DTN Early Word Opening Livestock

Lean Hog Issues Should Open Moderately Lower

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

Cattle: Steady-$1 HR Futures: Mixed Live Equiv: $139.12 - .05*

Hogs: $1 LR Futures: 50-100 LR Lean Equiv: $ 73.60 -1.25**

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

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

GENERAL COMMENTS:

Beef packer inquiry should slowly improve Thursday with opening bids around $108 live and $173 dressed. Yet look for the early effort to still come up short vis-a-vis asking prices of $112 to $114 in the South and $178 plus in the North. Yes, significant trade volume could once again be delayed until sometime Friday. Live and feeder futures are expected to open mixed Thursday thanks to short-covering on one hand and cash premiums on the other.

Expect the cash hog trade to open about a$1 lower Thursday. Buyers will want to maintain better processing margins built over the last several weeks if possible. So given the erosion of carcass value seen Wednesday, packers will see lower live hog expense Thursday as a necessity. The Saturday slaughter estimate is about 142,000 head. Lean futures should open moderately lower, checked by long liquidation and lower wholesale prices.

BULL SIDE BEAR SIDE
1)

The combination of firming futures and the ability to ignore some lower cash trade on Tuesday indicates that feedlot managers still possess decent leverage as well as enough market confidence to counter a sudden development of market panic.

1)

Although cattle futures did close modestly higher on Wednesday, most live contracts settled 60 to 80 points below session highs. This suggests there are still plenty of commercial sellers looking for places to reduce the price risk on late-year feeding programs.

2)

Beef processing margins may be down from early summer, but they remain decent, certainly decent enough for cattle buyers to support fully steady bids in feedlot country.

2)

Since the April lows, attempts to rally live cattle futures have run into considerable resistance at levels several dollars below the life-of-contract highs from last November.

3)

China's Ministry of Agriculture reported on Tuesday an outbreak of foot and mouth disease in its central province of Henan. The O-type strain of the disease was found in five pigs at a slaughter plant, leading to the culling of 173 pigs. On the other hand, northeast China's Liaoning province has culled 8,116 hogs after an outbreak of African swine fever earlier this month. While such numbers remain small and insignificant, they do point to a disease wildcard that could increase China's needs for greater pork imports.

3)

For the week ending Aug. 11, 2018, U.S. hatcheries set 228 million eggs in incubators, up 1% from a year ago. At the same time, chicks placed totaled 185 million, up slightly from 2017.

4)

For the week ending Aug. 11, Iowa barrows and gilts averaged 277.2 pounds, 1.2 pounds lighter than the prior week and .6 pounds heavier than 2017.

4)

The pork carcass value took another tumble on Wednesday with all primals losing ground except the picnic.

OTHER MARKET SENSITIVE NEWS

CATTLE: (CTV News) -- Farmers across Canada including parts of Manitoba are dealing with dry conditions which could cause cattle producers to sell off some of their herds if they can't find feed.

According to Agriculture and Agri-Food Canada continued precipitation deficits and above average temperatures led to persisting and worsening drought across much of the country in July.

"Hay yields across Manitoba were below normal at the end of the month, and rainfall is required in the southeast and Interlake regions for hay and pasture regrowth," read a report from Agriculture and Agri-Food Canada. Manitoba Beef Producers director and Interlake cow-calf producer Dianne Riding of Lake Francis, Man. has 132 head of cattle but she said this year she may have to scale back her operation. Riding said she's only getting about a quarter of normal yields from her hay fields.

"Our hay fields never got the rain when they should've and it's very dry," said Riding. "Very dry for us."

"That means this fall that we got some really hard decisions to make here because we, at this point, do not have half the hay we need to feed these cattle."

Riding said other producers in Manitoba are facing a similar situation.

"We are going to go into a downsizing mode," she said. "If we cannot find the feed people will be selling the livestock."

"There could be quite a glut of cattle going on the market."

Argyle, Man. farmer Colin Crockatt is one of the fortunate ones. He said he saw the drought coming and stocked up on feed in the spring for his 80 head cow-calf operation.

"We are quite lucky," said Crockatt. "We went out and spoke for hay and bought some back in April and May when we saw the drought coming."

Dalhousie University Food Distribution professor Sylvain Charlebois said if more cattle hit the market the situation could have an impact on the price consumers pay for beef at the store but he added there are many factors at play.

"I wouldn't be surprised if prices at retail fall slightly in the fall but in the winter they go back up again because of lower inventories," said Charlebois.

HOGS: (South China Morning Post) -- WH Group, the largest pork producer in China and the world, reported worse-than-expected results for the first half of the year, with its US operations coming under pressure as trade tensions between the world's two largest economies began to escalate.

The company reported a 7.7 per cent drop in net profit to US$514 million from US$557 million in the year-earlier period as its US and European operations were hurt by lower margins.

Revenue reached US$11.17 billion, up 4.8 per cent from US$10.66 billion after biological fair value adjustments, which is a way to measure value of biological assets including living plants and animals. The first-half revenue was lower than a Bloomberg analyst consensus estimate of US$11.24 billion in revenue.

"The company's US and European operations were affected by the change in trade environment and industry dynamics," said WH Group's chief financial officer Guo Lijun in a press conference on Tuesday.

Guo said operating profit of the company's US business dropped US$140 million to US$330 million, compared with the year-earlier period, with the fresh pork segment suffering an operating loss of US$15 million due to declining hog prices.

Hog prices in the US dropped 4.6 per cent during the first half, compared to the same period in 2017. In China, the fall was a bigger 23.8 per cent decrease, according to the company.

Overall fresh pork revenue slipped 1.1 per cent to US$4.6 billion, which was buffered by a 6.9 per cent rise to US$5.9 billion in packaged meat sales

"I didn't expect the performance of the company's fresh pork segment to drop so much," said Barney Wu, an analyst with Guotai Junan Securities. "In the second half, this section should see some recovery, while the impact of the trade war should be absorbed by the company as well."

Last year, the company's US business contributed to more than half of its turnover, which was also double the amount from China. Packaged meats and fresh pork accounted for most of its revenue, while hog production and other business made up for less than a tenth of the amount.

One of the Chinese companies that had been on an overseas buying spree, WH Group made headlines in 2013 when it bought US-based Smithfield Foods, then the world's largest pork producer, for US$4.7 billion. It has since been profiting from the US unit's mid to premium-range products, including high quality sausages and bacon, which suited the appetite of China's rapidly growing middle class.

Chairman Wan Long said the company had adjusted its export volumes to countries like Japan and South Korea.

"If the trade dispute drags on, we will continue to adjust our US operation's export channels," Wan said.

The company said it would limit hog production, "sensibly" develop fresh pork business while focusing on the expansion of the packaged meat segment, as well as "accelerate the company's pace of acquisitions in Europe".

WH Group's shares have lost 36.8 per cent since March, when news of a potential trade war became widely reported. They closed up 0.5 per cent on Tuesday to HK$6.07.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow him on Twitter @feelofthemarket

(BAS)

John Harrington