DTN Early Word Opening Livestock

Lean Futures Seem Staged to Open Moderately Lower

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

Cattle: Steady-$2 LR Futures: Mixed Live Equiv: $137.17 + .11*

Hogs: $1-2 LR Futures: 50-100 LR Lean Equiv: $ 76.18 - .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:

The cash cattle trade should be typically quiet Monday with packers focusing on the collection of new showlists. We expect the midmonth offering to be about steady with last week. Bids and asking prices are not likely to be well defined until Wednesday or later. Live and feeder cattle futures are likely to open on a mixed basis, tied to long liquidation interest on one hand and the reality of feedlot cash premiums on the other.

Look for cash hog buyers to open with bids $1 to $2 lower. Country offerings appear to be growing and will continue do so for another 30 to 60 days. Cash erosion could start to slow in terms of deterioration, but that will require the recovery of late-summer demand. Lean futures should open moderately lower Monday, pressured by bearish fundamentals and follow-through selling.

BULL SIDE BEAR SIDE
1)

For the week ending Aug. 7, noncommercials were more aggressive in reducing short positions than longs, resulting in their net-long position in live cattle increasing by 7,400 to 62,600. This is the largest level since late March.

1)

Cash cattle weakness in the South on Friday mirrored the defensive action seen in the North on Thursday. Generally speaking, feedlot leverage seems to be slipping as the market moves into late summer.

2)

Beef export forecasts are raised for both 2018 and 2019 on expectations of continued strong global demand.

2)

The structure of cattle continues to point to prospects of potential weakness in cattle and beef prices in late summer.

3)

The World Board has reduced its estimate of the 2018 pork production due to a slower-than-expected pace of slaughter during the last half of the year.

3)

For the reporting week ending Aug. 7, noncommercial traders increased their net-short position in lean hog futures by 1,000 contracts to net-short 27,500 and commercial merchants added to their short position by 3,600 contracts, now net-short 11,400.

4)

The pork carcass value closed moderately higher, pressured by softer demand for ribs, bellies and fresh cuts.

4)

As of Aug. 1, corn production is forecast at 14.6 billion bushels, up 356 million from the July projection. Larger feed supplies lead to cheap feed and cheaper feed leads to greater meat production.

OTHER MARKET SENSITIVE NEWS

CATTLE:(Western Producer) -- Thousands of feeder calves from the United States are flowing into Canada.

Strong basis levels and feed costs are the main drivers determining which direction cattle flow, said Brian Perillat, senior market analyst at Canfax.

"Traditionally, cattle moved to where the cheaper feed was, and right now the U.S. has cheaper feed, but we have had very strong basis levels," Perillat said.

"Our fed cattle for the most part have been higher than Nebraska, and that helps keep more of these feeders here and leads to more imports based on our stronger fed market despite having higher feed costs."

The U.S. Department of Agriculture's Economic Research Service reported July 18 that 170,000 head could arrive in Canada by the end of this year because of favourable prices. Cattle imports as of May totaled 169,763 head, an increase of 11,033 head year over year. About 15,000 head were sent to Canada in May, almost double 2017 levels.

"This whole trade story is so interesting, barring all the hype about NAFTA," Perillat said.

"Our exports and our imports are up, which is kind of odd in a lot of ways."

However, he does not entirely agree with the USDA forecast.

"Our calves are not at a premium to the U.S. like they were last year," he said.

"With the way our feed costs are and the price of barley and the fact that we could be looking at importing corn, I have a hard time to see how imports increase and have our feeder cattle go up as well."

The 2017 Canfax annual report said about 106,000 head of U.S. feeders arrived Canada, making this country a marginal net exporter of feeders.

Imports of feeders in 2015 and 2016 were 10,570 and 17,880, respectively.

More than 70,000 American calves arrived in Canada in 2011, when Alberta had a large feed cost advantage compared to the U.S., Perillat said.

Even with sabre rattling over trade, this two way activity is a good thing, said Bryan Walton, manager of the Alberta Cattle Feeders Association.

"This is a reason to keep this border flowing both ways. Those calves in Montana are closer to the big feedlots in Alberta than they are to the big feedlots in the United States," he said.

"It has been helped along by a positive basis and maybe some optimism."

Canada and the U.S. continue to streamline movement of cattle. Originally there were disputes over testing for diseases such as bluetongue and anaplasmosis, and over time these issues have been resolved. Walton expects a full resolution later this year.

"I think we have some common sense options now and we are continuing to work on that," he said.

The restricted feeder cattle program allows animals to be imported into Canada without testing requirements on a year-round basis. They require strict identification and certification for placement in feeding operations.

The U.S. has always accepted thousands of Canadian live cows, bulls, steers and heifers, but exports have been trending downward. Expanding U.S. cattle numbers were part of the reason for reduced export demand, said the 2017 Canfax annual report.

"We are still at historically low feeder calf exports," said Perillat.

In 2014, Canada exported 1.2 million head of cattle, the highest since 2000. Of that group, 490,000 were feeders.

The following year, 336,000 feeders went south. In 2016 there were 198,330 Canadian feeders exported and last year exports dropped to 131,269.

The latest export numbers for the end of June showed 327,390 cattle were sold, and of that about 131,000 were feeders, a 70 percent increase over last year.

HOGS: Washington (AFP) -- US and Mexican negotiators have made progress in narrowing differences on the update of the North American Free Trade Agreement, Mexico's Economy Minister Ildefonso Guajardo said Thursday.

The steps to reach agreement could allow Canada to rejoin talks next week, he told reporters as he entered meetings for the second day with US Trade Representative Robert Lighthizer.

US and Mexican officials have said they aim to conclude discussions this month and it is the third straight week ministers have traveled to Washington for meetings.

Teams worked through the night "changing the text" and "got a lot of work done," Guajardo said. But the thornier issues are being left to the end, including the US demand that NAFTA be approved every five years, a provision known as a sunset clause.

"We are organizing the items according to the degree of complexity and sunset clause is the very last," he said.

Mexico has repeatedly said it opposed to including such a clause.

The US and Mexican teams have spent a lot of time on issues involving the auto industry and Guajardo said earlier this week they had reached an agreement on the US demands that a share of vehicle components with duty-free treatment come from countries with high wages.

A USTR spokeswoman declined to comment on the content of the discussions.

Asked if Canada would rejoin the NAFTA talks next week, Guajardo said, "Hopefully. We have to make sure that the US-Mexico bilaterals are done."

But there is no specific date to return to trilateral discussions, he said.

Foreign Minister Luis Videgaray, who accompanied Guajardo, spoke to US Secretary of State Mike Pompeo on Wednesday and "discussed the importance of concluding a NAFTA agreement," according to a statement from the State Department.

Talks are due to continue Friday and include Jesus Seade, economics adviser to Mexico's President-Elect Andres Manuel Lopez Obrador.

US President Donald Trump demanded NAFTA be renegotiated after repeatedly criticizing the 24-year-old pact as a "terrible deal" and officials now are rushing to conclude the talks before Lopez Obrador takes office on December 1.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow him on Twitter @feelofthemarket

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John Harrington