DTN Early Word Opening Livestock

Lean Futures Set to Open Moderately Lower

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

Cattle: Steady-$2 HR Futures: Mixed Live Equiv: $137.84 - .34 *

Hogs: Steady-$1 LR Futures: 50-100 LR Lean Equiv: $ 90.67 - .13**

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

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

GENERAL COMMENTS:

Tuesdays typically don't count for much in terms of reflecting cash cattle potential, and there's little reason to anticipate anything different Tuesday. Bids and asking prices will remain largely hidden until midweek or later. Live and feeder futures seem likely to open on a mixed basis thanks to a combination of follow-through selling and large cash premiums.

Hog buyers are expected to resume work Tuesday with bids steady to $1 lower. Processors are slowly improving margins, but hardly in a convincing way. More times than not, live hog prices and carcass values are falling at near the same rate. Lean futures seem set to open moderately lower, pressured by follow-through selling and export business uncertainty.

BULL SIDE BEAR SIDE
1)

Between the strong midsummer basis and persistently hot temperatures, feedlot managers have plenty of reasons to pull cattle forward, maintain a leverage-friendly current status and check the seasonal increase in carcass weights.

1)

The inability of live cattle futures on Monday to show even marginal respect to towering feedlot cash sales underscores the intensity and entrenchment of bearish psychology regarding third quarter production.

2)

Beef export tonnage in May totaled 117,871 metric tons (mt), the sixth-largest on record, valued at a remarkable $722.1 million, which surpassed the previous monthly high (March 2018) by a healthy 4% and was 24% higher than a year ago (see article below).

2)

Beef cutouts remain on the defensive with the choice box closing more than a buck lower Monday, with box supplies described as "heavy."

3)

With the August/October lean hog spread (closing at $16.65 on Monday) approaching historical highs, the attractiveness of deferred selling should start to run out of gas.

3)

Official trade data is beginning to confirm adverse ramifications of tariffs. Following a record performance in April, May pork export volume was 217,209 mt, down 2% from a year ago, and reflecting smaller exports of variety meats. Pork exports to the China/Hong Kong region were well below year-ago levels in May, due in part to the additional 25% tariff imposed by China on April 2 (see article below).

4)

The bellies have decent potential for the next week or so, with some support for butts, while hams still possess upward price risk. For these reasons, the pork carcass value could move higher for the next several weeks.

4)

Lean hog futures were slammed with triple-digit losses on Monday with selling energy fueled by expectations of seasonally waning domestic pork demand as well as fears of softer foreign demand as U.S. product is priced out of competition via rising tariffs.

OTHER MARKET SENSITIVE NEWS:

CATTLE: (USMEF) -- U.S. beef exports set a new value record in May while also increasing significantly year-over-year in volume, according to data released by USDA and compiled by the U.S. Meat Export Federation (USMEF).

Beef export volume was 117,871 metric tons (mt) in May, the sixth-largest on record, valued at a remarkable $722.1 million, which surpassed the previous monthly high (March 2018) by a healthy 4 percent and was 24 percent higher than a year ago. Through the first five months of 2018, beef exports were up 10 percent in volume to 547,157 mt while export value was $3.32 billion, 21 percent above last year's record pace.

Exports accounted for 13.6 percent of total beef production in May, up from 13 percent a year ago. For muscle cuts only, the percentage exported was 11.1 percent, up from 10 percent last year. For January through May, exports accounted for 13.5 percent of total beef production and 10.9 percent for muscle cuts -- up from 12.8 percent and 10 percent, respectively, last year.

Beef export value averaged $313.39 per head of fed slaughter in May, up 18 percent from a year ago. The January-May average was $317.69 per head, also up 18 percent.

Japan and South Korea continue to be the pacesetters for U.S. beef export growth. In May, export volume to Japan totaled 30,117 mt (up 19 percent from a year ago) valued at $196.8 million (up 22 percent and the highest since August 2017). Through May, exports to Japan were up 4 percent from a year ago in volume at 128,207 mt while value increased 13 percent to $822.9 million. This included a 6 percent increase in chilled beef volume to 61,178 mt, valued at $488 million (up 18 percent).

