Light to moderate trading developed in most cattle feeding areas on Wednesday as sellers eagerly responded to aggressive packer bids. Although we assume there are still plenty of unsold cattle still on showlists, it will be interesting to see how Mandatory Reports are assessing the total movement. Opening bids should be around $210 to $212 in the North and $130 to $132 in the North. The balance of remaining showlists should be priced around $213 plus in the North and $133 $134 in the North. Live and feeder futures are expected to open sharply higher, jazzed by Wednesday's pop in cash business and technical buying.
The cash hog trade is staged to open with bids steady to $1 lower. New-spot June probably needs to close above $70 for the week in order to avoid the next wave of technical selling. Private analysts believe that this week's kill will be close to 2,269,000 head. If realized, this figure would represent a 2% increase over last week and 1.6% gain from last year. Lean futures should open moderately lower, pressured by spillover selling and the further erosion of carcass value.
| BULL SIDE | BEAR SIDE | ||
| 1) | Suddenly, the cash feedlot trade exploded higher at midweek (i.e., mostly $212 dressed in the North, $7 higher; $130 to $132, $3 to $5 higher), apparently signaling short-bought packer, big meat orders and strong seasonal demand. | 1) | With the cost of cattle surging ahead of carcass value, packer margins are back on the defensive, a reality that could force the reduction of chain speed. |
| 2) |
Open interest in live cattle futures continued to soar to are record levels. The combination of rising commitment and prices is typically a classical sign of bullish market health.
| 2) | For the week ending April 15, U.S. hatcheries set 222 million eggs in incubators; up 3% from a year ago. At the same time, chicks placed in the United States totaled 180 million chicks; up 2%from 2016. |
| 3) | While season pork demand has been a bit slow in surfacing this spring, buying interest may soon be sparked thanks to lower wholesale prices and the opportunity of better late spring and summer margins. | 3) | Significant chart support in summer lean hog futures is clearly breaking down as would-be bulls give up the ghost relative to the development of more constructive fundamentals. Note that practical spot June closed at $69.95, the first settlement below $70 since mid-October. |
| 4) | If lean hog futures were oversold before Wednesday's sell-off, the board now seems in even great need for technical correction. | 4) | The pork carcass value slid lower on Wednesday with the moderate loss tied to softening demand for bellies, hams and loins. |
CATTLE: (Bloomberg News) -- Go ahead, throw another T-bone on the grill. Thanks to a boom in beef production, steaks and burgers will finally be cheap enough this summer to rival pork and chicken.
The surge in output means the U.S. is headed for a meat bonanza. Americans will eat 8 percent more red meat and poultry per capita this year compared with three years earlier -- a record jump in government data going back to 1970. Beef, in particular, is expected to see increased consumer demand as prices in grocery stores drop, making the meat more competitive.
Retailers and restaurants are loading up on beef supplies, signaling that customers will enjoy summer promotions. Adding to the demand outlook is recent news that the U.S. may be getting closer to restarting trade with China, the world's second-biggest beef buyer, opening a market that's been shut since 2003. The brightening picture is drawing the attention of hedge funds, who have the most bullish holding on cattle futures since June 2014.
"If you lower prices enough, you can get products sold not just in the near term, but for the next three to five months," said Altin Kalo, an analyst at Manchester, New Hampshire-based Steiner Consulting Group, an economic and commodity-trading adviser. "For two or three years we were in a situation where beef went up and up, and it became difficult to run full promotions. Suddenly, the market switched and allowed more operators to do that."
Rising beef consumption is sparking a rally for cattle prices, as traders anticipate that meatpackers will need a steady stream of the animals. June futures climbed 2.6 percent to $1.147 a pound last week on the Chicago Mercantile Exchange, after reaching $1.15525, the highest since the contract started trading in February 2016. They rose again Tuesday, gaining 0.4 percent at 8:41 a.m. in Chicago.
Money managers are gearing up for more gains. The cattle net-long position, or the difference between bets on a price increase and wagers on a decline, climbed 1.9 percent to 123,372 futures and options in the week ended April 11, according to U.S. Commodity Futures and Trading Commission data released three days later.
Demand is picking up as retailers have responded to better wholesale pricing with "aggressive" beef promotions, analysts at Greenwood Village, Colorado-based CoBank said in a March report. Beef is seeing its highest share of total advertisements for the three main meats, including chicken and pork, in seven years, CoBank said.
Ground beef in grocery stores has dropped about 9 percent from a year ago, the most recent data from the U.S. Bureau of Labor Statistics show. Steaks are down 6.6 percent.
While pork and chicken and typically less expensive than beef, the gap between the prices is narrowing. Steak's premium over pork chops is down 6.5 percent from a year ago.
Above-average temperatures, favorable to grilling, and strengthening consumer confidence are also helping demand. As of April 7, the four-week average of beef sales for delivery between 22 and 60 days out was 34 percent more than a year earlier, according to U.S. Department of Agriculture data compiled by Steiner Consulting. The trend of higher sales has persisted all this year.
