DTN Early Word Opening Livestock

Hog Paper to Be Pressured By Fundamentals on Opening

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

Cattle: Steady-$2 HR Futures: 50-100 HR Live Equiv: $136.09 -.19*

Hogs: Steady-$1 LR Futures: 50-100 LR Lean Equiv: $ 85.12 -.79**

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

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

GENERAL COMMENTS:

Market watchers predictably anticipate another slow Tuesday with bids and asking prices poorly defined. We don't expect much definition in terms of price potential until Wednesday or Thursday. Live and feeder futures should open moderately higher, supported by cash premiums and follow-through buying.

At this point, hog buyers almost seem to be gathering numbers at will. The midsummer combination of ample supplies of barrows and gilts, and defensive carcass value has certainly made the procurement chore much easier over the last several weeks. Accordingly, cash bids Tuesday should be generally lower once again. Monday's hog slaughter was quite light (i.e., only 420,000 head thanks to two dark plants (i.e., JBS at Marshalltown where tornado clean-up and repair continues; Tyson Foods at Waterloo took a floating holiday). We expect Marshalltown to be back on line for the most part, pushing chain speed back toward 455,000 head. As indicated below, all Smithfield plants will be dark on Friday and Saturday. Indeed, this week's kill may fall a bit below 2 million. Lean futures are expected to open moderately lower, pressured by bearish fundamentals.

BULL SIDE BEAR SIDE
1)

New showlists distributed by cattle feeders on Monday looked generally smaller than last week with only Texas offering a few more ready steers and heifers.

1)

The bears defending the live cattle discount of late summer futures once again yawned in the face of higher cash news. Some traders still believe that the combination of dog-day demand and ample fed numbers could still cause significant cash market problems.

2)

Beef cutouts advanced with decent gains Monday with early demand described as "moderate to fairly good."

2)

If fourth quarter lean hogs currently reflect late-year supply and demand realities, the towering premiums of late-year live cattle futures may be seriously overpriced.

3)

As of June 30, frozen pork supplies were down 10% from the previous month but up slightly from last year. Stocks of pork bellies were down 16% from last month but up 130% from last year.

3)

The pork carcass opened Monday moderately lower, extending Friday wholesale implosion with the help of struggling fresh cuts and further erosion in the belly primal.

4)

Last week's monster hog kill was somewhat deceptive. Specifically, all Smithfield plants killed on Saturday, anticipating downtime this Friday and Saturday (i.e., allowing the company to install a computer system designed to put all plants in a single, coordinated unit). Because of such downtime, this week's hog kill will seem unusually small, countering to some extent last week's enormity.

4)

The market structure of the lean hog complex remains bearish, as the discount in the October contract compared to August is quite a bit larger than typical for this point in the calendar, suggesting that traders expect more than a seasonal decline in hogs from now into late summer and fall.

OTHER MARKET SENSITIVE NEWS

CATTLE:(Fortune) -- Motorcycles, beer, washing machines and whiskey -- U.S. producers in all of those categories have faced unintended consequences from the Trump trade war.

Now add another all-American mainstay: meat.

According to a new report by the Wall Street Journal, more than 2.5 billion pounds of U.S. beef, pork, and poultry are currently in cold storage, waiting for buyers. One analyst told the Journal that those stockpiles, combined with modest U.S. demand growth and serious uncertainty surrounding export conditions, could lead to "one of the biggest corrections we've seen in the industry in several years."

Some meat packers are canceling investment and expansion plans in the U.S., while others are reportedly scaling back production. Storage facilities, meanwhile, are reportedly running out of room to store the near-record amounts of excess meat.

Part of the glut is thanks to long-term overproduction caused by declining feed costs. U.S. meat production has been rising steadily for nearly a decade, and will reach a record 102.7 billion pounds this year, according to USDA projections.

But the best prospect for selling all that meat exporting has hit a snag courtesy of President Donald Trump. Trump's trade war has driven up tariffs on U.S. meat in major foreign markets including Mexico, China, and Canada. China imposed a 25% tariff on American pork in April, and raised it to a staggering 62% this month. According to the Journal, prices for pork products have increased sharply there, and exports from the U.S. declined by 18% in the first half of 2018. The largest market for U.S. pork, Mexico, doubled its pork tariff to 20% on June 5.

One hog farming operation in Carlyle, Ill. told the Journal it was cancelling $30 million worth of domestic investment, and considering setting up new operations in Eastern Europe or South America to avoid trade uncertainty. Many of America's meat production and processing hotbeds are in states Trump carried in the 2016 election, including Texas, Nebraska, Kansas, and Arkansas. That's not coincidental -- China has specifically targeted industries in conservative states as a way to drive a wedge between groups in the U.S.

Canada, meanwhile, implemented a 10% retaliatory tariff on some U.S. beef starting July 1, and China raised its tariff on U.S. beef to 37% on July 6. China is not a major export market for U.S. beef, which was banned there for more than a decade, but the tariffs appear poised to throttle rapidly growing demand. The U.S. Meat Export Federation had projected that U.S. beef exports to China, which only resumed in June of last year, could have reached $400 million over the next four years.

Farming leaders speaking at a House Ways and Means subcommittee hearing this month warned that Trump's multi-front trade war could have "dire" consequences for farmers and ranchers. Among other points, they emphasized that the impacts of tariffs don't end when the tariffs are lifted.

"Once we lose that market," one farmer told the committee, "It is really tough to get it back." (Messenger News) -- Eagle Grove's multi-million-dollar project expected to be ready by Nov. 1

HOGS:

A multi-million-dollar wastewater plant will be ready to service Prestage Foods of Iowa's state-of-the-art pork plant by Nov. 1, according to Bryce Davis, Eagle Grove city administrator.

Davis said city officials completed a walk-through of the wastewater facility last week.

The facility is being built on 22 acres of land in the 1300 block of Southwest Ninth Street, near the Eagle Grove's existing wastewater plant. It will include the water reclamation plant, force main and lift station.

ISG, of Storm Lake, is the engineering firm for the project. Gridor Construction, of Buffalo, Minnesota, is the contractor for the reclamation plant. Denver Underground, of Denver, Iowa, is working on the force main. King Construction, of Wall Lake, is building the lift station.

The lift station will be able to accommodate wastewater flows from any future industrial development in the proximity of Prestage.

The contracted price for the new wastewater plant is just under $25 million.

Funding for the wastewater project came through the State Revolving Loan fund.

The city is contractually obligated to treat Prestage's wastewater. Prestage will pay the city for the wastewater it sends to the new facility.

"Prestage's schedule is our schedule, so we want to make that happen," Davis said.

Prestage is building its $300 million plant four miles south of Eagle Grove. The company will employ an estimated 1,050 workers when operations begin in November or December. The pork plant will be capable of processing 10,000 hogs per shift. About 600 million pounds of pork will be processed annually.

The wastewater will be pretreated at Prestage before being pumped through the forcemain to the new water reclamation facility.

The water plant will eventually treat municipal wastewater also, but that phase of the project will not be completed until November 2019, Davis said.

"That's for the final grading and hooking up the municipal side to the new plant," Davis said.

Once that phase is completed, the city's current wastewater facility will be decommissioned. That plant is at least 45 years old.

The new system will use biological nutrient removal, which uses an oxidation ditch for removal of ammonia and biochemical oxygen demand.

It will have the capacity to treat an average of 4.15 million gallons per day.

The new plant could require up to four employees, but that has not been finalized, according to Davis.

The old plant required 1.5 employees, Davis said.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow him on Twitter @feelofthemarket

(BAS)

John Harrington