May exports to Korea were up 46 percent from a year ago in volume (20,781 mt) and jumped 64 percent in value to a record $146.2 million. For January through May, exports to Korea climbed 34 percent to 91,875 mt, valued at $647.3 million -- 49 percent above last year's record pace. Chilled beef exports to Korea totaled 20,365 mt (up 30 percent) valued at $196 million (up 41 percent).

"Despite the intense competition U.S. beef faces in Japan and Korea, these markets continue to display a terrific appetite for a growing range of cuts," said USMEF President and CEO Dan Halstrom. "Beef items that are traditionally popular in Asia continue to perform and other items more suitable for thick-cut steaks and barbecue concepts are gaining more traction, resulting in exceptional growth opportunities. But the enthusiasm for U.S. beef extends well beyond these two leading markets, and that's how exports have reached this record-breaking pace."

For January through May, other highlights for U.S. beef include:

In Mexico, exports were up 4 percent in volume (98,900 mt) and 13 percent higher in value ($427.9 million). Mexico is a critical market for U.S. rounds, shoulder clods and other muscle cuts which are typically undervalued in the U.S. market. It is also the leading destination for U.S. beef variety meat exports, which increased 15 percent from a year ago in value ($98.9 million) despite a 2 percent decline in volume (43,479 mt).

Exports to China/Hong Kong increased 20 percent in volume (57,186 mt) and 47 percent in value to $442.2 million. May exports to China were the largest (834 mt) since the market opened in June of last year, pushing the January-May total to 3,133 mt valued at $28.7 million. However, effective July 6, China's import duty rate on U.S. beef increased from 12 percent to 37 percent. The higher tariff will make it difficult for end-users to profitably utilize U.S. beef, especially with U.S. beef already priced at a premium compared to imports from other suppliers and with Australian beef subject to a duty of just 7.2 percent through the China-Australia Free Trade Agreement.

Coming off a record performance in 2017, beef exports to Taiwan continue to gain momentum. Exports were up 31 percent from a year ago in volume (22,127 mt) and 43 percent higher in value ($209.9 million). Chilled exports increased 39 percent in volume (9,272 mt) and 52 percent in value ($116 million), as U.S. beef captured 74 percent of Taiwan's chilled beef market.

More reliable access to Indonesia has helped bolster beef exports to this promising market, with volume increasing 52 percent from a year ago to 6,247 mt and value nearly doubling to $28.7 million. Due in part to the United States successfully challenging Indonesia's import restrictions at the World Trade Organization, U.S. beef now faces fewer obstacles and a more consistent regulatory environment. Indonesia's strong performance and solid growth in the Philippines helped push exports to the ASEAN region 17 percent higher in volume (18,472 mt) and 28 percent higher in value ($102.4 million).

Led by strong growth in Guatemala, Costa Rica and Panama, exports to Central America jumped 21 percent in volume (5,436 mt) from a year ago and 22 percent in value ($30.6 million).

HOGS: (USMEF) -- Following a record performance in April, May pork export volume was 217,209 mt, down 2 percent from a year ago and reflecting smaller exports of variety meats. Export value was $562.5 million, down 3.5 percent. For January through May, pork export volume was still 3 percent ahead of last year's record pace at 1.08 million mt, while value increased 6 percent to $2.85 billion.

Exports accounted for 27.8 percent of total pork production in May, down from 29.5 percent a year ago, while the percentage of muscle cuts exported fell about one percentage point to 24 percent. For January through May, the percentage of total production exported was slightly below last year at 27.5 percent, while the percentage of muscle cuts exported increased slightly to 23.7 percent.

May pork export value averaged $55.05 per head slaughtered, down 6 percent from a year ago. The January-May per-head average was $55.57, up 2 percent from last year.

