DTN Early Word Opening Livestock

Meat Futures Set for Mixed Opening at Midweek

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

Cattle: Steady Futures: Mixed Live Equiv: $139.17 + .84*

Hogs: $1 LR Futures: Mixed Lean Equiv: $ 74.85 -1.27**

* 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-buying interest could start to intensify Wednesday, but much may depend on general psychology and late-summer price expectations. There were some lower feedlot sales reported on Tuesday, but it's tough to tell whether such bearishness will mushroom into larger, definitive trade-volume totals. Asking prices should be around $112 to $114 live and $176 to $178 dressed. Live and feeder futures should open on a mixed basis, thanks to long liquidation and recent cash premiums.

The cash hog trade should open with bids close to a$1 lower. Processing margins have turned into a flashing green light just as producer margins have turned flashing red. Of course, it makes sense that packers are planning another large Saturday kill, perhaps as large as 142,000 head. Lean hog contracts are also expected to open mixed tied to light bull-spreading on one hand and profit-taking on the other.

BULL SIDE BEAR SIDE
1)

Wholesale beef continued to climb significantly higher on Tuesday with the choice and select cutouts advancing by $1.21 and $1.61, respectively. Box demand was described as "moderate to good."

1)

Though the cash cattle trade was thinly tested Tuesday, Mandatory did report a large string (i.e., 5,000 head) sold in Nebraska at $109.50 (nearly $2 below last week's weighted average).

2)

Though many of us would love to see nearby live cattle futures catch fire, it's good to see the board stabilize in the lateral trading range that has held since late spring. The recent downside move has halted, for now, near the mid-July lows, and above the lows of early July and mid-June.

2)

August live cattle futures tends to strengthen into mid-August and then deteriorate toward expiration.

3)

Factoring last week's hog count with the prior three, the average harvest increase over last year is less than 1%, when the last pig crop report suggested 4% more hogs wereavailable.

3)

The pork cutout got hit hard Tuesday, hammered by softening demand for bellies, picnics and loins.

4)

Packer margins doubled last week, with the cutout only losing slightly while cash hogs had one of the strongest losing streaks in recent history. Packers are back in double-digit margins and likely to improve. Such a reality will help to keep hog country current and thereby minimize production and tonnage.

4)

The short-term and long-term trends in lean hog futures are decidedly bearish. The structure of the market is bearish, as the discount in the October contract relative to August is larger than typical for this time of year.

OTHER MARKET SENSITIVE NEWS

CATTLE:(Queensland Country Life) -- Dry conditions across eastern Australia have been extremely tough. Many have been feeding stock or forced to sell more cattle than usual. The year-to-date (May 2018) national slaughter is up 11 per cent, with cow and heifer slaughter up 21pc for the same period. Yet cattle prices have remained firm. With constrained domestic consumption, part of the strength in prices is due to what is happening in our export markets.

Production and exports are on track to repeat a similar performance to that seen in 2013. Australian production is up 10pc for the year-to-date (May) and exports have increased 13pc for the year-to-date (June). Interestingly, while the proportional increases are similar, the volumes are different. Production for the first five months of 2018 (at 938,064 tonnes) is lower than 2013 (945,156t), however exports for the first six months of 2018 (at 535,734t) are higher than 2013 levels (499,750t). This may be a combination of lower domestic consumption, following the rise in domestic retail beef prices which have not yet declined and stronger export markets, with more willing buyers given domestic cattle prices have fallen from record highs.

However, unlike in 2013 and 2014, when export volumes started increasing and the US accommodated the large increase in production, this time other markets are playing a bigger role. This is important given the current position of the US beef complex and the volume of beef in their system. US beef cow inventory is high and there are high numbers of beef cows in the national slaughter which would have an impact on their demand for imported lean trimmings -- which will be discussed in more detail in next month's column.

Australia's four major export markets took more product in the first six months of 2018 compared to 2013. However, compared to 2017 exports, the US are only up 1pc year-to-date (June), while on the other hand exports to China, Japan and South Korea are up 46, 11 and 11pc, respectively.

What's more interesting in the growth in these other markets is that a portion of it would be associated with an increase in lean trimmings trade, given the increased slaughter of Australian cows. The increased presence of lean trimmings in these markets is also illustrated by the 'per unit' export value differences. Over the past five years, the 'per unit' export values for the four major export markets have tracked pretty closely together. However in the six months to April 2018, the average US 'per unit' export value (at $9.46/kg) has been 33pc higher than the average of the other three major markets -- an indication that there are more, higher value cuts going to the US than other markets.

This is a positive reminder -- that while the US market remains important for our lean trimmings trade at the right price, Australia still has the ability to compete and market lower value cuts to other major beef consumers in the world.

HOGS:(Bloomberg) -- China's pork imports are declining as a trade spat with the U.S. and a drop in domestic prices curb purchases of meat from overseas, according to WH Group Ltd.

The company shipped more pork from the U.S. to Japan and Korea in the first half and will continue to change its trade flows should tensions remain, Wan Long, chief executive officer of the world's biggest pork company, said in Hong Kong on Tuesday. Lower hog prices in China boosted consumption of domestic meat, while tariffs on American pork further eroded the competitiveness of imports, the company said in a statement.

China is the world's biggest pork producer, consumer and importer and boosted duties on U.S. pork to 37 percent in April and then to 62 percent in July. That's left American producers seeking ways to make up for trade-war losses and led to a 21 percent slump in American pork exports to the Asian country in the first half of 2018. Even without the tariffs, surging domestic production lowered the competitiveness of U.S. pork, according to WH Group.

"It's true our volumes to China dropped by 20 to 30 percent, but our volumes to Korea for example went up 50 percent," said Kenneth Sullivan, chief executive officer at Smithfield Foods Inc., which was bought by WH Group in 2013. "It's really a question of finding the market for this need. Because if you produce it, you don't throw it away, you ultimately sell that meat. It's a sell-it-or-smell-it business. Meat will get distributed."

WH Group shares have tumbled 31 percent this year, making it the third-worst performer on Hong Kong's benchmark Hang Seng Index, amid the tariffs and lower Chinese pork prices. Wholesale prices fell 17 percent in the first half, although they have since rallied 9.6 percent.

Average pig prices slumped 25 percent in the first half, before rebounding 23 percent and were at 14.07 yuan ($2.04) per kilogram on Tuesday, according to Shanghai JC Intelligence Co. data. Hog prices may average between 13.3 yuan and 13.5 yuan this year, said Ma Xiangjie, president of WH Group's Shuanghui Development unit.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow him on Twitter @feelofthemarket

(BAS)

John Harrington