DTN Early Word Opening Livestock

Livestock Futures Are Set to Open Mixed at Midweek

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

Cattle: Steady Futures: mixed Live Equiv: $136.05 + 0.54*

Hogs: Steady-$1 LR Futures: mixed Lean Equiv $ 89.38 + 0.83**

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

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

GENERAL COMMENTS:

Cash cattle potential should start to take shape this morning with the preliminary surfacing of a few bids and asking prices. Our guess is that asking prices will start out around $114-plus in the South and $176-178 dressed in the North. Significant trade volume could easily be delayed until Thursday or Friday. Live and feeder contracts are staged to open on a mixed. basis thanks to a combo of follow-through selling and midweek short covering.

Though it seems too early for the development of a serious bearish rout in the cash hog trade, buyers do seem to have ready barrows and gilts on a bit of a run. Look for opening bids to start out this morning steady to $1 lower. Processing margins are slowly improving, but available numbers may also becoming more ample. This week's kill could be as large as 2.365 mllion head. Lean futures should also open with uneven price action with follow-through selling on one and and short covering on the other.

BULL SIDE BEAR SIDE
1) The combination of shortbought packers (tied in part to last week's limited buy), relatively decent processing margins, and tighter supplies of formulas in the second half of July (especially in the South) bodes well for cash stability over the next several days. 1)

The debut of new spot August live was close to a complete flop. Despite taking center stage more than $11 below the cash index, August imploded by triple digits, setting a new contract low in the process.

2) Beef cut-outs scored decent progress on Tuesday with box demand described as "moderate to fairly good." 2)

Although spot August live is holding well above the 100-day moving average, it faces tough overhead resistance around $107.50.

3) The pork carcass value jumped solidly higher yesterday, supported by better buying interest for loins, hams, and ribs. 3) Despite dropping dressed bids by nearly a buck yesterday, hog buyers experienced no problems moving big numbers (i.e., 16,375 head basis the national report).
4) Closing in on $16, the hstorically large discount of October lean hog futures to spot August could easily turn out to be exaggerated, more a function of emotional psychology than a realistic balance of late-summer/early-fall supply and demand. 4)

The summer highs for the pork cutout value are now likely in the review mirror, especially as harvest levels are set to continuously increase over the course of late summer and fall.

OTHER MARKET SENSITIVE NEWS:

CATTLE: (Dow Jones) -- German drugmaker Merck KGaA and a top European meat processor are backing a startup producing beef from cattle cells, ramping up a race to transform the global meat industry with cell-culture technology.

The $8.8 million investment in Netherlands-based Mosa Meat by Merck's venture investing unit and Basel, Switzerland-based Bell Food Group fuels a continuing effort to fulfill growing global demand for meat via a process that developers say requires a fraction of the resources used in traditional livestock and poultry production.

Cell-culture meat makers have yet to begin selling any of their products. But the emerging technology has drawn investments from major U.S. meat processors like Cargill Inc. and Tyson Foods Inc. It also is raising complaints among cattle ranchers and hog farmers, some of whom regard it as a lab-developed imitation of traditional hamburgers and pork.

Mosa is led by Mark Post, a Maastricht University physiologist who unveiled the world's first lab-grown burger in 2013, and Peter Verstrate, a food technician at the university. Mr. Post's prototype burger cost $330,000 to develop, but the project encouraged Mr. Post to form Mosa, which previously received funding from Google Inc. co-founder Sergey Brin.

"We've done a lot of work in scaling up the cell culture . . . to something that can be used on an industrial scale," said Mr. Post.

Cell-culture meat makers begin by isolating livestock or poultry cells that have the capacity to renew themselves, and place them into room-size bioreactor tanks, similar to fermenters. The cells are fed oxygen and nutrients like sugar and minerals, and can grow into skeletal muscle that can be harvested within a few weeks. That tissue can then be formed into meatballs or chicken strips.

