DTN Early Word Opening Livestock

Meat Futures Set for Moderate Gains on Opening

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

Cattle: Cash Steady Futures 50-100 HR Live Equiv $134.69 - .49*

Hogs: Cash Steady-$1 LR Futures Mixed Lean Equiv $86.39 - .57**

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

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

GENERAL COMMENTS:

A few more token cattle bids may be thrown on the table at midweek, but significant trade volume will probably be delayed until Thursday or Friday. Initial bids could be around $114 to $115 in the South and $182 to $184 in the North. But such cheap talk will not attract much selling interest, at least not this early. Furthermore, country ideas have no doubt been steeled by Tuesday's significant bounce in futures. Our guess is that asking prices will start out around $120-plus in the South and $190-plus in the North. Live and feeder futures should open moderately higher, thanks to residual buying and pre-cash short-covering.

Look for opening cash hog bids to start out steady to $1 lower. Yet Tuesday's country run seemed no larger than moderate. If receipts remain on the sticky side, packers may find it necessary to stabilize the cash market. At this point, Saturday kill plans are likely to total close to 245,000 head. Lean futures seem staged to open on a mixed basis tied to follow-through selling on one hand and short-covering on the other.

BULL SIDE BEAR SIDE
1) Cattle futures surged with triple-digit gains on Tuesday with most live contracts landing back over 100-day moving averages. Are late-year bottom-pickers actively on the prowl? 1) Given the extremely oversold status of cattle charts, Tuesday's correctional rally in live and feeder futures may have been nothing more than a dead cat bounce.
2) 2017 beef production is lowered on the current pace of cattle slaughter and lighter carcass weights, according to the World Board. Additionally, beef production is forecast lower, reflecting slightly lighter carcass weights in 2018. 2) The boxed beef trade didn't show much follow-through buying interest with the choice box quoted $1.47 lower. Not only do packers remain cautious about late-year plans, many already have a good deal of late December slaughter needs covered.
3) The World Board finally aggressively dropped its 2017 estimate of U.S. pork production by 180 million pounds. While its projection for 2018 was left unchanged, the late-year cut of tonnage power continues to invite speculation that the sow base may be overstated. 3) The pork carcass value continued to slide lower on Tuesday, further bothered by the imploding bacon trade. Note that the belly primal fell to $123.58, off $11.46 from the prior day.
4) Given that the December 1 Hogs & Pigs report will be released a week from Friday, specs and commercials should be reluctant to press the short side. 4) Some NAFTA skeptics who see the odds of successful renegotiation as no better than 50-50 fear that the premiums currently traded by 2018 lean hog futures could be serious overpriced.

OTHER MARKET SENSITIVE NEWS
CATTLE:

(foodmarket.com) -- Australia on Tuesday raised its forecast for beef exports by five percent as farmers are expected to send more cattle to slaughter to capitalise on strong Asian demand ahead of a La Nina weather event that will provide near perfect seasonal conditions.

Beef exports from the world's fourth largest seller will total 1.145 million tonnes this season, the Australian Bureau of Agriculture, Resource Economics and Rural Sciences (ABARES) said, up from its previous estimate in September estimate of 1.09 million tonnes.

Much of the increased exports will flow to Japan and China, ABARES said, two countries where Australia enjoys favourable access following the completion of trade agreements in recent years.

The increased export forecast comes as ABARES lifted its forecast for beef production to 2.32 million tonnes, up nearly four percent from the September estimate of 2.244 million tonnes.

The increased production is a boost to Australian exporters, such as Cargill. They had been forced to idle processing plants over the last two years as farmers sought to rebuild herds after the end of the strongest El Nino in nearly 20 years in 2014, which drove slaughterings to a record high.

The expected arrival of a La Nina this month will likely extend the boom, bringing wet conditions across Australia's largest cattle rearing region that will stimulate pasture growth, used to fatten livestock before being sold for slaughter.

Although a boom to cattle farmers, ABARES said the wet weather will crimp Australia's sugar production.

ABARES said Australian sugar production this season will total 4.7 million tonnes, down two percent from its September forecast of 4.8 million tonnes.

ABARES left its forecast for milk production during the 2017-18 season unchanged at 9.25 billion litres.

HOGS:

(University of Illinois) -- The pork industry has been in expansion now for three years dating back to 2014 when the PED virus reduced pork supplies and sent hog prices to record highs. After an initial surge of breeding herd expansion of two to three percent three years ago, that expansion has been steady at between 1.2 and 1.5 percent for the past four quarters.

States with the most robust expansion over the past three years as measured by the largest increases in breeding herd animals include: Missouri +50,000; South Dakota +40,000; Texas +35,000; Illinois +30,000; North Carolina +30,000 and Oklahoma +25,000.

"The good news is that a breeding herd expansion of about one percent is sustainable. This means that pork supplies will grow at two percent a year, or maybe slightly higher. This is about the same rate that consumption is increasing," said Chris Hurt, Purdue University Extension Economist. "So with the current rate of expansion, hog prices would be expected to stay near levels that are reasonably close to total costs of production."

Pork supplies this fall are expected to be about three percent higher than year-previous levels. In the first three quarters of 2018, pork supplies are expected to be up about two percent.

Live hog prices are expected to average in the mid $40s in the final quarter of this year and then move upward to the higher $40s in the first quarter of 2018. Prices are expected to rerun to the mid-$50s in the second and third quarter next year and then be back around the mid $40s in the final quarter, he said.

For calendar year 2017, prices are expected to average about $50 on a live weight measure. For 2018, current futures estimates are for hogs to be about $1 higher, near $51. Production is anticipated to rise by 2.4 percent in 2018.

"That would generally mean slightly lower prices. However, strong pork demand and reduced packer margins may help bolster hog prices somewhat above those of 2017," Hurt said.

While hog prices may be somewhat higher in 2018 compared to 2017, Hurt says that feed costs may also be somewhat higher. Current estimates suggest that the U.S. farm price of corn for calendar year 2017 may average about $3.38 per bushel — the lowest calendar year price since 2006.

Hurt's estimate for calendar year 2018 is currently higher at $3.60.

"The $3.60 estimates is based on current corn futures prices where there is a high level of futures carry. This simply means that the market is providing higher prices in the future to provide a sufficient financial incentive for market participants to store corn," he said.

The reason for the large futures carry is the surplus corn inventory, according to Hurt.

"Large surpluses do not sound like a reason to think corn prices should be higher next year. The point is that while forward prices in futures markets suggest corn prices will be rising over the next two years, the ultimate price levels may not rise as much if surplus inventories continue," Hurt said.

What do estimated returns look like for 2017 and 2018 for average costs farrow-to-finish production?

"Right now, returns in 2017 and 2018 are expected to be similar."

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(BAS)

John Harrington