DTN Early Word Opening Livestock

Meat Futures to Launch Week With Mixed Prices

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

Cattle: Steady Futures: Mixed Live Equiv: $136.56 + .11*

Hogs: Steady-$1 LR Futures: Mixed Lean Equiv: $ 82.02 +1.32**

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

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

GENERAL COMMENTS:

Light to moderate trade finally surfaced in parts of cattle-feeding country late Friday. While most of the business seemed to surface around $112 live and $176 dressed, the lateness of the hour made it very difficult to assess actual country movement. Once again, we stand to learn much when Mandatory publishes summaries later Monday. At this point, we assume the distribution of new showlists will suggest a larger fed offering, probably inflated by a number of unsold steers and heifers carried over. Live and feeder futures should open on a mixed basis with nearbys gaining on deferreds.

Look for cash hog traders to kick off business with bids steady to $1 lower. Offerings remain plentiful and pork demand remains iffy. Assuming that chain speed disruptions no longer plague pork production through the week, hog slaughter should be substantially larger than last week. Lean futures are also set for uneven price action in the opening rounds.

BULL SIDE BEAR SIDE
1)

Given the combination of relatively small trade volume totals and fairly aggressive chain speed last week (i.e., 640,000 head, 5,000 more than the prior week), cattle buyers should start out the week short-bought and very close to the knife.

1)

The extremely slow movement of ready cattle last week probably forced many feedlot managers to carryover a good number of unsold inventory, causing new showlists distributed this week to be much larger.

2)

With a large increase from the long side and larger reductions of shorts, noncommercials increased their net-long positions in the week of July 24 by 10,000 to a total of 52,600.

2)

As more and more pressure is applied on cash hog prices as we move through the third quarter, cattle bulls will find it increasingly difficult to hold feedlot sales steady let alone move them higher.

3)

The pork carcass value managed to close sharply higher on Friday, recovering nearly half of Thursday's crash thanks to recovering demand for loins, picnics and hams.

3)

Despite the fact that last week's hog slaughter collapsed to 1,987,000 head (i.e., down 16.6% below the previous week), the pork cutout still lost $3.89 from Friday to Friday.

4)

For the week ending July 24, noncommercial traders reduced their short position in live cattle futures by 300 contracts, now 23,000 net short. Furthermore, commercial traders reduced their short position by 3,300 contracts, now short 3,000.

4)

Declining cash hog and product values combined with the uncertainties regarding the magnitude of the impact caused by the recent punitive tariffs continues to weigh on lean hog futures. The August and October 2018 contracts posted new life of contract lows on Friday and the remaining issues closed out the week lower.

OTHER MARKET SENSITIVE NEWS

CATTLE:(NCBA) -- Late last week the National Cattlemen's Beef Association (NCBA) and other leading organizations in the animal agriculture industry ("the Barnyard") sent a letter to President Donald J. Trump urging him to ensure the U.S Department of Agriculture (USDA) acts as the primary regulatory authority over lab-grown fake meat products. The Federal Meat Inspection Act (FMIA) designates USDA as the main oversight body for emerging lab-grown products. However, in recent weeks the Food and Drug Administration (FDA) has moved aggressively to assert regulatory jurisdiction over lab-grown fake meat.

"The American people elected President Trump because they trusted him to promote a level playing field for American products around the world," said Kevin Kester, President of NCBA. "Now, the President has the chance to demonstrate his support for free and fair markets right here at home. By supporting USDA oversight of lab-grown fake meat, the President will protect American consumers and ensure that America's farmers and ranchers are not disadvantaged in the marketplace."

In the letter, the Barnyard groups highlight the critical role USDA plays in enforcing the same rigorous food safety and labeling standards for all meat and poultry products.

"Undoubtedly, USDA's exacting standards impose regulatory burdens on meat and poultry producers -- as they should," the groups wrote. "However, if cell-cultured protein companies want the privilege of marketing their products as meat and poultry products to the American public, in order to ensure a fair and competitive marketplace, they should be happy to follow the same rules as everyone else. Consumers expect and deserve nothing less."

The groups also questioned the FDA's "regulatory power grab" and noted that the agency's actions are inconsistent with a recently-released White House government reorganization plan.

HOGS: (Farm Journal) -- The U.S. pork industry has been fortunate. Producers have enjoyed strong demand for pork over the past several years and especially in the past 18 months. Demand for U.S. pork on an international basis in 2017 reached a new record of 1,905,186 MT with a total value of $5.3 billion. Pork variety meat was also at a record volume with 543,973 MT sold to foreign markets in 2017. Variety meat exports were more than $1 billion for the first time in history, with $1.173 billion in sales. The total combined export value was $53.47 per head produced in the U.S. in 2017.

As we read the news about trade tariffs being placed on U.S. pork and pork products, it is important to understand where our product goes.

These five destinations for U.S. pork amounted to 82.3% of all pork exported in 2017:

Mexico 34.5%

Japan 20.1%

Canada 9.9%

China/Hong Kong 9.2%

Korea 8.6%

When looking at pork variety meat, our exports were more concentrated, to China/Hong Kong with 59.0% and Mexico, 26.5%. Exports to these two destinations amounted to 85.5% of total variety products.

The impact has been very clear. Futures contracts continue lower at a time we would expect stronger seasonal markets.

Contract months from December 2018 and beyond have reached contract lifetime lows and continue weaker. The trade's expectation of export losses are dealing a financial blow in the short term for pork markets, and generally for all commodities exported in volume (beans, corn, dairy, poultry and beef are also impacted at various levels).

Fortunately, many of our swine clients have built working capital and equity over the past five years and are in a good position to withstand some adversity. However, when you look at the broader industry and how it has expanded in the past few years, some producers will likely be in a tough position if we don't see some resolve to export issues soon.

Losses for the six months between October 2018 and March 2019 would be $15 to $20 per head based on Monday's futures and normal basis, amounting to $250 per sow. This would pressure some covenants for producers who operate with significant borrowing base debt. For those who have a lot of coverage on hogs, well done. Overall, there is not as much coverage as in the past few years.

For producers with current ratios of less than 1.5:1 and less than 40% equity in the business; it might be necessary to make some changes quickly. What cash-generating or cash-saving opportunities exist for you? Communicate with your lender and develop a strategy to manage through the down cycle.

We all hope trade normalizes before the anticipated impacts affect cash, but we need to prepare accordingly if it drags out for some time.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow him on Twitter @feelofthemarket

(BAS)

John Harrington