface this morning, earlier than normal thanks to the need to wrap-up procurement chores before breaking for turkey on Thursday. Expect live bids to start out around $117-118, probably $3-4 below asking prices. Yet both these starting points may depend upon the board's ability to stabilize. Our guess is that significant trade volume will probably be delayed until sometime Wednesday. Live and feeder futures should open moderately lower, pressured by spillover selling and cash uncertainty.

Hog buyers seem likely to resume trading this morning with bids steady to $1 lower. Processing margins remain quite attractive, so packers will be looking for ways to make up for holiday down-time. At this time, the Saturday kill should be as large as 340,000 head. Lean futures should open higher, supported by residual buying interest and appreciating carcass value.

BULL SIDE BEAR SIDE
1) From 2011 to 2016, USDA's Foreign Agricultural Service reported that Chinese consumption of beef products increased nearly 20 percent while pork was up just 8 percent and broiler meat declined five percent through the same timeframe. Defenders of deferred live cattle futures seem eager to bet this trend will continue. 1) Live and feeder cattle futures broke hard on Monday, hammered by long liquidation and technical selling.
2) Out-front boxed beef sales (i.e., with delivery of 22 days or more) bounced back over 1,000 loads last week. 2) New showlists distributed on Monday look generally larger than last week with only Texas offering more ready steers and heifers.
3) Lean hog futures closed sharply higher yesterday with spot December closing firmly back above its 100-day moving average. Perhaps the board is finally showing more respect for the premium of the cash index and what it suggests about the potential of late year cash strength. 3) Though this week's holiday should cut hog slaughter down to 2.2 million head or less, record large harvest levels are expected from late November to mid December.
4) The pork carcass value exploded higher on Monday, impressively supported by all major primals except the picnic. 4) Despite Monday's rally in the first four months if lean hog futures, traders remain cautious taking into consideration the continued weakness in the cash market and whether or not domestic and export demand will be adequate enough to clear the additional product anticipated in the coming months.

OTHER MARKET SENSITIVE NEWS

CATTLE: (USAgNet.com) — Beef cattle performance growth trends, as calculated through the Cow Herd Appraisal of Performance Software (CHAPS), are very stable.

The North Dakota State University Extension Service and North Dakota Beef Cattle Improvement Association (NDBCIA) collect and analyze the CHAPS data to produce meaningful annual benchmarks. The current growth benchmark for actual weaning weight is 554 pounds at 192 days of age, with an average daily gain of 2.5 pounds. These calves are a 5.2 frame score.

The NDBCIA uses the CHAPS program to calculate five-year rolling benchmark values for average herd performance, which have been quite consistent. Let's look closer at the average actual weaning weight benchmark.

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Historically (10-plus years ago), the benchmark was 558 pounds for 2003, 556 pounds for 2004, 558 pounds for 2005, 562 pounds for 2006 and 561 pounds for 2007. In 2008, the benchmark was 560 pounds, and it was 567 pounds in 2009, 565 pounds in 2010, 563 pounds in 2011 and 563 pounds in 2012. More recently, the benchmark was 558 pounds in 2013, 556 pounds in 2014, 555 pounds in 2015 and 553 pounds in 2016. The 2017 benchmark is 554 pounds.

Not much has changed in commercial beef production in terms of fall weaning weights. The benchmark for age at weaning has fluctuated a little. Historically (10-plus years ago), the benchmark was 196 days of age for 2003, 194 days of age for 2004, 192 days of age for 2005, 191 days of age for 2006 and 189 days of age for 2007.

The weaning age benchmark remained at 189 days for 2008, 2009, 2010 and 2011, and increased to 190 days of age for 2012 and 2013, 192 days of age for 2014 and 2015, and 193 days of age for 2016. The 2017 benchmark is back at 192 days of age at weaning.

This translates into fairly consistent average daily gain (ADG) benchmarks, starting at 2.3 pounds per day in 2003 and 2.4 pounds per day in 2004. Remarkably, the ADG benchmark has been 2.5 pounds per day from 2005 through 2017. Interesting.

The frame score benchmark, although not a growth number, is indicative of the calf's frame size and has been quite consistent as well. Historically (10-plus years ago), the benchmark was 5.4 for 2003, 2004 and 2005, and 5.5 for 2006 and 2007. The benchmark for 2008 increased to 5.8 and remained at 5.8 for 2009, 2010 and 2011.

In 2012 and 2013, the annual frame score benchmark declined to 5.7. It declined to 5.5 in 2014 and to 5.4 in 2015, and further declined to 5.2 in 2016. The 2017 frame score benchmark is still at 5.2.

Perhaps the commercial beef cattle business could be called mature, at least for growth on the cow-calf side of the business.

A producer needs to decide what level of performance is expected and how much one is willing to expend to get that performance. Performance is really herd output, a function of age and growth. The benchmarks provide a tool for herd evaluation, a review of growth annual trends and a number on which to base future goals for the operation.

Interestingly, producers continue to market cattle with considerable growth potential, based on current trends for expected progeny difference (EPDs) within available herd sires offered for sale. But they're actually selling calves at historical weights, thus allowing the feeding industry to capture the additional growth potential bred into the cattle.

Historical marketing brings comfort to established cow-calf programs, but - yes, there is a "but." Historical marketing programs apparently do not allow for expression and payback for the growth potential that is hidden within the phenotypes of the calves brought for sale.