Some livestock groups have called for regulations restricting the word "meat" to conventionally raised and slaughtered livestock. Meat companies have billed it as an additional way to provide beef, pork or chicken to an expanding and more affluent world population that is expected to strain the existing agricultural system.

The investment led by Merck's M Ventures unit represents its first in the food industry, said Alexander Hoffmann, a principal at the firm. Beyond the funding, Merck could provide Mosa with the drug and chemical maker's own expertise in cell-culture technology. "What we intend to do is at least open doors to our parent company," Mr. Hoffmann said.

HOGS: (Washington Post) -- Donald Trump's trade wars are making pork a bargain.

American production is poised to reach an all-time high this year, and output is forecast to surge again in 2019. The supply boom comes as tariffs from China and Mexico threaten to curb export demand, leaving Americans with a mountain of cheap meat.

On Saturday in Dallas, as many as 30 people on a local bacon-focused food tour were set to traverse the city chomping down on bacon donuts, bacon brown sugar ice cream, bacon jam and candied bacon. While retail bacon prices are down in the past 12 months, they're still up from six years ago, so any relief from higher costs will be welcome news to the pork enthusiasts.

"It's almost like a bonding experience," said Jeanine Stevens, the owner of Dallas Bites! Tours, which takes participants to little known restaurants and other eateries. "Bacon is a kind of food that people just feel a little bit lighthearted about. It's a fun food."

Other Americans might agree. The U.S. Department of Agriculture is predicting overall pork consumption next year will climb to 53.3 pounds a person. That's the highest since the early 1980s.

But the demand swell isn't enough to make up for the gains in production, and hog futures are trading near their lowest for this time of year since 2002. "Unprecedented change" is expected for global pork exports in the second half of 2018, and rising pork supply will pressure the U.S. market the rest of the year, Rabobank analysts including Chenjun Pan said in a report emailed on Friday. Hedge funds just more than doubled their wagers on price declines.

Part of the reason demand hasn't rescued prices is because pork is vying against cheap chicken and burgers. Total U.S. meat production is forecast at a record in 2018 and is set to climb again next year, the USDA estimates. Cash hogs may average about 42 cents a pound in 2019, down 7.7 percent from this year, the department predicts.

For hog futures, "the risk going forward is we have huge numbers of hogs coming at us and huge numbers of beef and poultry," said Don Roose, president of U.S. Commodities in West Des Moines, Iowa.

Hedge funds raised their net-short position in hogs to 8,718 futures and options in the week ended July 10, according to U.S. Commodity Futures Trading Commission data published Friday. The holding, which measures the difference between bets on a price increase and wagers on a decline, compares with 3,260 a week earlier. Total short holdings jumped 12 percent to the highest since the data begins in 2006.

Hog futures for October settlement fell for five straight weeks through July 13 on the Chicago Mercantile Exchange. On Monday, the price dropped 0.7 percent to 54.9 cents a pound at 8:46 a.m.

The glut of meat isn't likely to shrink soon. U.S. pork packers have been opening more processing plants and another is expected to come online in 2018, CoBank analysts said in a June report.

"With that increased capacity, producers are unlikely to pull back hog numbers as long as prices are covering variable costs," the analysts said.

Still, what's been a boon for carnivores is hurting American farmers.

Tariffs from China and Mexico mean "40 percent of total American pork exports now are under retaliatory tariffs, threatening the livelihoods of thousands of U.S. pig farmers," the National Pork Producers Council said in an emailed statement on July 6. "We now face large financial losses and contraction because of escalating trade disputes."

That spells trouble for Maschhoff Family Foods, a pig producer in Carlyle, Illinois. The hog unit could post a loss of $100 million in the year that stared on July 1, according to Ken Maschhoff, chairman of the company. That would be a record loss in a 12-month period for the operation, which sells about 5.5 million hogs a year from 550 farms across nine states.

Rather than expand domestically, the company may invest in hog production in Europe or South America if trade tensions persist, he said.

"We had anticipated kind of a decent 2018 year, with a break-even 2019 year, and now both years will be in the red for us," Maschhoff said.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

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John Harrington