Assuming that cattle buyers would like procurement chores completed by Thursday night, it seems like a good bet that packer inquiry will start to take shape Wednesday. Perhaps late-morning results tied to FCE business will nudge country trading in one direction or the other. Our guess is that asking prices will start out around $136 in the South and $215 plus in the North. Live and feeder futures should open moderately lower Wednesday, initially checked by follow-through selling and eroding carcass value.
Hog buyers are expected to return to work Wednesday with bids steady to $1 higher. With carcass values still appreciating at a faster rate than the cost of live inventory, pork processing marginsare improving. Needless to say, this reality bodes well for further improvement in the country next week, especially as market receipts start to tighten more dramatically. Lean futures are staged to open moderately higher thanks to follow-through buying and encouraging product demand.
| BULL SIDE | BEAR SIDE | ||
| 1) | Initial pasture and range ratings this spring look historically favorable in all major grazing areas. Such a realty should work to check feedlot placement activity this week and next. | 1) | Beef cutouts plunged sharply lower on Tuesday, a predictable sign that many retailers and food managers are simply out of the market until after the holiday. |
| 2) | Larger total open interest on higher prices in recent days suggests additional buying interest with noncommercials still sporting a large net-long commitment in live cattle futures. | 2) | Between Monday's large pullback from session highs and follow-through selling that surfaced Tuesday, significant overhead resistance has been reinforced in the June live cattle chart. |
| 3) | Late-spring pork demand really seems to be on a roll. The cutout surged sharply higher again on Tuesday, powered by stronger demand for all primal except the loin. | 3) | Given the fact that U.S./China beef negotiations seem to be developing nicely, with some believing U.S. exporters will be shipping beef to China as early as late June, it's possible that U.S. pork shipments could be checked to some extent as China realigns its red meat mix. |
| 4) | Interest in bull spending in lean hog futures continues to grow, a reflection of cash market optimism over the next 30 to 45 days. Note that spot June closed over $80 on Tuesday, a new contract high close. | 4) | As summer lean hog futures sit on the threshold of the low $80's, they approach the price area that many analysts have long considered to represent a best case scenario. A more promising collection of fundamentals may be very difficult to assemble. |
CATTLE: (Dow Jones) -- Shares of Brazilian meatpacker JBS plunged more than 30% Monday, costing the company about $2 billion, after President Michel Temer accused its owners of insider trading as part of a bitter battle over the country's corruption scandal.
JBS's shares have slumped since its executives said in documents made public last week by the country's top court that they bribed Mr. Temer and his two predecessors as part of its involvement in the graft scheme, raising fears over the company's future and its planned initial public offering in the U.S.
In a televised address Saturday, Mr. Temer said JBS's executives were lying and accused company Chairman Joesley Batista of making "millions and millions of dollars" by buying $1 billion in dollar contracts and selling the company's shares before leaking the allegations about him to the press.
The accusations accelerated JBS's share losses Monday, sending shares in São Paulo down 31.34% to 5.98 reais ($1.83). The drop erased about 7 billion reais ($2.14 billion) of its market cap in a matter of hours, said Guilherme Figueiredo, a fund manager at São Paulo-based investment firm M. Safra.
JBS has denied wrongful trades.
Moody's Investors Service downgraded both JBS and JBS USA by one notch Monday, citing increased risks related to potential future litigation.
"The IPO is dead -- [JBS's] name has been soiled in all markets," said Pedro Galdi, an analyst at São Paulo-based research firm Upside Investor.
JBS planned to list its international unit in the U.S. this year as part of its global reorganization plan. In May, it said it is delaying the listing because of the company's legal troubles but vowed it would go ahead at some point.
"It will likely have to go down the route of selling some assets," said Mr. Galdi. ] "JBS's operations are continuing at a normal pace, as set out in the business plan. The company has a robust financial situation and believes in the quality of its products and services," JBS said late Monday.
J&F, the holding company owned by Mr. Batista's family, may consider selling its pulp and paper company, Eldorado Brasil Celulose, and/or Alpargatas, owner of the popular flip-flop Havaianas brand.
"It will be much more expensive to get credit -- it will have to rethink its management strategy," Mr. Galdi said.
Brazilian market regulator CVM has opened five separate probes into the family holding firm, JBS, and Banco Original, which is also owned by J&F, over the past week following the allegations.
Once a butcher's shop, the global meatpacker has become the latest company to admit involvement in the Car Wash corruption investigation, which began three years ago and has since ballooned into the biggest scandal of its kind in Brazilian history.
