DTN Early Word Opening Livestock

Cattle Futures Should Open With a Firm Undertone

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

Cattle: $1-3 HR Futures: 25-50 HR Live Equiv: $138.33 - .96*

Hogs: Steady-$1 LR Futures: Mixed Lean Equiv: $ 91.64 + .49**

* 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 buyers may have painted themselves into a corner Friday in terms of spending for ready cattle. Packers need to make something happen in the next several hours, at least in terms of moderate trade volume. Opening bids should be around $110 live and $169 to $170 dressed. Asking prices are around $113 to $115 in the South and $176 to $178 in the North. Live and feeder futures are likely to open somewhat higher, supported by stronger cash expectations and bull spreading.

The cash hog buyers should resume procurement chores with bids ranging from steady to $1 lower. Although tariffs on U.S. pork are scheduled to keep working higher, it's not like the board hasn't had plenty of time to stew over prospects. Indeed, we're somewhat impressed with how well futures have held up in the face of such bearish trade prospects. On the other hand, the unknown impact of higher and higher tariffs may be a bit like a ticking time bomb. At the very least, the situation should keep would-be buyers cautious. Lean futures seem set to open on a mixed basis thanks to residual selling on one hand and short-covering on the other.

BULL SIDE BEAR SIDE
1)

Higher live bids in Kansas and Texas Thursday (i.e., $110, $2 to $4 higher than last week) strongly suggests that short-bought and well-margined beef processors are set to spend whatever it takes Friday in order secure immediate slaughter needs.

1)

The wholesale beef market continues to struggle big time. Cutouts closed sharply lower on Thursday with post-holiday demand described as no better than "light."

2)

The growing premium structures from October through April live cattle is impressive, especially given all the worries about the ongoing trade war and predictions of record meat production.

2)

October live futures closed slightly above the top end of the relatively wide trading range of $101.50 to $110.05 that has been in place since late March but was unable to reach the $112 to $113 region of major chart resistance.

3)

For the week ending June 30, Iowa barrows and gilts averaged 277.7 pounds, .3 pounds lighter than the previous weeks and 1.3 pounds heavier than 2017.

3)

For the week ending June 30, U.S. hatcheries set 230 million eggs in incubators, up 3% from last year. At the same time, chicks placed by broilers growers totaled 187 million, up 2% from 2017.

4)

The pork carcass closed moderately higher Thursday with help by better demand for bellies, loins, picnics and hams.

4)

Stress on U.S. pork exports will intensify starting Friday as China tariffs increase by 25% (see article below).

OTHER MARKET SENSITIVE NEWS:

CATTLE: (beefmagazine.com) -- A coalition of industry and government in Kansas on Saturday kicked off a pilot program for a mandatory disease traceability program for cattle.

Named Cattle Trace, the pilot aims in 2018 and 2019 to involve about 55,000 cattle from farm to feedlot through slaughter, and to use mock disease events to test the logistics of such a system. Many of the projects in the past have tested the equipment that is required in a traceability program.

The organizers started with a top-down organizing scheme, gathering support from three major packers, and now are in the process of setting up participation with 10 to 15 feedyards and four to five sale barns, followed by enough farm/ranch-level beef producers to obtain the 55,000 cattle, says Cassie Kniebel, Cattle Trace project manager.

Cattle Trace will use ultra-high frequency technology to collect what it calls "the minimal data necessary," including an individual animal identification number, a GPS location, and date and time, in order to track animals in the event of a disease outbreak. Tag readers will be livestock markets, feedyards and beef processors. Movement data collection will begin in fall 2018, and the project will continue for about two years.

Kniebel expects the project to begin in earnest this fall with data collection and the first tests should begin next spring. She adds that the first report on the logistics and function of the system should be created by next summer. This is to include an economic analysis.

The catalyst for this project in part traces to a policy change by the Kansas Livestock Association (KLA) last fall to change policies and support mandatory traceability instead of its previous stance for voluntary traceability only, says Mary Soukup, assistant secretary for the Kansas Department of Agriculture.

