DTN Early Word Opening Livestock

Look for Lean Hog Futures to Open Moderately Higher

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

Cattle: Steady-$2 HR Futures: Mixed Live Equiv: $145.68 + .03*

Hogs: $1 HR Futures: 50-100 HR Lean Equiv: $ 86.50 + .86**

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

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

GENERAL COMMENTS:

Beef packer inquiry could start to improve, at least in terms of more bids on the table. Furthermore, feedlot managers seem likely to become more definitive relative to asking prices. Our guess is that asking prices will start out around $117 to $118 in the South and $185 to $187 plus in the North. Significant trade volume may not surface until Thursday or Friday. Live and feeder futures should open on a mixed basis tied to follow-through selling and cash premiums.

The cash hog market should once again open with a firm undertone with bids ranging from steady to $1 higher (mostly $1 higher). Lean futures are staged to open at least moderately higher, supported by bull-spreading interest and the constructive march of supply and demand fundamentals.

BULL SIDE BEAR SIDE
1) Although gross beef processing margins have tightened from near records, packer profit potential still looks excellent, easily good enough to encourage cattle buyers to support the feedlot cash trade if that's what it takes to maintain aggressive chain speed. 1)

June live cattle remain at more than a $6 discount to last week's cash, compared to a more average basis at nearly a $3 discount heading into mid-June. The strong basis and deeper-than-average discount in August points to expectations of sharply lower cattle prices heading into the summer.

2)

According to the World Board's latest update released on Tuesday, expected beef production for 2018 is lowered primarily as lighter carcass weights more than offset higher second-quarter steer and heifer and cow slaughter.

2)

Leather demand is really struggling (see article below). This fact coupled with expanding cattle numbers has caused hide prices to be among the lowest since 2009. More specifically, the branded butt averaged $50 last week, its lowest price level since late October 2009.

3) Soon-to-be-spot July lean hogs seemed to wake up Tuesday to the bullish potential of the summer's bullish fundamentals, closing at $81.45, its highest peak since Feb. 28. 3)

The World Board also increased its estimate of broiler production for 2018, raising it tied to the pace of second-quarter production data and stronger growth in production during the second half of the year.

4) After that last spitball is tossed, it may be very difficult for Mexico to shop elsewhere for pork. Specifically, Mexico buys most of its hams from the U.S. for a very good reason: the U.S. is simply the most reliable, long-term, price-competitive supplier of product (even with the new tariff added). 4)

Pork processing margins are narrowing, partially explaining why plans for this Saturday's hog slaughter may not exceed 25,000 head.

OTHER MARKET SENSITIVE NEWS:

CATTLE: (Bloomberg) -- Back in 1991, when Scott Starbuck opened City Soles in Chicago, most of the shoes his customers wanted were made with real leather from cow hides.

Wednesday, shoppers have a more vegan sensibility about what goes on their feet, demanding shoes with non-animal elements like canvas, microfiber and plastic. Making the choice easier are advances in the quality of fake leather, which is now so good most buyers can't distinguish it from the real thing.

"You see more and more people wearing other materials," even if they aren't vegetarians or vegans, Starbuck said.

That's bad news for the leather industry because footwear makers are by far the biggest buyers, accounting for 55 percent of demand. What's worse, the world's appetite for American beef is sending near-record numbers of cattle to the slaughterhouse, leaving a glut of hides as demand slows.

Once a status symbol and a staple of formal outfits, leather shoes are falling on hard times. Not only has the casual-dress trend fueled the rise of sneakers for all occasions, but more shoppers are avoiding products made with animal parts, like hides or furs. While the shift partly reflects an abundance of choices in materials, consumers cite growing discomfort with the slaughter of cattle and concern over the environmental impact of raising them by the millions.

Turning cattle hides into leather is just one of many uses for cattle carcasses, which humans have been exploiting since early civilizations made food containers from intestines and soap from fat. While the most valuable parts Wednesday are those sold as ground beef or steaks, remnants like bones, blood and fat end up in things like fertilizer, gelatin, medicines and textiles. Hides and other byproducts account for about 44 percent of the slaughtered animal's weight, but less than 10 percent of its value, government data show.

Hides are the key ingredient in a global market for leather goods that was worth $93.2 billion in 2016, according to Research and Markets. A single hide can produce enough leather for 11 cowboy boots, 20 footballs or one bucket seat. But supplies of the raw material have been out of balance for several years.

Back in 2014, the number of hides plunged after a drought forced U.S. ranchers to shrink their cattle herd to its smallest size in six decades. As a result, prices shot up. Manufacturers were forced to figure out ways of using less leather in their products, said Ken Maxfield, president of The Maxfield Report, a hide-market publication. Years later, demand still hasn't bounced back.

"The industry has struggled to recover," said Stephen Sothmann, president of the U.S. Hide, Skin & Leather Association. "We haven't regained market share," according to the most recent monthly report from the U.S. Department of Agriculture.

The market probably hasn't bottomed yet, according to a recent report by Harland M. Braun & Co., which supplies hides to tanners.

Younger consumers, in particular, prefer more casual footwear to dress shoes, and they are gravitating to non-leather products from companies with a compelling feel-good story about how they're made, said Jocelyn Thornton, senior vice president of creative services at the retail and fashion advisory firm Doneger Group. Hide prices are among the lowest since 2009. They've dropped as much as 24 percent from a year earlier and are down by almost half since the peak in 2014

For example, Allbirds, a San Francisco-based shoe startup, makes athletic shoes out of wool. Adidas AG, the giant sportswear maker headquartered in Herzogenaurach, Germany, has made a million shoes out of up-cycled plastics.

"They're not necessarily seeking out synthetics," Thornton said. "They're just looking for things that are better for the environment, better for the future."

Leather shoes will retain the biggest share of $83.7 billion in U.S. footwear sales this year, according to Hamburg-based researcher Statista. But athletic footwear sales jumped 14.3 percent in 2016, while leather shoes tumbled 12 percent, a trend that's expected to continue, Statista said.

Leather items that remain in vogue contain less. Little ankle booties with synthetic cutouts have replaced knee-high leather boots, and generously-sized leather bags have made way for smaller purses, like clutches, according to Maxfield, the leather market researcher.

Automobile makers are selling more cars, but finding reasons to cut down on the leather they use. Some consumers demand a "fully vegan car," and electric-vehicle maker Tesla Inc.'s new Model Y sport utility vehicle won't use any leather at all, Chief Executive Officer Elon Musk said at the company's annual meeting June 5.

Even the traditional leather billfold may be on its way out. Over the next decade, people will ditch "dead-cow wallets" as commerce moves to more mobile and digital payments, Dan Schulman, CEO of PayPal Holdings Inc., told analysts in a May 24 call. "They will be a thing of the past."

To be sure, demand is growing for fine leather. There's actually not enough supply of the high-end hides from pampered young calves that produce the soft, unblemished leather needed for the pricey hand bags and other luxury goods favored by the wealthy, according to Don Ohsman, publisher of industry researcher Hidenet.

But those markets are small compared with shoes, which account for more than half. About 20 percent goes to cars, 12 percent to furniture upholstery, and 13 percent for bags, according to Sothmann, the industry group president.

Alexis Lavko, a consultant at Epsilon Economics in Chicago, has traded leather flat shoes for a pair of Rothy's -- made from recycled plastic bottles that cost $125. She says they look stylish enough for the office and didn't need time to break them in.

"I love the fact that this company was trying to figure out something to do with things that are getting thrown in landfills," Lavko said. "I like them better than any other leather flats."

HOGS:(porkbusiness.com) -- Agriculture Secretary Sonny Perdue is vocal that the Trump administration is leaning towards potentially drifting away from the tri-lateral North American Free Trade Agreement (NAFTA) and heading toward two separate bi-lateral agreements with Canada and Mexico.

"I am optimistic overall," said Perdue to U.S. Farm Report host, Tyne Morgan. "The president has made the decision certainly on NAFTA not to withdraw but to negotiate separately with Canada and Mexico believing that we can get a better deal with Canada and with Mexico separately. Honestly, based on some of the differences and the needs there, that's true."

Ambassador Gregg Doud, chief ag negotiator for the U.S. Trade Representatives believes NAFTA has never been a tri-lateral deal, explaining the U.S. negotiated the U.S.-Canadian free trade agreement in 1988 and a separate agreement with Mexico, which Canada joined in 1994.

"You have to understand, when we're doing this, when we are negotiating, very seldom are all -- if ever -- are three countries in the room at the same time," said Doud. "These are bi-lateral conversations. We talk with Canada and we talk with Mexico."

AgDay national reporter Betsy Jibben asked, "Is it fair for me to say [the administration] is aiming towards bi-lateral?"

Doud replied, "I don't know if it's ever really been any different than that anyway."

Nick Giordano, vice president and counsel with the National Pork Producers Council (NPPC) says without knowing possible verbiage or what a potential bi-lateral deal would look like with Mexico, the industry should support whatever deal works to restore trade with Mexico.

"We are for whatever works to restore our trade to Mexico and keep that trade," said Giordano. "We've had zero tariffs in Mexico for quite some time thanks to NAFTA. It's a huge market for us. We are for the fastest possible solution for these trade disputes."

Giordano also saying NPPC has a priority to get a bi-lateral trade deal with Japan.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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John Harrington