Executives involved in the scheme have increasingly turned on their former allies in government, signing tell-all plea bargains with prosecutors in a desperate attempt to avoid jail time.
Mr. Batista, his brother and five other executives signed plea bargain deals with prosecutors in which they have agreed to pay a total of 225 million reais. JBS is also negotiating a leniency deal with prosecutors, who have demanded more than 11 billion reais to settle the case.
HOGS: (National Hog Farmer) -- Last fall we all feared a debacle in hog prices as concern mounted that slaughter capacity would be exceeded and result in a collapse in hog prices. It never happened.
It turns out that packer margins were highly profitable, so profitable that they were willing to pay overtime and process numbers above capacity without breaking cash hog prices severely. During the first two months of this year, when virtually no hogs were backed up during the early winter and the holidays, cash prices surged higher until finally peaking in February. Cash prices were then throttled lower during much of April as supplies were consistently larger than expected.
However, this behavior was eventually rectified as surging demand for pork once again saved the day. Cash hog prices have since rallied sharply during May almost as if a "bullish" switch had been turned on. In reflection, first quarter pork exports were up 17% compared to the first quarter of 2016. This represents a huge year-over-year change in trade. Typically we speak of exports being up or down 2% to 4%, not 17%. During the quarter exports to Mexico were up 33%, up 8% to Japan, up 32% to South Korea, up 34% to Australia, up 98% to Colombia, up 28% to the Dominican Republic and up 5% to the Philippines. During the quarter, exports were unchanged to Canada and down 12% to China/Hong Kong. So, the huge growth in exports occurred without the help from China. First-quarter pork exports as a percentage of production equaled 22.3% compared to 19.6% in the first quarter of 2016. Again, these are very impressive trends and should they continue one can anticipate higher hog prices during the course of 2017.
Finally, on the export front, the U.S. dollar has been trending lower making pork exports more attractive. Very few thought we'd be experiencing a weakening dollar during the course of 2017.
Domestic pork demand has also been powerfully strong. On the backside of record large pork production last year, total frozen pork stocks, as of April 1, were down 10% compared to last year. Clearly this indicates that usage has been greater than production, forcing a drawdown in frozen supply. Ham stocks on April 1 were down 6% from last year. Belly stocks were down 69%, loin stocks down 24% and trimmings were down 9%. Pork sparerib stocks were unchanged from last year with pork butts up 12%.
Looking ahead, the USDA is forecasting record large production this year as producers continue to expand at a steady, but cautious, rate. Pork production for this year is currently forecast at 26.0 billion pounds, or up 4.4% from last year. For 2018, the USDA is projecting production to be 26.9 billion pounds, or up 3% from this year. Both years would be record high production. I [Dennis Smith] have no quarrel with these projections although we're hearing that hog weights are declining a bit faster than normal due to quality issues with corn. Lower weights than expected might shave some production off future forecasts. The real good news for hog producers is the fact that slaughter capacity will be increasing into next year with total slaughter capacity slated to increase by 8%. Finally, export projections indicate that exports this year will rise by nearly 8% with exports for next year slated to increase by another 4%. These are very positive trends and actually project to only a very small increase in per capita pork supplies for this year. In addition, the huge pace of first quarter pork exports could indicate that actual exports may exceed projections.
From an analyst/trader standpoint there are several items that I'm watching closely going into summer. First, I'm hearing that bellies are being pulled out of the freezer during May. If this is correct, fresh belly prices could become explosive and wild this summer as usage increases and production declines. An increasingly large portion of bacon demand is centered in food service demand which, in my opinion, is more inelastic. For example, the widespread use of bacon at the fast food restaurant represents inelastic demand for bacon. Arby's has just re-introduced their pork belly sandwich. Chick-fil-A has just introduced, for the first time, a chicken sandwich topped with bacon. Burger King is advertising their burgers topped with bacon and McDonald's has featured bacon on their menu for months. These sandwiches won't be pulled from these menus regardless of the price of bacon.
Second, another item I'll be watching closely this summer will be packer processing margins. Finally, I'll be closely watching the size of the hog runs and the resulting seasonal decline in pork production. Last year the August lean hog contract reached $90 before topping. Summer hog futures contracts are just now testing and penetrating resistance levels at $80. In my opinion the summer hog market has $5 upside potential and possibly as much as $10 from current prices. Are you ready for the summer hog market?
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