DTN Early Word Opening Livestock

Cattle Futures Staged to Open Week With Mixed Prices

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

Cattle: Steady Futures: Mixed Live Equiv: $135.83 -1.47*

Hogs: Steady-$1 LR Futures: Mixed Lean Equiv: $ 89.00 + .21**

* 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 market starts the week with plenty of unanswered questions, questions like how many steers and heifers actually traded last week, and what did weighted average prices finally look like. Trade volume on Friday seemed unusually small, but it will be very interesting to see how mandatory summaries read later Monday morning. For the most part, live sales were marked $1 to $2 lower on Friday (i.e., $110 to $111). Most dressed deals were booked at $173, $2 to $4 lower. But again, the big question is exact trade volume. Activity Monday will be limited to the distribution of new showlists. We assume the new offerings will be larger, thanks to unsold numbers carried over. If limited business means that packers are now especially short-bought, we could see cash trading surface somewhat earlier than normal. Live and feeder futures seem geared to open on a mixed basis thanks to the odd combination of cash premiums and struggling beef cutouts.

Look for the cash hog trade to open with bids steady to $1 lower. While we don't expect chain speed to accelerate anytime soon, most agree that a seasonal low in weekly slaughter has probably come and gone. Spot July is scheduled to expire Monday at 12 p.m. CDT. Lean futures are expected to open with uneven price action with nearby contracts gaining on deferred counterparts.

BULL SIDE BEAR SIDE
1)

Limited trade volume totals generated last week should mean that cattle buyers start out Monday morning possibly needing to secure more slaughter needs by Tuesday or Wednesday.

1)

On the other hand, last week's slow movement suggests that a good number of feedlot managers were forced to carry over unsold steers and heifers into this week. Accordingly, new showlists distributed Monday morning could be substantially larger than last week.

2)

The July 1 Cattle on Feed report is scheduled to be released on Friday. Most analysts believe the USDA will confirm June placement to be 3% to 5% smaller than last year.

2)

Beef cutouts closed sharply lower on Friday, capping a week of defensive wholesale pricing and slow box movement. Seasonally, lackluster beef demand could continue for anothertwo tofour weeks.

3)

The fact that August lean will soon take the spot position nearly $10 under the cash index could work (at least temporarily) to slow selling interest in the late summer board.

3)

For the week ending July 10, noncommercial traders increased their net-short position in lean hog futures by 3,100 contracts to net-short 24,300. At the same time, commercial traders increased their short position by 5,400 contracts (i.e., now short 8,700).

4)

Although the cash hog index is moving lower, the pace of erosion is quite slow, signaling that the availability of hogs is not excessive to demand by any means.

4)

The pork carcass value lost ground last week and further erosion is expected through midmonth, headed lower this week. Despite the gains in the bellies, further weakness in other primals can be expected. In particular, hams are losing value as packers unload the extra product that Mexico is not taking.

OTHER MARKET SENSITIVE NEWS:

CATTLE: (foodmarket.com) -- China has granted the first beef import permits to two French slaughterhouses and two storage sites, ending a 17-year embargo, the French Foreign Ministry said on Friday.

France signed a health and safety agreement last month with Beijing, opening the way for effective access to China's beef market.

Paris, which secured last year the lifting of the embargo dating from Europe's mad cow disease crisis two decades ago, has been eager for exports to begin, which could bring relief to cattle farmers struggling with low prices.

"The decision, which ends a 17-year Chinese embargo on French beef, is very important for the beef industry," the ministry said in a statement.

French meat industry association Interbev said last month that seven slaughterhouses had applied for export permits and that it expected actual beef exports to begin in September.

China is now the world's second-largest beef importer, taking in almost 700,000 tonnes of the red meat in 2017, worth about $3.3 billion, with volumes up 20 percent from the year before, according to Chinese customs data.

China has been loosening such longstanding restrictions on beef imports to feed the appetite of the country's growing middle class for steaks and ribs, and has in the past couple of years cleared the United States and Ireland, like France a member of the European Union, to export beef.

Locked in a tit-for-tat trade standoff with Washington, China has proposed retaliatory tariffs against a range of U.S. goods including beef, which could help France by stalling U.S. shipments after they resumed last year.

HOGS:(Rabobank)-- Escalating trade tensions between the US and China, and within North America, are expected to greatly impact global pork trade in 2H 2018, according to Rabobank's latest Pork Quarterly report.

"The major changes in global pork trade reflect uncertainties arising from the increasing political and economic tensions between the US and China," says Chenjun Pan, Senior Analyst -- Animal Protein at Rabobank. "New tariff measures on agri products will put great pressure on several markets -- mainly the US, China, and Mexico -- although the nature of the pressure will depend on each trading position."

In addition, increased production across the globe in 1H is expected to continue weighing on prices in 2H. Disease could add further uncertainty to supply and trade, as African swine fever (ASF) is spreading in Europe. Changes in feed prices in many regions could pressure margins. The Rabobank Five-Nation Hog Price Index dropped below the average level seen from 2015 to 2017, reflecting market sentiment.

Other highlights from the Pork Quarterly Q3 2018 include:

China: Full of uncertainties -- Hog prices saw a brief rebound, shorter than expected. Small farmers continue to reduce their herd or exit under the pressure, while larger farms continue to expand, so that overall pork production is still increasing. The uncertainty from escalating trade tensions may prompt farmers to shift to herd liquidation sooner than expected. Pork imports are expected to decline in 2H, due to these trade disruptions.

US: Disruptions on pork exports -- Pork production continues to run ahead of last year's level, but there is also slower-than-expected utilisation of newly-added slaughter capacity. Additional tariffs on US pork exports imposed by Mexico will significantly slow the US export business. Exports to China and Canada are also slowing down, due to rising trade tensions. While exports to other destinations are expected to improve, overall larger pork supplies will weigh on domestic prices in 2H 2018.

EU: Relatively steady market performance -- While pork prices are 17% lower than last year, the market has had no major ups or downs in recent months. Expectations of growing supply and rising feed costs in 2H 2018 may reduce farmers' profitability. However, EU exports will likely benefit from trade tensions in other regions, with some opportunity already seen in Mexico. ASF remains a big concern as it spreads within Central Europe.

Brazil: Better results expected in 2H -- After experiencing a bumpy and challenging first half of the year, Brazil's pork industry is expected to improve performance in 2H 2018. Rising trade tensions in other parts of the world will likely benefit Brazil, offering opportunities to increase exports to existing markets and gain access to new markets.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(BAS)

John Harrington