DTN Early Word Opening Livestock

Cattle Futures Set to Open Post-Christmas Trade Lower

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

Cattle: Steady Futures: 50-100 LR Live Equiv NA*

Hogs: Steady Futures: 50-100 HR Lean Equiv $82.51 -0.02**

* 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 action will start out in slow gear with buyers and sellers focused only on the distribution of nre showlists. The late week offering should be about steady with last week. Significant trade volume will probably be delayed until at least Wednesday or Thursday. Our guess is that asking prices will start out around $122-123 in the South and $193-195 in the North. Live and feeder futures are expected to open lower thanks to reidual selling and nervousness tied to the larger thsn expected November placement total.

Look for the cash hog market to open this morning with generally steady bids. While today klil will be abbreviate with several plants still dark for the holiday, the Saturday slaughter shound be quite larger as processors push to make up for lost time. Lean futures should open some higher based on follow-through buying and post-report short covering.

BULL SIDE BEAR SIDE
1) Although last month's feedlot in-movement was histroically large (i.e., the largest Nov plecement since the data series began in 1996), it was clearly backloaded with most of the increased linked to light weight cattle. Indeed, 8-weights placed last month totaled 20 percent below 2016. Instead of concentrated, the marketing implications of the Nov placement seem quite scattered. 1) November placement turned out to be much larger than expected (i.e., up 14 percents versus an average trade guess of up 6-7 percent), The stage is set for significant beef production through the first quarter of 2018.
2) Total pounds of beef in freezers were down 4 percent from the previous month and down 8 percent from last year. More generally, red meat supplies in freezers were down 10 percent from the previous month and down 4 percent from last year. 2) Cattle buyers will again work with a limited appetite this week as they consider the short slaughter schedule following New Year's. Additionally, retail buying interest could remain lackluster until early January.
3) The three major catories in The Dec 1 H&P released on Friday seemed to be well anticipated by the trade. Indeed, the board rallied following the report, confident that greater packer demand (e.g., the new Prestage plant set to open in the second quarter) will be fully capable of sopping up expanded pork production. 3) The fall pig crop, as well winter and spring farrowing intentions, proved to be larger than most were expecting. The spring and summer markets could be groaning under record tonnage if either domestic or export falters.
4) Frozen pork supplies were down 16 percent from the previous month and down 3 percent from last year. Given the record level of fourth quarter pork production, such freezer total supports ideas of strong product demand. 4) During the week ending December 19, noncommercial traders reduced their net long position in lean futures by 5,700 contracts (i.e., reduced to 44,300).

OTHER MARKET SENSITIVE NEWS

CATTLE: (hpj.com)— The annual U.S. cattle inventory numbers in the January report are eagerly anticipated, not only to confirm what happened to the nation's beef cow herd in 2017 but for indications of what lies ahead in 2018.

Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist, said America's beef cow herd began its recent expansion in 2014, growing 0.75 percent followed by more significant growth in 2015 of 2.95 percent and in 2016 at 3.46 percent.

"From the January 2014 low of 29.1 million head, the herd has expanded by 2.1 million head to the January 2017 level of 31.2 million head," he said. "There are numerous indicators beef cow herd expansion continued in 2017 but we won't know for sure until the cattle inventory report issued by USDA's National Agricultural Statistics Service in late January."

The potential for herd growth starts with available replacement heifers. On Jan. 1, 2017, some 6.4 million replacement heifers were reported, representing 20.6 percent of the beef cow inventory.

"This was the third-largest replacement heifer percentage, down slightly from the two prior years," Peel said. "Of the total replacement heifers, 4 million were expected to calve in 2017. This was a record number of reported heifers calving since this data became available in 2001."

Peel explains these numbers confirm considerable potential for herd expansion and indicated producer intentions to continue adding to cow inventories. The great unknown is whether producers adjusted their intentions during the year.

"Open replacement heifers can be easily diverted into feeder markets if producers' expectations change," he said.

