DTN Early Word Opening Livestock

Lean Hog Futures Braced for Further Selling at Midweek

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

Cattle: Steady-$2 HR Futures: Mixed Live Equiv: $137.85 + .01*

Hogs: Steady-$1 LR Futures: 50-100 LR Lean Equiv: $ 89.38 -1.29**

* 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 market monitors should at least start to see a few more preliminary bids at midweek. It sounds like some feedlot managers are pricing showlists around $116 on a live basis. Our guess is that significant trade volume will not surface until Thursday or Friday. Live and feeder cattle should open with uneven price action with the later once again gaining on the former.

Look for the cash hog trade to open Wednesday with bids steady to $1 lower. Although Tuesday's country bids were generally steady, negotiated receipts were fairly large. In short, it doesn't seem necessary at this point to increase country bids very much in order to motivate sufficient movement. At this time, the Saturday kill is estimated to total close to 38,000 head. Lean futures should open moderately lower, pressured by follow-through selling and struggling carcass value.

BULL SIDE BEAR SIDE
1)

Although beef cutouts were no better than mixed on Tuesday, box demand was described as "moderate to fairly good." Perhaps lower prices are working to spark better buying interest among retailers and food managers.

1)

Long liquidation continues to be a dominant feature in live cattle futures. For one thing, the "official" index roll is underway this week, with most actively-traded August losing 6,700 in open interest on Monday. But beyond that excuse, total live cattle open interest is at its lowest level since mid-September of last year.

2)

Although live cattle futures continue to have a lackluster undertone, they remain within relatively broad trading ranges in place from early April through the end of June. While the first three contracts closed below their respective 100-day moving averages on Tuesday, they remained above the 40-day moving averages.

2)

The major discount of spot August live could make it virtually impossible for feedlot managers to dig in their heels for steady money, let alone higher asking prices.

3)

With most lean hog contracts now dragging oscillator readings in the high teens, the board is seriously oversold and is due for at least a short-term bounce.

3)

The pork carcass value fell sharply lower on Tuesday with hams, ribs and picnics failing by $4.18, $2.02 and $1.09, respectively.

4)

The discount in the October lean hog contract compared to August is a good deal deeper than typical for this time of the year.

4)

Lean hog futures imploded on Tuesday as both specs and commercials ran with panic from the idea of record pork production and trade war implications. With the exception of spot July, all months collapsed to new contract lows.

OTHER MARKET SENSITIVE NEWS:

CATTLE: (Beef Magazine) -- It has been just over a year since China reopened to U.S. beef after an absence of nearly 14 years following the first U.S. case of BSE in December 2003. When the market reopened, the U.S. Meat Export Federation (USMEF) cautioned industry stakeholders that it would take time for U.S. beef to gain a foothold in the Chinese market due to current beef consumption habits, a well-established field of competitors and China's restrictive import requirements. Most notably, China requires beef to be produced from cattle raised without use of synthetic hormones or beta agonists, which means that only a small percentage of U.S. beef is eligible.

Despite these restrictions, the U.S. industry has made progress in establishing a customer base in China, and U.S. beef has been well received in the foodservice and higher-end retail sectors. In the second half of 2017, following the reopening of the market, U.S. beef exports to China totaled about 3,000 metric tons valued at $31 million. Through April of this year, exports were just under 2,300 metric tons valued at $21.3 million.

However, effective July 6, U.S. beef faces an even steeper obstacle in China -- an additional 25% retaliatory tariff. China announced the tariff increase in response to U.S. tariffs imposed on a range of imports from China due to issues related to the forced transfer of American technology and intellectual property.

China's total import duty rate on U.S. beef will be 37%, more than triple the 12% rate imposed on beef from most of China's trading partners. The gap is even wider when compared to beef imported from the two suppliers that have free trade agreements with China, as Australian beef is subject to 7.2% duty this year that will eventually decline to zero. Beef imported from New Zealand already enters China duty-free.

Joel Haggard, USMEF senior vice president for the Asia Pacific, says that the threat of the higher duties has already had a noticeable effect on customer interest in U.S. beef. He expects the volume entering China to decline once the higher duty rate takes effect.

"U.S. exporters can't be expected to lower prices by the extent of the additional duty, because alternative markets exist for cuts being shipped to China -- such as ribeyes and other steak items, short ribs and chuck rolls," he explained. "We definitely face the prospect of a significantly lower flow of product entering the Chinese market, and very likely the loss of U.S. beef accounts ranging from Korean barbecue restaurants to steakhouses to supermarkets."

Excited by the prospects for long-term expansion and China's status as the world's fastest-growing beef market, the U.S. industry has made significant investments in the Chinese market.

"The duty rate increase on U.S. beef and its likely impact on exports are very regrettable, because over the past year the U.S. industry put a lot of effort and capital into kick-starting U.S. beef's reintroduction into China," Haggard said. "But USMEF will continue to support the loyal customers who purchase and feature U.S. beef, regardless of any larger turmoil and uncertainty, because we still believe China holds incredible long-term potential."

