DTN Early Word Opening Livestock

Cattle Futures Staged for Pressured Opening Thanks to Lower Cash and Large May Placement

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

Cattle: Steady-$2 LR Futures: 100-200 LR Live Equiv: $142.67 -0.02*

Hogs: Steady-$1 LRFutures: 50-100 LR Lean Equiv: $ 90.96 +0.65**

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

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

GENERAL COMMENTS:

While feedlot managers successfully passed lower packer bids for one full week, they just couldn't keep shaking their heads through two. Country sellers finally had to come up for breath on Friday, selling moderate numbers $2 to $3 lower in the South (i.e., mostly $109) and $5 lower in the North (i.e., mostly $172).

Activity in feedlot country Monday will be limited to the distribution of new showlists. We expect the late-month offering to be steady to somewhat larger. Live and feeder futures should open significantly lower, pressured by cash weakness, beef demand concerns, and the negative implications of the June 1 Cattle on Feed report.

Cash hog buyers are expected to start work Monday with bids steady to $1 lower. Lean futures should open moderately lower, checked by long liquidation and suggestions that seasonal fundamentals are about as good as they're going to get.

BULL SIDE BEAR SIDE
1)

Despite all the trade-war talk, Asian demand for U.S. beef remains very strong. Japan buying continues to run aggressively, accounting for 37% of the total sales last week. South Korea continues to lead the year-over-year increases. Year-to-date weekly exports to South Korea are up 45% from a year ago, while China remains just a drop in the bucket, accounting for 3.9 million pounds of the 829.78 million pounds exported, year-to-date.

1)

Federally inspected cattle slaughter this week jumped to 664,000 head, 10,000 greater than last week. And given the consistent pattern since mid-April, it could easily be revised another 3,000 to 4,000 head.

2)

In the week ending June 19, noncommercial traders increased their net-long position in live cattle futures by 1,900 to 20,600 positions.

2)

The June 1 Cattle on Feed report released on Friday confirms a total equal to the large in-movement of late spring 2017 (i.e., the average trade guess expected a drop of 4%). Like last year, such a placement is historically large, roughly 11% larger than the five-year average.

3)

The June 1 Hogs & Pigs report will be released this Thursday. While the numbers should confirm further herd expansion, most believe the growth rate will be documented as slowing (even as chain speed potential continues to expand).

3)

Total red meat supplies in freezers as of May 31 were down 2% from the previous month but up 9% from last year. Total pounds of beef in freezers were down 1% from the previous month but up 13% from last year.

4)

The pork carcass value closed with a firm basis on Friday, supported by better demand for bellies, ribs and loins.

4)

At the same time, frozen pork supplies were down 2% from the previous month but up 6% from last year. Stocks of pork bellies were down 5% from last month but up 94% from last year.

OTHER MARKET SENSITIVE NEWS:

CATTLE: (KOSU) -- The Chinese government plans to implement retaliatory tariffs on $50 billion worth of American goods next month. Although beef is on the list, Oklahoma cattlemen are also keeping an eye on pork tariffs.

China is an up and coming market for Oklahoma's cattle ranchers. American producers just regained access to China as an export market when a 14-year ban on U.S. beef exports to the country was lifted last year.

But according to Michael Kelsey, the president of the Oklahoma Cattlemen's Association, most of the state's beef is consumed domestically, competing with other proteins like pork, which also faces tariffs.

"We're as equally concerned about the potential for a pork tariff in China as we are a beef tariff there," Kelsey said.

He says if China buys less pork, domestic pork supplies will likely increase.

"An increased supply of pork is gonna cause the price of pork at the retail outlet to go down," Kelsey explained. "That's going to be a very competitive disadvantage for us in the beef industry."

The Chinese tariffs are set to take effect July 6, but Kelsey says the uncertainty around trade is already making it difficult for cattlemen to compete with pork and poultry operations.

"For cattlemen, it takes about three years to get a product to market as compared to our friends in the protein market," Kelsey said. "Pork is less than a year. Poultry is a couple of months."

Without the ability to easily ramp up or slow down production, Kelsey says trade tussles are making cattle operations more difficult than usual.