Changes in the beef cow herd are a function of the pace of heifer retention relative to the pace of cull cow slaughter. Heifer slaughter provides a delayed indication of heifer retention. Year-to-date heifer slaughter through late November was up 12.3 percent year over year. This follows the jump in quarterly heifers on feed, up 10.6 percent in July and 13 percent year over year in October.

"Even with the increase in heifer slaughter, the ratio of steer-to-heifer slaughter remains well above historic levels," Peel said. "Heifer slaughter was squeezed dramatically in 2015 and 2016. Although it is increasing, it has yet to return to normal levels relative to steer slaughter."

Beef cow slaughter increased 10.1 percent in 2017 through late November. This follows a 13.7 percent year-over-year increase in cow slaughter in 2016.

"Part of the increase in cow slaughter was caused by herd growth since 2014," Peel said. "As with heifer slaughter, beef cow slaughter was sharply reduced from 2014 through 2016 as a part of jumpstarting herd expansion."

Net beef cow culling was a record low 7.6 percent in 2015. Sustained below-average culling rates in 2014 through 2016 were possible following above average culling rates from 2008 through 2013. This included drought-forced liquidation that removed many older cows and allowed a period of reduced culling as herd expansion began.

"If the current beef cow slaughter pace continues through the end of the year, the 2017 beef cow culling rate will be 9 percent, still below but close to the long term average of 9.6 percent," Peel said. "In other words, the industry is returning to normal beef cow culling rates. Both heifer and beef cow slaughter are consistent with continued but slowing herd expansion."

Peel believes there is little doubt herd expansion continued in 2017, albeit at a slower pace than 2016. The jump in heifer and beef cow slaughter both reflect a return to more typical relative slaughter rates.

"I'm currently estimating the 2018 beef cow herd will be up 1.5 to 2 percent over January 2017," he said. "Expansion rates above or below this level are possible, though expansion above 2.5 percent is difficult to reconcile with current numbers."

Expansion slower than 1.5 percent is possible but it would suggest an unusually large percentage of pregnant heifers available on January 1 did not, in fact, enter the herd.

"If true, this begs the question of what happened to them," Peel said.

Oklahoma is the nation's fifth-leading producer of cattle, according to USDA National Agricultural Statistics Service data. In terms of Oklahoma cash receipts, cattle represent more than $3.7 billion annually to the state economy.

The Oklahoma Cooperative Extension Service is one of two state agencies administered by OSU's Division of Agricultural Sciences and Natural Resources, and a key part of the university's state and federally mandated teaching, research and Extension land-grant mission.

HOGS: (nationalhogfarmer.com —More money in consumers' pockets in 2018 is good news for a growing pork industry. Chris Hurt, agricultural economics professor at Purdue University, says demand carries the theme for 2017, and it will continue in 2018. Lower unemployment with improving wages in going into the new year will strongly support domestic meat demand.

Worldwide, consumers are eating pork. Americans are anticipated to not back away from meat and poultry in 2018, estimated to eat as much as in 2017. Turning to exports, U.S. pork is reaching more consumers through new marketing opportunities with strong numbers already recorded in 2017. The USDA estimates pork exports will grow close to 6%, up almost 13% from 2013.

Consumers want pork. America's pig farmers are delivering with excellent production performance as illustrated in the USDA's National Agricultural Statistics Service December Hogs and Pigs Report, released Dec. 22.

According to the report, the highest pigs saved per litter rate ever recorded at 10.74. November hit the fresh monthly high ever at 10.8 pigs saved per litter. Putting this in perspective, Bob Brown, market consultant, says in September 2017 11.4 million pigs were born. Ten years ago in the same month, there were 10 million hogs born. "We had 11,000 fewer litters this year with a gain of 1.4 million hogs. Over 10 years we have this huge continuous growth in productivity only interrupted by PEDV (porcine epidemic diarrhea virus) of 2014," he explains.

As of Dec. 1, there were 73.2 million hogs and pigs on U.S. farms, up 2% from December 2016, reports USDA. Of the 73.2 million hogs and pigs, 67.1 million were market hogs, while 6.18 million were kept for breeding.

Looking at total annual pig crop, Brown says the United States averaged 115 million pigs born from 2008 to 2014 and 126 million after PEDV. For 2018, he estimates 134 million for 2018, pushing U.S. pork production to new highs.