China had recently updated its eligible plant list to allow more U.S. suppliers to begin exporting beef to China, and efforts were also underway to ensure full eligibility for all beef products China had agreed to accept last year at the time the market reopening was announced. Prior to the duty rate increase, USMEF projected that with these additional products and additional eligible plants, exports to China could have increased from the $70 million that was expected in 2018 to $430 million by 2020.

The higher duty rate takes effect July 6 and remains in place for an extended period, meaning the U.S. beef industry will likely lose more than $30 million in exports this year, and the potential losses over the next couple of years will easily be in the hundreds of millions. More details are available in this preliminary analysis prepared by USMEF.

Meanwhile, the world's other beef suppliers continue to capitalize on China's booming beef demand. China's 2017 imports totaled 716,200 metric tons valued at $3.14 billion -- up from less than $30 million a decade earlier. Imports in the first quarter of 2018 were running 40% ahead of last year's record pace. China's leading beef suppliers are Brazil, Uruguay, Australia, New Zealand, Argentina and Canada. Australia is the primary supplier of the grain-fed product that competes most directly with U.S. beef.

HOGS: (USAgNet.com) -- The pork industry appears to be headed for a period of large losses in which excess pork supplies force prices below costs of production, according to Purdue University agricultural economist Chris Hurt.

"Demand will likely be weakened by reduced exports with tariffs in place on U.S. pork exports to China and Mexico. On a positive note, Chinese tariffs on U.S. grains and soybeans are helping to erode feed prices along with favorable growing season weather," Hurt says.

The industry has expanded the breeding herd by 3 percent according to a recent USDA producer survey. This is the highest rate of breeding herd expansion since this expansion phase began in 2015. Hurt explains that a breeding herd of this magnitude is likely to be a primary contributor to excess supplies in 2018 and 2019.

The market herd was up 3 percent and farrowing intentions for this summer and fall were up 2 percent. With the breeding herd up 3 percent, Hurt says there is concern that actual farrowings this summer and fall could be higher than the 2 percent increase recorded by survey respondents.

According to Hurt, pork supplies will also be large. First-half supplies this year have been up 4 percent and are expected to rise to 5 percent higher in the third quarter this summer, and 4 percent higher in the final quarter of 2018, Hurt explains. Current expected supplies for the first half of 2019 are up 4 percent and 3 percent in the last half of 2019.

The second driver of the large losses facing the pork industry revolve around the current trade war the U.S. has entered.

"The U.S. pork industry has done an amazing job of producing low costs and high-value pork products and adapting them to our foreign customers," Hurt says. "As a result, we have targeted exports as a strategic objective to grow the U.S. pork industry. Our success in growing exports to 22 percent of production means that pork became a target of both China and Mexico."

Pork exports started the year with a lot of promise, up 9 percent at the end of April compared to the January to April period last year. Chinese tariffs on U.S. pork began on April 2 and were raised again on July 6 making additional tariffs of at least 50 percent. Mexico placed tariffs of 10 percent on U.S. pork June 5 and raised those to 20 percent July 5.

Weekly export data from USDA suggests a sharp drop in pork export sales during the month of June, representing about a 25 percent decrease from last year.

"Weakness in exports will be expected as long as the tariffs stay in place. China has also placed tariffs on U.S. beef and poultry which may reduce U.S. exports of these competitive meats," he says.

Just how large are the loss prospects right now considering the large pork supplies, reduced exports due to tariffs, and reduced feed prices due to tariffs and favorable growing conditions?

Liveweight prices for 51-52 percent lean carcasses are expected to average about $49 in the third quarter of 2018 before dropping sharply in the last quarter to near $40. Current estimates of cost of production are near $50.

In 2019, prices are expected to be below costs for much of the year. Liveweight prices are expected to be in the low $40s in the first quarter and then move to near $50 for averages in the second and third quarter before dropping back to the low $40s for the final quarter.

Estimated losses are expected to be large this fall and winter with losses averaging about $25 per head for this six month period. Hog prices may be close to breakeven in the second and third quarters before returning to losses greater than $20 per head in the last quarter of 2019. Losses for the calendar year of 2018 are estimated at a loss of $10 per head and $12 per head of loss in 2019.

Feed costs are expected to be somewhat lower in the second half of 2018 versus the first half.

"This is especially true for soybean meal where Decatur prices for high protein meal were near $365 per ton in the first half," Hurt explains. "That same price in the second half is expected to be closer to $340 per ton. Unfortunately, corn costs may be similar in both halves of the year and thus the modestly lower feed costs are not enough to offset low hog prices."

Hurt's prices for hogs and feed are primarily based on July 9 futures prices. "Clearly, agricultural product markets are in a period of high uncertainty and volatility," Hurt says. "Weather will continue to be a driver of crop prices over the next six to eight weeks. What happens to tariffs on U.S. exports of crops and animal products will also add dynamic price potential.

"Given the heightened level of uncertainty, most pork producers will not want to make long-term decisions at this point. That means carrying on as best they can with short-term plans. The current trade war that agriculture has been unwillingly forced to participate in has an unknown and difficult to predict outcome. Only time will help bring the 'end game' into better focus.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(BAS)

John Harrington