DTN Early Word Opening Livestock

Lean Hog Contracts Set to Open at Least Moderately Higher

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

Cattle: Steady-$2 HR Futures: Mixed Live Equiv: $136.28 - .13*

Hogs: Steady-$1 LR Futures: 50-100 HR Lean Equiv: $ 83.72 + .25**

* 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 buyers and sellers should resume fighting positions in the early going with bids of $110 live/$175 to $177 dressed on one hand and asking prices of $115 to $116 live/$183 plus dressed on the other. It's certainly possible that significant trade volume will be delayed until Friday. Live and feeder futures are expected to open with mixed prices tied to residual buying and long liquidation.

The cash hog trade seems geared to open with bids steady to $1 lower. Several dark plants caused Wednesday's kill to total no more than 381,000 head. Saturday's kill estimate has been pulled back to 55,000. The weekly kill will now certainly total under 2 million. Lean futures should open at least moderately higher, supported by follow-through buying and the stubborn premium of the cash index.

BULL SIDE BEAR SIDE
1)

Spot August live cattle surged back over $109 at midweek, an impressive vote of confidence regarding the strength and potential of late-week cash.

1)

With the large placements the past couple of months, fed cattle slaughter levels may duplicate the pattern of the past two years, with beef production increasing counter-seasonally from the third quarter into the fourth quarter.

2)

The beef rib complex could chop sideways for another week or so, but should shift intoa better demand period as retailers and food managers begin to shop for the Labor Day holiday period.

2)

For the week ending July 21, U.S. hatcheries set 229 million eggs in incubators, up 1% from a year ago. At the same time, chicks placed by broiler growers totaled 185 million, up 2% from 2017.

3)

Despite the slippage in the cash market, lean hog futures ended Wednesday session higher, with both the October and December issues posting the largest gains on the day. The nearly $9 premium of the cash index is probably working to pull nearby futures higher.

3)

For the week ending July 21, Iowa barrows and gilts averaged 276.6 pounds, 0.1 pound more than the prior week and 0.9 pounds more than 2017.

4)

If producers are sending market hogs to town a bit early that should help stabilize country prices in a few weeks if packers find themselves requiring hogs prior to the Labor Day holiday period.

4)

Although the pork carcass value caught a modest bounce Wednesday, the cutout is forecast successively lower the next two months along with the cash hog markets.

OTHER MARKET SENSITIVE NEWS

CATTLE:(NCBA) -- Kent Bacus, Director of International Trade for the National Cattlemen's Beef Association, released the following statement in response to the Trump Administration's announcement of trade aid for U.S. farmers and ranchers:

"NCBA looks forward to reviewing the details of the Trump Administration's trade retaliation relief package. Trade agreements and trade enforcement are the most effective long-term solutions to the challenges faced by U.S. beef producers. For many years, U.S. beef has been a target of high tariffs and restrictive trade policies from notorious actors like China and the European Union. We support a vigorous approach to tearing down trade barriers, including non-tariff barriers that are not based on science.

"Removing China's highly-restrictive barriers on U.S. beef exports could unlock the full potential of that market and result in $4 billion in annual sales. Here at home, beef producers need relief from onerous federal regulations that undermine their businesses. Let's start by fixing the restrictive hours-of-service rules for livestock haulers, modernizing the Endangered Species Act, and ending the 2015 Waters of the United States rule once-and-for-all."

HOGS: (Western Producer) -- For more than two weeks, China has imposed a tariff of 62 percent on pork imports from the United States.

At that punitive rate it's possible that no U.S. pork is moving into China, a country of 1.4 billion where the average person consumes 40 kilograms of pork per year, the highest rate in the world after Brazil.

The tariffs are now at 62 percent because of the trade war between the U.S. and China, which unofficially began in April.

"China announced a new 25 percent tariff in response to U.S. action," the U.S. National Pork Producers Council said July 6.

"That tariff is on top of the 25 percent punitive duty levied by China in early April... U.S. pork already had a 12 percent tariff on exports to China."

On top the Chinese tariffs, Mexico is now collecting a 20 percent duty on U.S. pork.

The tariffs are a response to U.S. action. This spring, President Donald Trump hit Mexico, Canada and many other nations with tariffs on steel and aluminum. As of July 6, the U.S. began collecting tariffs on $50 billion worth of Chinese goods.

The battle is part of Trump's war against unfair trade practices, as he has repeatedly said that the U.S. loses on trade with Europe, China, Mexico and Canada.

Canadian hog producers compete with U.S. farmers in the Chinese market, but it's hard to know if Canada's pork industry is benefitting from the trade war or not.

"It's a bit too soon to really understand the impact. We have no … current data released as to whether there is any sort of bump, specifically in the Chinese market," said Gary Sturdy, the Canadian Pork Council's director of government and corporate affairs.

"The last (data) we have is April."

In 2017, Canada exported about $570 million worth of pork to China, the third largest export destination after the U.S. and Japan. The Chinese market is particularly significant for offal. Canada sold $178 million in organ meats and intestines to China in 2017, compared to $20 million to Japan.

While it's possible that Chinese buyers are turning to Canadian pork suppliers, it's unlikely that pork exporters are seeing a boom in sales because China increased its pork production in recent years.

"The Chinese domestic price was going to be lower (in 2018)," Stordy said.

"That puts a downward pressure on imports (into China)."

Plus, Canadian hog farmers cannot press a switch and suddenly produce more pork for the Chinese market. Other countries and domestic customers also need pork from the approximately 22 million pigs slaughtered in Canada annually.

"We kind of go, 'whoa, this (trade war) is going to be great. Canada is going to be able to sell a whole bunch more pork (to China),'" Stordy said.

"In theory that sounds good ... (but) a lot of what we're already shipping that could go to China is already going to China, and the increased demand isn't going to make (that) much of a difference."

In the short term, Canada may not see a boom in pork sales to China, but if the China-U.S. trade war drags on for months, it's possible Canada could grab a larger share of the Chinese pork market for three, four or five years at the expense of U.S. producers.

Leaders of American farm groups have been saying for months that it will be difficult for exporters of pork, soybeans and other ag commodities to regain the trust of Chinese clients.

"Once you lose a market, it is really hard to get it back," said Minnesota Farm Bureau president Kevin Paap, as reported by Agri-Pulse.

Canada's ag industry learned that lesson the hard way in South Korea.

In 2011, Canada exported about $1 billion worth of food to South Korea. By 2014, that figure was cut in half, thanks to South Korea signing free trade deals with the European Union, the U.S. and Australia.

"Canadian pork had a strong presence in the Korean market. On average it was about $250 million in sales," Stordy said.

"The United States got ahead of Canada with its FTA (free trade agreement) ... and that market shrunk by about 60 percent."

Canada's free trade agreement with South Korea took affect Jan. 1, 2015, but the damage and loss of market share for Canadian exporters still lingers.

"To get that back you have to invest time and energy ... making the connections and demonstrating you do have that product available and (that it's) cost competitive," Stordy said.

"It's only now that we're becoming more competitive (in Korea)."

In 2017, Canada sold $133 million worth of pork to South Korea.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow him on Twitter @feelofthemarket

(BAS)

John Harrington