Ironically, the heifer mates to these cattle are retained at the home place. The heifers grow into cows and their mature weight naturally would be similar only to the steers that were sent to the feedlot.

They have gotten bigger. So producers face some challenges: growth genetics that are not being captured as the progeny are marketed and subsequent larger mother cows that cost more to keep. The real answer to the management of growth genetics needs to return to where it started, which is sound breeding systems combined with more flexibility in the marketing of the offspring.

Historically, breeding systems were intended to allow producers to maintain the most efficient maternal cow at home, purchase good terminal-type sires and produce a terminal offspring that was intended for the feed yard. At some point, another breeding system would be utilized to produce the replacement maternal cow; thus, the best of both worlds.

Cattle breeding systems with additional marketing options may well be the better answer. Producers need to implement terminal and maternal breeding systems with additional marketing flexibility.

HOGS: (nationalhogfarmer.com) — Over the 11 weeks since Labor Day, hog slaughter has been up 2.1%, year-over-year. Imports of slaughter hogs from Canada are down, so U.S.-raised barrow and gilt slaughter has been up a fraction more at 2.2%. That is less than expected. The 120-pound-plus market hog inventory in the September Hogs and Pigs Report indicated slaughter of U.S.-raised market hogs during this period would be up 3.9%.

The light weight market hog inventory in the September Hogs and Pigs Report indicates weekly market hog slaughter will be up 1.7% to 1.8% year-over-year for the next 15 weeks or a bit less if live hog imports from Canada remain low.

Two older plants in Minnesota and Missouri were remodeled and reopened earlier this year. The big, new hog slaughter plants in Sioux City, Iowa, and Coldwater, Mich., both began operations on Sept. 5. Prior to this fall, the record daily slaughter was 448,608 hogs processed on Dec. 12, 2016. Daily slaughter exceeded 450,000 head for the first time in August and exceeded 460,000 for the first time in September. Hog slaughter fell 138 head short of 465,000 on Oct. 10. Daily slaughter will likely set more records before the end of the year as these plants continue to increase their chain speed.

The combination of increased slaughter capacity and lower-than-expected hog numbers has been positive for hog prices this fall. The added slaughter capacity has allowed packers to handle more of the weekly kill by Friday leaving fewer hogs for Saturday slaughter.

During the 11 weeks since Labor Day, Monday-Friday slaughter has been up 5.7% and Saturday slaughter has been down 25% compared to a year ago. Put another way, during this 11-week period last year 11.9% of hog slaughter occurred on Saturday. During the same 11 weeks this year, only 8.8% of slaughter occurred on Saturday. Last Saturday's hog slaughter was 154,000 head, down 19.4% from the week before and down 53.2% year-over-year.

Packers only operate six days per week when there are lots of hogs available and their margins are strong. As a general rule, the larger Saturday slaughter, the greater packer margins, i.e. the wider the spread between cutout value and hog price. Packer margins are usually the greatest in the fall when the hog run is so large as to necessitate a large Saturday kill.

Since this fall packers are better able to handle the hog run without having to operate large Saturday kills, packer margins have tightened and hog producers are getting the benefit. In the 11 weeks following Labor Day 2016, the negotiated Iowa-Minnesota market hog price averaged $47.99 per hundredweight. During the same period this year, the Iowa-Minnesota price averaged nearly $10 higher at $57.42 per hundredweight. This fall's hog prices are higher despite increased slaughter.

Part of the hog price increase is due to higher cutout values. In the first 11 weeks following Labor Day 2016, the pork cutout value averaged $75.37 per hundredweight. During the same period this year the cutout averaged nearly $1.84 higher at $77.21 per hundredweight. Most of this fall's hog price increase is due to tighter packer margins. The post Labor Day Iowa-Minnesota negotiated market hog price averaged 63.7% of cutout value last fall and 74.4% this fall.

Weights have been running high this fall. During the past 11 weeks U.S. hog slaughter was up 2.1% and pork production up 2.4%, thus weights were up 0.3%. Barrow and gilt carcass weights averaged 209.94 pounds in the prior day slaughter data for the 11 weeks starting after Labor Day 2016. The same period this year carcass weights averaged 211.0 pounds.

The final six weeks of 2016 saw federally inspected hog slaughter of 13.8754 million head with a cutout value of $76.78 per hundredweight and an Iowa-Minnesota average negotiated market hog price of $49.67 per hundredweight, which equaled 64.7% of cutout value. If the September Hogs and Pigs Report is right, hog slaughter will be up 1.8% for the final six weeks of 2017. If weights continue their trend, then pork production will be up 2.1% or so compared to a year earlier.

Forecasting prices is always risky, but if pork demand continues strong and if the year-over-year relationships continue, the rest of 2017 should yield a pork cutout that is in the neighborhood of $80 per hundredweight and an Iowa-Minnesota negotiated purchase price that is around $60 per hundredweight.

The USDA will release both the Livestock Slaughter report and the Cold Storage report for October on Nov. 22. Based on preliminary data, it looks like October hog slaughter was up 5.3% from a year earlier, due largely to one additional slaughter day than in October 2016. The amount of pork in cold storage has been below the year-ago level each month since January 2016. I won't be surprised if this streak continues for another month.

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: