DTN Early Word Opening Livestock

Lean Hog Futures to Sport Firm Undertone on Opening

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

Cattle: Steady-$2 LR Futures: 50-100 LR Live Equiv: $144.47 + .02*

Hogs: Steady-$1 HR Futures: 50-100 HR Lean Equiv $ 89.68 + .32**

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

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

GENERAL COMMENTS:

The cash cattle trade should remain slow in the early rounds with bids and asking prices poorly defined. Having said that, it seems reasonable to assume that trade volume will develop earlier than normal. Both sides would no doubt like to make up for last week's extremely slow pace. Live and feeder futures seem staged to open mixed with deferreds losing ground to nearbys.

Hog buyers were not successful Monday in moving numbers with lower bids. Therefore, look for them to try harder Tuesday morning with bids at least steady to $1 higher. Processing margins are very discouraging, but between lightening country numbers and intense competition between buyers, there may not be much they can do about it for the foreseeable future. Lean futures should open moderately higher, supported by follow-through buying and bullish fundamentals.

BULL SIDE BEAR SIDE
1)

According to the national comprehensive boxed beef report released on Monday, out-front demand remains quite solid. Box volume last week involving delivery of 22 days or more once again totaled well over 1,000 loads (i.e., 1,159 loads).

1)

As expected, new showlists distributed in all major cattle-feeding states were larger than the previous week, perhaps lending buyers more leverage later in the week.

2)

For the week ending June 12, noncommercials increased their net-long position in live cattle futures by 5,900 in the week of June 12 to 18,700 positions, one of the larger increases so far this year.

2)

Despite last week's foot dragging, the stronger-than- average basis, deep discount in the summer contracts, and fears that the best of seasonal beef demand is fading into the rearview mirror may soon soften the resolve of feedlot managers over the next two to four weeks.

3)

Nearby lean hog futures shot sharply higher on Monday with spot July landing its highest close since late February. Such aggressive buying seems to be gathering midsummer to move prices into the mid-$80s, apparently confident that supply and demand fundamentals will remain bullish for another 30 to 45 days.

3)

The fact that hog buyers tried to own barrows and gilts Monday reflects how dismal processing margins have become. If cooler temperatures could work to increase receipts (and perhaps put back on some weight), packers would not think twice about leaning into the cash trade.

4)

For the week ending June 12, noncommercial traders reduced their net-short position in lean hog futures by 4,400 contracts, which now stands net-short 16,700.

4)

Given that the June 1 Hogs & Pigs report will be released a week from Thursday, the recruitment of long specs may become increasingly difficult as traders nervously consider the next documentation of herd expansion.

OTHER MARKET SENSITIVE NEWS:

CATTLE: (Nebraska Rural Radio Association) -- The National Cattlemen's Beef Association Director of Government Affairs Danielle Beck issued the following statement in response to the Food and Drug Administration's announcement that they will hold a public meeting on foods produced using animal cell culture technology:

"NCBA looks forward to participating fully in the public meeting, and will use the opportunity to advocate for U.S. Department of Agriculture (USDA) oversight of lab-grown fake meat products. The Food and Drug Administration's announcement disregards the authorities granted to USDA under the Federal Meat Inspection Act, as well as USDA's significant scientific expertise and long-standing success in ensuring the safety of all meat and poultry products. Under the current regulatory framework, FDA plays an important role in terms of ensuring the safety of food additives used in meat, poultry, and egg products. All additives are initially evaluated for safety by FDA, but ultimately FSIS maintains primary jurisdiction."

According to the FDA, the public meeting is intended to provide interested parties and the public with an opportunity to comment on emerging lab-grown protein technology. The public meeting is not a formal decision and will not prevent USDA from asserting primary jurisdiction.

USDA oversight of lab-grown protein products is consistent with existing federal laws. Lab-grown protein products fall within statutory definitions of a meat byproduct. USDA is responsible for ensuring the safety and proper labeling of all such products under the Federal Meat Inspection Act (FMIA) and the Poultry Products Inspection Act (PPIA).