Pork exports still ahead of last year's record pace, but will be tested by higher tariffs

Mexico's retaliatory duties on U.S. pork took effect in June, so January-May results were not directly impacted. May exports to Mexico increased 3 percent from a year ago in volume (70,589 mt) but slipped 11 percent in value to $115.6 million. Through the first five months of 2018, exports to Mexico were 6 percent above last year's record volume pace at 353,264 mt, with value up 2 percent to $621 million. On June 5, Mexico imposed a 10 percent duty on fresh/frozen pork muscle cuts from the United States, and the rate increased to 20 percent on July 5. Also in June, Mexico imposed a 15 percent duty on U.S. pork sausages and a 20 percent duty on some prepared hams (these rates did not increase July 5) and opened a duty-free quota aimed at attracting imports from non-U.S. suppliers.

Pork exports to the China/Hong Kong region were well below year-ago levels in May, due in part to the additional 25 percent tariff imposed by China on April 2 (the increase does not apply to product entering Hong Kong). May exports to China/Hong Kong were 34,191 mt, down 31 percent from a year ago, while export value dropped 25 percent to $79.9 million. For January through May, exports to China/Hong Kong were 18 percent below last year's pace in volume (187,439 mt) and down 6 percent in value to $436.4 million. Exports to China will face an even steeper challenge in the second half of 2018, as China recently hiked the duty rate on U.S. pork by another 25 percent. This means U.S. pork cuts and pork variety meat entering China now face a duty rate of 62 percent, compared to 12 percent for China's other suppliers, including the European Union, Brazil and Canada.

"It is unfortunate that U.S. pork is caught in the crosshairs of a dispute that has nothing to do with pork trade," Halstrom said. "USMEF is focusing on the factors we can control by partnering with U.S. packers and exporters to make every effort to defend our market share and protect our business in Mexico and China. USMEF also consistently stresses the importance of diversifying our export markets and expanding U.S. pork's footprint into emerging markets, and those efforts are more critical than ever."

January-May highlights for U.S. pork include:

As an outstanding destination for U.S. pork for further processing and value-added items destined for the home meal replacement sector, exports to South Korea continue to achieve impressive growth. May exports climbed 44 percent from a year ago in volume (22,447 mt) and 47 percent in value ($64.4 million). For January through May, exports to Korea totaled 117,335 mt (up 44 percent), valued at $340.6 million (up 54 percent).

Exports to leading value market Japan were 1 percent below last year in volume (167,294 mt) and steady in value ($689.6 million). This included a 4 percent decrease in chilled pork, with value down slightly at $424 million. Surging demand in Colombia and solid growth in Peru pushed pork exports to South America up 26 percent from a year ago in both volume (50,993 mt) and value ($125.4 million). Argentina officially opened to U.S. pork in April but it has taken some time for exporters to complete various regulatory processes. USMEF is optimistic that shipments to Argentina can begin soon.

Exports to Australia and New Zealand were up 8 percent in volume (36,184 mt) and were 11 percent higher in value ($107 million) as the United States has gained market share in Oceania, an increasingly important market for U.S. hams. Led by strong year-over-year growth in Honduras, Panama, El Salvador and Guatemala, pork exports to Central America climbed 18 percent from a year ago in volume (33,590 mt) and 20 percent in value ($79.7 million). Coming off a record year in 2017, exports to all seven Central American nations achieved double-digit growth in the first five months of 2018. Exports to the Dominican Republic, which were also record-large in 2017, increased 19 percent in both volume (19,102 mt) and value ($42.4 million) through May. For the Caribbean region, exports were up 13 percent in volume to 25,667 mt and 14 percent in value to $60.8 million.

With solid growth in the Philippines and Vietnam offsetting lower shipments to Singapore, pork exports to the ASEAN region increased 12 percent in volume (20,630 mt) and 24 percent in value ($57.4 million). Pork variety meat exports to the ASEAN, which are especially important when shipments to China are declining, increased 50 percent in volume (6,827 mt) and 58 percent in value ($12.5 million).

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(BAS)

John Harrington