DTN Early Word Opening Livestock

2018 to Initially Fire With Sharply Higher Cattle Prices

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

Cattle: Steady-$2 HR Futures: 100-200 HR Live Equiv $136.04 + 0.76 *

Hogs: Steady-$1 HR Futures: 50-100 HR Lean Equiv $ 83.44 + 0.13**

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

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

GENERAL COMMENTS:

Off to another dalayed start, activity in cattle-feeding country Tuesday will be limited to the distribution of new showlists. We look for the early-year offering to be steady to somehat larger than last week. While cash business eventually developedright before the holiday break, it's tough at this point to guess at trade volume totals. Accordingly, we are eager to see Mandatory reports to be released laterTuesday morning. Live and feeder futures should open significantly higher, backed by bullish cash news that finally surfaced late Friday afternoon.

Hog buyers seem likely to launch 2018 with bids steady to $1 higher. Although slaughter will remain fully ample early this month, we do look for some reduction relative to the chain speed peak of the fourth quarter. Lean futures seem likely to open moderately higher, girded by firming cash bids and spillover strength from cattle contracts.

BULL SIDE BEAR SIDE
1) While you had to stay late Friday to see it, the 2017 cash cattle market definitely concluded with impressive strength: $123 in the South, $3 higher; $95 in the North, nearly $5 higher. Clearly, feedlot clout remains formidable. 1) For the week ending Dec. 26, noncommercial traders continued their long liquidation in live cattle futures, declining by 8,800 to a total of 94,700 contracts.
2) For the first time in a fortnight, cattle buyers will be charged with securing slaughter needs for the first full production of 2018. 2) The discounts in both February and April live cattle to last week's cash trade suggests limited upside potential in the cash market going into the early part of 2018 and could discourage producers from holding for higher prices (or even steady money).
3) Red meat demand typically improves in early January as retailers and food managers move to resupply in the wake of holiday clearance. 3) For the period Dec. 15 to Dec. 21, net pork export sales totaled 16,600 metric tons, down 30% from the previous week and 16% from the prior four-week average.
4) For the week ending Dec. 26, noncommercial traders increased their net-long position in lean hog futures by 700 contracts (i.e., now totaling 45,000). That may not seem like much of a change, but it marks a big shift away from long liquidaton (in the face of ample-supply hogsand pigs news to boot). 4) Pork supplies are going to be record large throughout 2018, so if either domestic or export demand (let alone both) falter from current levels, current board premium could prove very difficult to maintain.

OTHER MARKET SENSITIVE NEWS

CATTLE:(USMEF)-- Mexico's proposed beef grading standards may be confusing to end users, because Mexican products may have identical grade names to USDA grades while offering a substantial difference in eating quality.

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The Mexican government recently opened a proceeding in which grading standards are proposed for Mexican beef. Mexico's Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA) accepted public comments on the proposal through Dec. 19.

The U.S. Meat Export Federation (USMEF) filed comments in this proceeding, raising concerns about how English grade names could be used interchangeably with Spanish names. This could create confusion in the marketplace and diminish the value that the U.S. beef industry derives from the USDA grading system.

"In many respects, the grading system proposed by SAGARPA appears to be modeled after the USDA system," said Thad Lively, USMEF senior vice president for trade access. "According to the information we have, the proposed standards are designed primarily for exports. So we definitely have concerns about beef from Mexico arriving in the United States or in any of Mexico's other export markets carrying grade names that are very close to the USDA grades we are all familiar with, but which have fundamentally different definitions behind them."

There are also significant differences that make interchangeable use of the English and Spanish grade names problematic. For example, marbling scores proposed under the Mexican standard are much lower -- by a full score or more -- than the scores corresponding to the same name in the U.S. standard. This will be confusing to end users, because products may have identical grade names while offering a substantial difference in eating quality.

Mexico's proposed standard also includes no distinction for bull or bullock carcasses. Therefore, carcasses from intact males could be graded the same as carcasses from castrated males, even though there is a clear difference in the quality of meat derived from intact versus castrated males.

"Our technical experts at USMEF have reviewed SAGARPA's proposal in detail, and they've identified a number of areas where the actual standards that would be applied in Mexico are considerably watered down when compared to those used in the United States," Lively explained. "So you could see products carrying the same English-language grade names used for U.S. beef, but in fact the products are significantly different. This is, of course, a concern for USMEF and for our members involved in the production, processing and export of U.S. beef."

Additional concerns raised in USMEF's comments to SAGARPA include:

•Grading of Mexican carcasses will be performed by graders employed by private sector certification bodies rather than the government. These graders will be required, as a condition of their initial employment, to pass an examination administered by the certification body. But their training -- both initially and on an ongoing basis -- will not be at the level provided to USDA graders.

•Mexico's proposed standards include no provision for ensuring that grades assigned by different graders working for different certification bodies are aligned. By contrast, continuous alignment of grades assigned by USDA graders working across the United States is a defining characteristic of the USDA system.

•The USDA system includes a robust grade labeling program for verifying that the correct USDA grade is applied to box labels and retail packaging. Mexico's proposal lacks sufficiently detailed instructions in this area.

•It does not appear that results of grading carried out by Mexico's certification bodies will be publicly available, whereas USDA publishes regular reports on the results of grading performed across the United States.

"The USDA grading system has helped establish a goal that all sectors of the U.S. industry have worked together to meet, which is improving the quality and consistency of U.S. beef," Lively said. "It's really a cornerstone of the message USMEF uses to promote and differentiate U.S. beef overseas, and something we are certainly looking to protect."

HOGS: (undercurrentnews.com) -- China will import more animal proteins next year from South America, North America and Europe, as structural changes to the country's livestock sector limit domestic production growth, according to a recent Rabobank report.

"The Chinese market will continue to be key [for global meat trade]," said Rabobank in its Global Animal Protein Outlook 2018. "Due to China's rising imports in recent years, many exporters are turning to the country to grow trade business."

Slower production growth of pork, beef and poultry as consumer demand increases has driven Chinese importers to source meat produced abroad. Market volatility in China's huge pork sector, in particular, can have a big impact on global markets.

Over 18 months from 2014, for instance, China's hog herd to decrease by 100 million head, according to Rabobank, the biggest fall in inventories recorded in China's history, due to low prices. The subsequent big rebound in prices caused imports to soar to over 1.6 million metric tons in 2016, according to International Trade Center.

Over the past two years, many small to medium-sized pig farms in China have closed since the government implemented ever-stricter environmental policy, the bank said. In the first half of 2017, for instance, 213,000 livestock farms were closed, according to China's Ministry of Environmental Protection, with larger, industrial farms expanding in their place.

Beef producers faces similar environmental and resource constraints in China, turning the country into the world's biggest importer of frozen beef.

It's unclear how China's increasing demand for meat imports will impact seafood prices in China. While this year prices for pork, milk, poultry and chicken eggs have been stable-to-falling, China's seafood index -- which is made of prices for 30 key seafood products across China -- was CNY 22.51 per kilogram ($3.43/kg) in November, 24% above November of last year (see graph below), according to China's Ministry of Agriculture.

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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