DTN Early Word Opening Livestock
Livestock Futures Set to Close Week With Mixed Price Action
GENERAL COMMENTS:
Cattle: Steady-$2 HR Futures: Mixed Live Equiv: $143.47 - .44*
Hogs: Steady-$1 HR Futures: Mixed Lean Equiv: $ 74.63 - .14**
* based on formula estimating live cattle equivalent of gross packer revenue
** based on formula estimating lean hog equivalent of gross packer revenue
Trade volume in cattle country was uneven on Thursday with decent movement in the South (i.e., $125 live, steady) and generally slow in the North. While we could always be surprised by Mandatory's final reporting, we expected Northern business to improve Friday. Scattered clean-up action is also possible in parts of the South. Some asking prices will be restated around $126 plus in the South and $200 in the North. Live and feeder futures should open on a mixed basis with trading ideas torn between feedlot premium sales and late-week profit-taking.
Cash hog buyers should resume work Friday morning with steady/firm bids. There's still plenty of debate between supply bears and demand bulls. Which side will prove to be the superior force in the months ahead? Or will supply and demand prove to be equally matched? Lean futures seem staged to open mixed with nearbys probably attracting more buying interest than deferreds.
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| BULL SIDE | BEAR SIDE | ||
| 1) | In slipping $1 to $2 below feedlot cash, spot February live futures look vulnerable with absolutely no weather premiums as we move toward the heart of the winter. | 1) | Beef cutouts closed significantly lower on Thursday, especially in terms of select boxes. Furthermore, wholesale offerings were described as "moderate to heavy." |
| 2) | Following the strong harvest levels in the weeks preceding Christmas, weekly cattle slaughter is expected to fall toward 620,000 head or so through January, with further declines toward 600,000 head on average for February. | 2) | Beef rib prices are now falling sharply lower on a seasonal basis and will likely have more downside before reaching winter lows. Tenderloins are also expected to be under pressure in the coming weeks. Some of the carcass damage will be offset by strengthening end cuts into at least mid-January, before starting to show some weakening late in the month and on into February. |
| 3) | China reported an outbreak of deadly African swine fever on a huge pig farm part-owned by a Danish investment fund, showing the spread of the virus to modern industrial farms expected to have the best levels of disease prevention. The outbreak occurred on a farm in Suihua city with 73,000 pigs in northeastern Heilongjiang province, owned by the Heilongjiang Asia-Europe Animal Husbandry Co. Ltd, a company established in 2016. | 3) | Implied market volatility remains high to start off the year, and one must note that the seasonal tendency is for hog futures to trend lower into expiration of the February contract. |
| 4) | Cash hog strength Thursday suggested what well-margined pork processes are still stretching for live inventory in order to stoke a Saturday kill as large as 420,000 (if not larger). | 4) | This time of year, the February lean contract normally takes its cues from the cash market and with tariffs from Mexico and China likely to remain in place through much of the first quarter and domestic demand lackluster at best during early 2019, overall pork demand will likely struggle. |
CATTLE: (MacauHub) -- China is expected to have imported about 44% of all beef exported by Brazil in 2018, the Brazilian Association of Meat Exporters (ABIEC) announced.
The association expects Brazil's total beef exports to reach 1.626 million tonnes in 2018.
Abiec president Antônio Camardelli said that Brazil is prepared to export 1.8 million tonnes in 2019, which should generate revenues of US$7.26 billion. Camardelli also said he believes that in 2019 beef exports to China will increase following a visit to Brazil in late 2018 by a Chinese delegation to determine conditions at six units that intends to start exports to China .
At present, 16 Brazilian units are authorised to export meat to China.
HOGS:(Penton Business Media)-- 2018 didn't turn out well for pork producers, as estimated losses were about $12 per head for farrow-to-finish operations. These are the largest losses since 2012, when high feed prices prevented positive returns. Pork production was up 3% in 2018. That was record high production, as the industry has been in expansion since 2014.
Prospects look somewhat better for 2019. Producers are expected to continue to provide record supplies with another increase of 3%. However, demand continues to look favorable for 2019, with a continuation of U.S. and world economic growth but at a slowing growth rate. Low unemployment in the U.S. and rising wage rates will be supportive to domestic demand for meat. Global demand for 2019 has turned more optimistic for multiple reasons.
First, total pork exports to all destinations in 2018 were up 6%. While China did buy less in 2018, this was more than offset by other countries buying more. USDA estimates that U.S. pork exports will grow again by a strong 8% in 2019.
Second, the signing of the U.S.-Mexico-Canada Agreement helped calm trade conflicts with Mexico and Canada.
Third, there may be progress toward resolving trade conflicts with China. If there is a grand bargain for China to buy more U.S. goods, then pork will be one of those named ag goods.
Fourth, African swine fever in China is not under control, and China may import more pork and other meat products to compensate for lost hogs due to the disease. China produces 97% of the pork it consumes and imports only 3%. A loss of just 1% of its hogs due to the disease could result in one-third more pork imports for that country.
Carcass prices in 2018 averaged about $62 per cwt. Current prospects are for prices to average near $65 in 2019. Winter prices are expected to be in the higher $50s, and then to move to the low $70s for averages in the second and third quarters. Prices will likely drop seasonally back toward the very high $50s in the final quarter of the year.
Feed prices have been low and steady in recent years. This has helped stabilize costs of pork production around my estimated total costs of $67 per carcass cwt. For 2019, corn prices are expected to be about 20 cents per bushel higher, while soybean meal may be around $20 per ton lower.
Pork producers can expect slightly higher total costs of production due to higher costs for corn, labor, interest and building costs. With current prospects for hog prices to average near $65, this means 2019 would be a year near breakeven for farrow-to-finish producers. Losses would be the norm in the first and the fourth quarters, with profits in the second and third quarters roughly offsetting those losses. The bottom line is that the U.S. pork industry will be producing record pork supplies in 2019. It will need more open export markets and strong demand support. If not, another year of losses might result.
John Harrington can be reached at harringtonsfotm@gmail.com
Follow John Harrington on Twitter @feelofthemarket
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