While record production usually indicates a drag on prices, the expansion of the pork industry through efficient pork production is sustaining profits.

"One thing we have to recognize we have a growing industry on the pork side. That is very positive," explains Hurt. "When we think about growth orientation, it is not just on the domestic side, but the export market also. This adds to our ability to expand the herd and expand production 2% a year or somewhat higher."

Moreover, consumer demand for pork supports the expansion. In 2017, the U.S. herd produced 2.5% greater supply of pork marketed at a farm price 10% higher. "What that says at least relative to 2016, we had a very strong demand year," notes Hurt.

Heading into 2018, predicting demand for next year the same factors are in play with a good U.S. economy and more people working. "Lot of demand is helping us to market more pork and even see stronger prices maybe for next year," states Hurt.

On the bigger picture, Jim Robb, director at Livestock Marketing Information Center, says the headwind is the sheer amount of total red meat and poultry produced in 2018. The USDA released the Cattle on Feed report on Friday also, showing a larger number of cattle coming to market in late spring and summer than market analysts anticipated. According to Robb, the United States is slated to produce on net basis 102 billion pounds of meat and poultry in 2018, exceeding 100 billion pounds for the first time. "When we put that big picture together that is probably the headwind in the marketplace should there be any stumbling on demand side. Taking those number to per capita basis and adjust for imports and exports, it looks like we are going to ask consumers overall in the United States to eat as much poultry and meat in 2018 as they did in 2017."

Still, growth has its limits. Supply can outrun demand. Hurt says the pork industry can maintain 2-2.5% annual growth rate in strong U.S. economy and continue to do well in the export market. However, it is essential to keep an eye on overall meat and poultry production. In 2017, the three species — beef, pork and chicken — ramped up production. "As we get back to 220 pounds per capita, we are going to have to be really cautious across the animal industries as expanding too much rapidly. Going forward we are going to have to match our supply increases with what the world is going to eat," explains Hurt.

Profitability in 2018?

On the price profile for the pork complex, the big story is margins with higher pork prices and lower wholesale prices. That is market compression at the packer level, says Robb.

Given the crop production will be good next year keeping feed prices at an affordable level, profits should hold steady for America's pig farmers. For 2017, Hurt estimates profitability at $5 per head. He estimates an improvement next year to $5-$8 per head.

As of Dec. 1, there were 73.2 million hogs and pigs on U.S. farms, up 2% from December 2016, but down slightly from Sept. 1, according to the Quarterly Hogs and Pigs report published today by the USDA's NASS. Breeding inventory, at 6.18 million head, was up 1% from last year, and up 1% from the previous quarter. Market hog inventory, at 67.1 million head, was up 2% from last year, but down slightly from last quarter.

• Between September 2017 and November 2017, 33.4 million pigs were weaned on U.S. farms, up 3% from the same period one year earlier. Sows farrowing during this period totaled 3.11 million head, up 2% from 2016. The sows farrowed during this quarter represented 51% of the breeding herd.

• From September 2017 through November 2017, U.S. hog and pig producers weaned an average of 10.74 pigs per litter.

• U.S. hog producers intend to have 3.07 million sows farrow between December 2017 and February 2018, and 3.08 million sows farrow between March 2018 and May 2018.

• Intended farrowings for March-May 2018, at 3.08 million sows, up 4% from 2016.

As expected, the USDA revised estimates from previous reports. For the last four quarters previously reported, the USDA increased breeding herd by 20,000 to 40,000 head while at the same time decreased the pig crop by 254,000 head for December-February and 474,000 for March-May, matching it up to hog slaughter numbers.

According to the USDA, the net revision made to the December 2016 all hogs and pigs inventory was 0.1%. The net revision made to the March 2017 all hogs and pigs inventory was 0.4%. The net revision made to the June 2017 all hogs and pigs inventory was 0.9%. A revision of 1.5% was made to the March-May 2017 pig crop. A revision of 0.3% was made to the September 2017 all hogs and pigs inventory.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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John Harrington