HOGS: (USMEF) -- In response to the U.S. implementation of Section 232 tariffs on steel and aluminum, Mexico has imposed new duties on imports of U.S. pork. On June 5, tariffs on chilled and frozen pork cuts were increased from zero to 10 percent. Effective July 5, 2018, the rate will increase to 20 percent. Mexico also applied a 15 percent duty to pork-only sausages and a 20 percent duty to some cooked ham and shoulder products.

By increasing the tariff on U.S. chilled/frozen pork cuts to 20 percent, Mexico has effectively eliminated the NAFTA benefit, and the tariff on U.S. pork cuts is now at most favored nation (MFN) levels. The new tariffs are not expected to be lifted until the U.S. rescinds the steel and aluminum tariffs.

To minimize the impact on pork prices and encourage imports from non-U.S. suppliers, Mexico has established a duty-free tariff rate quota (TRQ) for 350,000 metric tons (mt) of chilled/frozen pork that will be open through the end of 2018. Import licenses are distributed on a first-come, first-served basis, with 97 percent of the volume allocated to companies that imported these products last year.

WTO rules require new market access to be open to all eligible suppliers, so Mexico does not explicitly exclude U.S. product from the quota. However, it is understood that all chilled/frozen pork cuts imported from the U.S. will be charged the 10 percent (and later 20 percent) duty.

There has been great uncertainty about how the quota is being administered but USMEF has been in constant contact with the trade and it is our understanding that companies have not been successful in applying for import licenses for U.S. pork.

In recent years the U.S. has accounted for 90 percent of Mexico's chilled/frozen pork imports and Canada the other 10 percent. Last year Mexico's imports of U.S. pork items subject to the new duties totaled 713,500 metric tons valued at $1.25 billion. These chilled/frozen pork cuts accounted for 80 percent of Mexico's imports from the United States (Imposition of new duties on U.S. pork and implementation of the new pork TRQ will likely result in 1) lower volumes of U.S. pork exports; 2) lower U.S. prices (especially hams where Mexico purchases roughly 45 percent of total U.S. production and accounts for 86 percent of U.S. bonein ham exports); 3) with new competitors entering Mexico's chilled/frozen pork import market, U.S. share will be lower; 4) substitution of more imported turkey for pork in Mexico's processing industry; and 5) more features of poultry by Mexican retailers.

Canadian pork is likely to benefit in the short-term from the new Mexican retaliatory tariffs on U.S. pork, although Canada already exports the majority of its hams to Mexico so its ability to ramp up sales -- at least in the short-term -- may be constrained. Currently about 60 EU slaughter plants are approved to export to Mexico, with more pending approval. The U.S. maintains transportation and logistical cost advantages, so it will not be easy for Mexican processors to switch to frozen European pork. However, increased Canadian and European supplies could result in U.S. market share dropping from the current 90 percent to 75 percent in the second half of this year. This would result in a decrease in U.S. exports of roughly 10,000 mt per month or more than 60,000 mt for the rest of 2018. If unit values hold at first-quarter levels, the drop in export value to Mexico would be more than $100 million over 6 months.

Given the growth in U.S. production and already large U.S. consumption, it is likely that product not going to Mexico will be absorbed in other export markets as well as in the domestic market, at lower prices. The drop in the ham primal value could translate into industry losses of more than $300 million for the remainder of this year and roughly $600 million over the next 12 months. The added negative price pressure for both hams and picnics could result in industry losses of $425 million for July-December 2018 and $835 million over the next 12 months.

USMEF's understanding is that the duty-free quota is specifically aimed at Mexico's processing industry and retailers are not able to purchase pork at zero duty (beyond Canadian and Chilean pork, where the potential for supply growth is limited). Prices for Mexican pork already see inflationary pressure, so retailers are likely to shift more shelf space to poultry as they struggle to offset the cost of the 20 percent duty on U.S. pork.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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John Harrington