HOGS: (National Hog Farmer) -- As often happens in June, hog prices are rising fast. Cash hog prices on last Friday's morning report averaged $82.35 per hundredweight, $6.01 above the week before, $13.11 above the first of June, and $18.91 higher than a month earlier.

The futures market anticipates steady to possibly higher hog prices over the next several weeks. When the June lean hog futures contract expired on Thursday, the July hog futures contract was trading $0.45 per hundredweight higher than the June contract. That day the August contract was $2.57 per hundredweight under June. Hog prices often peak in late-June or early July.

Declining hog slaughter is the primary reason for the higher prices. Hog slaughter last week was only 2.215 million head, down 2.5% from the week before, down 5.3% from a month ago and the smallest hog slaughter for a non-holiday week since the week ending July 22 of last year. Last Saturday's slaughter was only 21,000 head, the smallest Saturday number since June 24, 2017. Hog slaughter is likely to remain light for three more weeks then begin a long seasonal uptrend following the week of July 4.

Heavy slaughter weights are offsetting some of the decline in hog slaughter. Last week hog slaughter was up 1.7% year-over-year, but because of heavier slaughter weights, USDA's estimated pork production was up 3.8%. Hot weather will keep market weights down in coming weeks. The lightest dressed weights of the year typically come in August.

As also is common for June, hog prices are rising much faster than is the pork cutout value. On Friday morning, the average hog carcass price equaled 98.5% of the pork cutout value. A month earlier hog prices were 86.6% of pork cutout and two months ago hog prices were 73.6% of the pork cutout value.

The June quarterly Hogs and Pigs report will be released June 28. Large revisions to past inventory reports are not likely. March-May hog slaughter was up 3.4% which is exactly what USDA's March inventory survey predicted. The March report implied June-to-August market hog slaughter will be up 3.14% year-over-year. During the first two full weeks in June, hog slaughter was up 2.4% compared to the same period last year. This recent shortfall in marketings could be temporary. Heavy slaughter weights may indicate producers have been holding hogs in anticipation of higher prices ahead.

I [Dr. Ron Plain] expect the June Hogs and Pigs report to show slowing herd growth. Historically, breeding decisions have responded to profitability in the last four to six months. Hog prices have been unprofitable seven of the last nine weeks. Iowa State University profit calculations put May net returns at minus $0.80 per hog marketed during the month. This was the third consecutive month of red ink.

According to calculations by Lee Schulz, economist at Iowa State University, the cost of production for hogs marketed in May was $46.84 per hundredweight (live) or $62.46 per hundredweight (carcass). This was the highest monthly cost in the Iowa series since August 2015.

The June 11 weekly crop progress report says 77% of corn acres were in good or excellent condition. That is 10 points higher than the same week last year, and last year's harvest produced a record 176.6 bushels per acre. Midwest weather conditions in the next six weeks will go a long way toward determining corn prices for the coming year.

The U.S. economy continues to post impressive numbers. The unemployment rate was 3.8% in May, the lowest for any month since 3.8% in April 2000, which was the lowest month since 3.5% in December 1969. The low unemployment rate appears to be pushing up the inflation rate. The consumer price index for

May was up 2.8%, year-over-year. This was the biggest increase since February 2012. Excluding food and energy, the cost of living in May was up 2.2% year-over-year, the biggest increase since January 2012. Strong economic growth is usually good for meat demand.

The average grocery store price for pork during May was $3.741 per pound, down 1.1 cents from the month before. Despite lower retail pork prices than in April, tighter margins for middlemen allowed the May average live price for 51-52% lean hogs to be up $6.98 per hundredweight to $46.86 per hundredweight. Packer margins were down 2.4 cents per pound in May and the wholesale-retail price spread was down 10.9 cents per retail pound compared to April 2018.

April pork exports totaled a record 547.9 million pounds, up 18.4% from the year before. The increase was due mostly to large increases in shipments to Mexico, South Korea, Colombia and China. Exports equaled 25.6% of U.S. pork production, the highest share for any month since May 2009. Pork exports have been above the year-earlier level for 23 of last 24 months.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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John Harrington