Optimism that China will soon buy U.S. beef is also fueling bulls. President Donald Trump's administration called it a "big prize" after he and Chinese President Xi Jinping agreed to expand American shipments to the country during a meeting this month. China lifted its 2003 ban in September, but difficulties negotiating conditions attached to the re-opening of trade have held up sales.
Even without China, beef exports have chipped away at bigger domestic supplies, with volumes in the first two months of the year up 13 percent, according to the latest government data compiled by the U.S. Meat Export Federation.
An expanding herd and robust slaughter numbers are also deceptive -- supplies are actually tight when looking at market-ready cattle, or those that have been fattening up for months in feedlots and are ready to be bought and processed. The number of animals on feed for more than 120 days was 16 percent lower on March 1 and may be down as much as 12 percent for April 1, according to Kalo of Steiner Consulting.
Even with booming demand and near-term supply tightness, the futures curve signals price declines in the longer-term. Contracts through the end of the year are trading at a discount to June futures.
Output will catch up with demand, and production of other meats will continue to expand, pressuring prices, said Donald Selkin, the New York-based chief market strategist at Newbridge Securities, which manages around $2 billion.
"I don't think there's so much bullishness going into the end of the year," Selkin said. "There's going to be some herd expansion, and there's the realization that there's going to be larger pork and poultry supplies. That's why the bullishness is only near term."
HOGS:(porknetwork.com) -- Despite low domestic prices for pork, global prices are still attractive, and China is expected to import about three million tons of pork in 2017. This is similar to last year's level despite rising domestic production, a senior industry official said.
"Global prices are still attractive for importing pork into China," Juhui Huang, Shanghai-based vice president of Brazilian food conglomerate BRF SA said in an interview. "We expect pork imports will remain the same as last year at around 3 million tons."
China, which accounts for half of the world's pork consumption, has been rebuilding its herd of pigs following widespread culling in 2014 when prices were low.
Smithfield's parent company, WH Group, will evaluate market conditions carefully before expanding pork processing operations in that country because of the over-capacity.
Chairman and CEO Wan Long said he expects pork prices to fall to an average of 14 yuan to 15 yuan ($4.20) per kilo this year after hitting a record high in 2016.
His comments come four years after WH Group bought U.S.-based Smithfield Food Inc., the world's biggest pork producer, for almost $5 billion, in a deal aimed at tapping the massive supplies of U.S. meat for export to China.
Pork demand has been impacted by a slowing economy, too. Consumption growth is expected to slow to less than 1 percent annually through 2020, according to Rabobank.
China has multi-year hog price cycles and seasonal fluctuations in pork demand associated with major holidays, said a USDA report on China's pork industry. The ratio of the price of hogs to the price of corn, both measured in Yuan per kilogram, is used to measure the short-term profitability in hog production and to trigger government interventions, including a hog "price alert" market stabilization program introduced in 2009 to increase meat inventories to support market prices or release inventories to drive down consumer prices. A hog/corn ratio of 6:1 is considered "normal." The national government is using a wide array of programs to encourage the development of hog farms, expand the breeding herd and control diseases.
U.S. and Chinese consumers have tastes that are complementary and should increase trade, the report stated. The U.S. prefers muscle meat while Chinese consumers favor offal and variety meats. U.S. variety meats in 2011 sold at retail for less than half of Beijing variety meat prices, and tails, ears and kidneys have higher average prices in Beijing than spareribs.
The authors note that variety meats account for most of U.S. pork exports to China, but U.S. muscle meat is becoming more competitive.
The environmental impact of hog manure and risks of food safety incidents have received increased attention in recent years, and the authors theorize that environmental impacts and tight feed supplies may limit domestic Chinese pork production.
The authors concluded, "China's status as a major pork importer will likely continue to grow. China's tradition of self-sufficiency in pork will be hard to maintain as feed costs rise and as land for expanding farms and processing facilities becomes scarce and expensive."
Steve Meyer, Vice President at EMI Analytics. agrees with the National Pork Board and NPPC that a major export disruption would be devastating to the industry. Mexico and Canada -- two of U.S. pork's biggest customers -- are pivotal, so a "new and improved" NAFTA is a high priority. New bilateral agreements with other important trading partners in Asia and elsewhere are close behind in importance. Besides the tumultuous political environment, the fear of a foreign animal disease is a real threat, and it difficult to even imagine the impact such an occurrence would have on livestock producers in the U.S.
Pork is still the No. 1 consumed meat in the world, primarily because of China. Keeping it at the top remains a challenge. The National Pork Producers Council (NPPC) is requesting USDA's Plant and Animal Inspection Service to "develop an adequate vaccine bank to address an outbreak in the U.S. for Foot and Mouth Disease.
"FMD presents a critical risk to the U.S. livestock industry," NPPC said in an issue paper presented at the Pork Forum. "An outbreak of the foreign animal disease would cripple the entire agricultural sector and have long-lasting ramifications to the economic viability of U.S. livestock production. It is essential that USDA's APHIS have a robust and timely response capability in the form of a rapidly deployable FMD vaccine bank."
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