Another factor is NCBA, in accordance with its Beef Industry Long Range Plan, commissioned and released in January 2018 a feasibility study about things to consider in the development of a national ID and traceability system. Here is the link to this report from World Perspectives, Inc., called US Beef Cattle Identification and Traceability Systems. In other words, this is part of a national movement toward mandatory traceability.

One of the strikes against traceability has always been the worry such information will be readily available to any level of government. Soukup replies the Cattle Trace group is designing a system that is to be privately held and only available to government in the event of a disease outbreak.

Soukup and Kniebel say the Cattle Trace project is a collaborative partnership among the Kansas Department of Agriculture, USDA, Kansas State University Beef Cattle Institute, Kansas Livestock Association and individual producer stakeholders.

HOGS:(CNBC) -- U.S. pork producers are about to be hit by a second batch of hefty retaliatory tariffs from China and Mexico that has some large producers predicting they will lose big money.

China is scheduled Friday to start collecting an additional 25 percent tariff on imported U.S. pork, which when added with the previous import taxes will mean a tax exceeding 70 percent.

Industry analysts say China's high import tax essentially slams the door shut on U.S. pork imports into China, which also will start collecting 25 percent tariffs for soybeans this Friday.

U.S. pork producers are about to be bitten by a second batch of hefty retaliatory tariffs from China and Mexico -- and that has some large producers predicting they could lose big money and be forced to invest overseas.

Executives say the pork industry has been expanding in recent years, in part on the expectation of export opportunities that would continue to support growth. However, the threat of a trade war is adding uncertainty and driving fear. One in 4 hogs raised in the U.S. is sold overseas, and the Chinese are the world's top consumers of pork.

"We put a halt on all investment, not just because we will be losing money, but because we don't know if growing in the U.S. is the right move if we won't be an exporting country," said Ken Maschhoff, chairman of Maschhoff Family Foods and co-owner of the nation's largest family-owned pork producer.

Maschhoff said the farm industry has been "asked to be good patriots. We have been. But I don't want to be the patriot who dies at the end of the war. If we go out of business, it's tough to look at my kids and the 550 farm families that look us into the eye and our 1,400 employees."

Mexico imposed a 10 percent tariff on chilled and frozen pork muscle cuts effective June 5, and that import tax is set to double to 20 percent on Thursday. Mexico's retaliatory action followed the Trump administration's duties on imported aluminum and steel.

China, meantime, is scheduled to start collecting an additional 25 percent import duty Friday on American pork products as it targets $34 billion worth of U.S. goods in response to President Donald Trump's action against Beijing for alleged intellectual property theft.

China also is set to add tariffs this week on U.S. soybeans, corn, wheat, cotton, whiskey and dairy, as well as U.S. autos. Nearly $20 billion in U.S. agricultural exports went to China last year, with the more than half of that amount coming from soybeans.

"It's pretty apparent that these countries will go after, by and large, Trump supporters from a political base standpoint since items exported by red states are the ones being targeted," said Maschhoff, a past president of the National Pork Producers Council and a fifth-generation hog producer.

In April, China slapped U.S. pork imports with a 25 percent duty, in retaliation for the Trump administration's steel tariffs. When combined with previous import levies, "the other white meat" will be subjected to import taxes that approach a whopping 71 percent cumulatively, according to Rabobank. And that's without including the 10 percent VAT, or value-added tax, that China charges for the import of agricultural products.

Industry analysts say China's high import tax essentially slams the door shut on U.S. pork imports into China, which will also begin collecting 25 percent tariffs for soybeans this Friday.

"At 81 percent net tariff, you're not moving any pork product into China," said Christine McCracken, executive director of animal protein at Rabobank, a financial services firm for the agribusiness.

She added, "I would suspect by the end of the year hog producers will be losing quite a bit of money. Part of it is just surplus pork on the market. We've been in an expansion mode."

Industry experts estimate that the Chinese tariffs alone represent around $18 per animal for a hog producers on an annualized basis, or cost more than $2 billion.

According to Maschhoff, the tariff will result in a hit of $100 million for his Illinois-based family farm operation, which markets about 5.5 million hogs a year, and operates in 10 states.

