DTN Early Word Opening Livestock

Cattle Paper Set for Further Strength Wednesday

John Harrington
By  John Harrington , DTN Livestock Analyst
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Cattle: Steady-$2 HR Futures: 50-100 HR Live Equiv $137.79 +1.75 *

Hogs: Steady-$1 HR Futures: Mixed Lean Equiv $ 83.55 + .11**

* 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 bids and asking prices are likely to remain poorly defined this week, linked in part to the uncertain potential of futures and wholesale prices. FCE internet results will be posted on the DTN cash cattle page later Wednesday, but that auction has been very small in recent weeks. We assume that bullish-minded feedlot managers will be pricing showlists at least $2 to $3 higher. (e.g., $125 to $126). Live and feeder futures are staged to open moderately higher, boosted by follow-through buying and firm cash expectations.

The cash hog trade should open Wednesday with bids steady to $1 higher. While the cash index continues to edge higher, the nearby board remains significantly moreabove spot cash trade. Lean futures are likely to open on a mixed basis thanks to a combination of long liquidation and short-covering.

BULL SIDE BEAR SIDE
1) Though mixed from state to state (i.e., smaller in Kansas, somewhat larger in Nebraska and Texas), the new offering of ready cattle this week is looking generally steady. That's good news given a larger packer appetite and typically stronger early-year retail buying. 1) Given high placement levels through the fall, fed cattle supplies are staged to build over the next several months.
2) Beef cutouts closed sharply higher on Tuesday with early-week box movement described as "moderate." 2) Early bird guesses suggest that December placement activity remained well above 2016, possibly by 3% to 5%.
3) Early-week receipts in hog country on Tuesday were very light (e.g., 6,653 head based on the national report), suggesting that packers would soon help to reach deeper in their pockets to fund desirable chain speed. 3) Given Tuesday's sag in lean hog futures, the production increases disclosed in the December Hogs and Pigs report for the second half of 2018 may be causing the board to struggle in maintaining the forward curve in seasonal price distribution.
4) Even though February lean futures remain roughly $8.50 over the cash index, the structure of the market is positive as the spot month is trading at a fairly "typical" premium to the cash market. Furthermore, February prices remain at the low end of the five-year trading range. 4) It's certainly possible that the premium of lean hog futures are already fully reflecting the price potential of the early-year cash market.

OTHER MARKET SENSITIVE NEWS

CATTLE:(Farm Journal) -- 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."

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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.

HOGS: (Bloomberg News)-- For all the buzz about pea protein and lab-grown burgers, Americans are set to eat more meat in 2018 than ever before.

To be precise, the average consumer will eat 222.2 pounds (100.8 kilos) of red meat and poultry this year, according to the U.S. Department of Agriculture, surpassing a record set in 2004. Meanwhile, domestic production will surpass 100 billion pounds for the first time, as livestock owners expand their herds on the back of cheap feed grain.

Per-capita availability to rise to all-time high in 2018

Though the USDA's per-capita measure isn't a true gauge of consumption, it serves as a common proxy. It shows egg demand reaching an all-time high as well in 2018. Dairy items like cheese and butter have also been growing in popularity.

"If you look at the items that consumers say they want more of in their diet, protein tops the list," said David Portalatin, a Houston-based food industry adviser for NPD Group.

Many Americans are actively shunning carbohydrates in favor of protein, though any health benefits may be outweighed by the sheer volume of meat, eggs and dairy being consumed. While the government recommends that adults eat 5 to 6.5 ounces of protein daily, the USDA forecasts the average person will down almost 10 ounces of meat and poultry each day in 2018.

It's a sharp turnaround from 2007 through 2014, a time when per-capita meat and poultry demand slumped 9 percent as rising corn-based ethanol demand and a drought sent commodity prices sharply higher. Though cattle and hogs are now far cheaper than their 2014 peak, prices could still rebound. U.S. meat exports have soared as the global economy improves, outpacing the gains in domestic demand.

Meat substitutes have gained attention in recent years amid concerns about the impact of a carnivorous diet on health, animal welfare and the environment. For example, Chicago-based Epic Burger Inc. last year started selling the Beyond Burger plant-based patty that mimics meat. Protein from plants, insects or cultured meat are a top food trend to watch, though the category isn't expected to significantly dent animal product sales just yet, according to a November report from CoBank.

Ten years from now, there will be higher plant consumption, but beef will always be king," Epic Burger founder David Friedman said. "People are always looking to put more protein into their diets. But they want high quality and transparency in the food they're eating." Category's sales are expected to climb in the coming years.

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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