"That's one farm company, and not the whole industry," said Maschhoff. "It's really tough and we had anticipated a decent 2018-19. This is only the second time we've had red ink 37 years in the business."

Even some big U.S.-based food companies such as Hormel Foods and Tyson Foods are exposed to the new tit-for-tat reality between the U.S. and Mexico. Virginia-based Smithfield Foods, the nation's largest pork producer, is owned by China's WH Group, and ships pork to more than 40 countries. The company declined comment to CNBC.

Hormel Foods warned in a 10-Q regulatory filing April 29 that "pork export margins could be challenged near-term due to tariffs on exports to China." That said, the company in a statement provided to CNBC indicated that "only a very small portion of our pork is exported. We will be closely monitoring any impact on the broader protein markets."

Tyson has exposure to Mexico and China's meat market. "With the current volatility in trade relations, we've experienced day-to-day uncertainty in our ability to deliver products and services to customers," the company said in a statement. "With countries imposing retaliatory tariffs on U.S. products, Tyson Foods as well as others in U.S. food and agriculture, will lose our competitive advantage in critical export markets like Mexico, Canada and China."

The impact on the new tariffs is seen as amplified by the domestic pork industry's expansion in recent years and the record-high hog herd disclosed last week by the U.S. Department of Agriculture. Also, the trade tussle with China comes as export volumes to China have been trending down from 2016 levels, when there was record need for imported pork.

"We might have been better able to weather the tariff rate increase (back in 2016) than we can now." said Joe Schuele, a spokesman for the U.S. Meat Export Federation, a trade association. "You've got a lot of suppliers -- the European Union, Canada, Brazil, and the U.S. -- competing for a tighter space."

He continued, "That makes it an even more difficult situation than if it had come about in 2016 when China had really a record need for imported pork."

China ranked as the second-largest volume market for U.S. hog producers last year, and in export value totaled about $1.1 billion, according to the USMEF. Mexico was the largest volume market last year, and in export value totaled $1.5 billion, slightly behind Japan.

The Mexican and Chinese markets have been seen as especially important to the U.S. pork producers, because they have purchased product that Americans typically don't buy, including raw hams and "variety meats" like tongue, ears, snout, and heart.

However, it's no surprise that Mexico has been looking to other global suppliers for pork, such as Brazil, Chile and the European Union. The country has other agricultural product concerns amid the North American Free Trade Agreement renegotiation talks. Andres Manuel Lopez Obrador, the president-elect of Mexico, has been advocating the country reduce its dependence on U.S. farm imports.

"Mexico and China are about 40 percent of total exports, so those are critical markets and it's a significant concern with U.S. pork," said Jim Monroe, a spokesman for the National Pork Producers Council, a trade group.

"The longer these trade disputes go on, and the cloud of uncertainty remains over the industry, it's going to have real negative financial consequences for U.S. pork producers," Monroe said. "It's a shame, because we support so many jobs, and when we can compete on a level playing field around the world we do extremely well."

In 2017, the average value of a hog was $147 -- and of that amount almost $54 of the total value was driven by exports, according to Monroe. He said about 550,000 jobs are tied to the pork sector and 110,000 of them are directly tied to exports.

David Maloni, executive vice president of analytics for ArrowStream, a Chicago-based foodservice supply chain technology company, said he believes the tariffs are short-term and "more tactical" in nature, useful in the broader context of forcing key countries to negotiate on trade.

"Our advice is don't get too wrapped up in politics, but see it as a major buying opportunity for commodities," he added.

Trump has previously offered to make it up to farmers, and USDA Secretary Sonny Perdue has spoken several times about Trump instructing him to craft a plan to help protect farmers and agricultural businesses.

However, producers like Maschhoff aren't looking for farm subsidies from the federal government. He told CNBC that the current programs are not for pork and beef producers, but focused mostly on dairy and grains.

"We want to compete and be able to sell abroad and make sure our government knocks down trade barriers," he said. "All we've accomplished is getting more trade barriers. We are the casualty and predicted it from day one."

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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John Harrington