The cash cattle market could start to take on some definition at midweek in terms of a few preliminary bids and asking prices. Buyers and sellers will be watching for clues from the FCE internet trade later the morning. Live and feeder futures should open lower, pressured by follow-through selling and uncertain cash potential.
Look for the cash hog trade to open with bids steady to .50 lower. Lean futures are expect to begin with a firm undertone, supported by residual buying and midweek short-covering.
| BULL SIDE | BEAR SIDE | ||
| 1) | Beef cutouts closed higher on Tuesday with the select box surging more than a buck higher for the second consecutive session. Furthermore, after being described as "heavy" all last week, box supplies now seem more manageable, described as "light to moderate." | 1) | Live and feeder futures tried to bounce higher early Tuesday, but reversed through the session thanks to long liquidation and technical selling. The board continues to exhibit expectations of lower cattle and beef prices going into late summer and fall. |
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With live cattle open interest down 15% from early May highs and at the lowest since the latter part of March, long liquidation is at least much less of a bearish threat than earlier this spring.
| 2) | As spot August live sinks toward long-term support around $112 to $112.50, the strengthening basis is likely to strip feedlot managers of cash leverage. |
| 3) | Frozen pork supplies as of June 30 were down 5% from the previous month and down 4% from last year. Stocks of pork bellies were down 29% from last month and down 65% from last year. Given record production, these numbers imply strong foreign demand. | 3) |
Total frozen poultry supplies as of June 30 were up 4% from the previous month and up 4% from a year ago. Total stocks of chicken were up 3% from the previous month but down 1% from last year. Total pounds of turkey in freezers were up 7% from last month and up 12% 2016.
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| 4) | This week's hog kill should be about the same as last week at 2,214,000 head. Given attractive processing margins, packers have plenty of incentive to ramp up slaughter totals if the hogs are available. Apparently, extra hogs are not out there yet. | 4) | The short-term and long-term market trends in lean hog futures remain bearish and the market structure is also bearish, with the August contract trading at a significant discount to the cash hog market. |
CATTLE: (food.market.com) -- USDA provided several key updates last week when it released the July Cattle inventory report along with its monthly Cattle on Feed report. The mid-year cattle inventory report provided the first estimate of the 2017 calf crop, which at 36.3 million head was 3.5 percent larger than the 2016 calf crop. The year-over-year increase in the calf crop's size was slightly larger than in 2016, when the U.S. calf crop increased 2.9 percent compared to the prior year. This is the third consecutive year that the calf crop size has increased after bottoming out at 33.5 million head in 2014. The calf crop increase continues to point to larger slaughter cattle supplies in both 2018 and 2019, despite the downturn in profitability experienced by U.S. cow-calf operations.
Year-to-year comparisons of other data included in the cattle inventory report are not possible since USDA did not publish the mid-year report last year because of budget pressure. Despite that shortcoming, the report does provide some key insights into developing changes in the industry. The July 1 all cattle and calves inventory estimate was 102.6 million head, which was the first time the July inventory was above 100 million head since 2011. The beef cow inventory of 32.5 million head was 6.6 percent larger than two years ago and was the largest July inventory since 2008. Both of these estimates are consistent with the expansion observed on the January inventory report.
Although it's not clear from the report that beef industry expansion has come to a grinding halt, it does suggest expansion interest is waning. For example, the number of beef heifers being held by producers for herd replacement on July 1st was 2 percent smaller than in 2015 and, when expressed as a percentage of the beef cow inventory totaled just 14.5 percent. In contrast, when the beef industry was expanding rapidly this ratio climbed above 15 percent. Additionally, the ratio of female (cow and heifer) slaughter relative to steer slaughter has been above a year ago 5 out of the last six months, the exception occurring in February. The increase in female relative to steer slaughter suggests herd expansion has slowed, if it has not actually come to a complete halt.
USDA's Cattle on Feed report confirmed that the on feed inventory remains well above last year. Early in 2017 the on feed inventory was very near a year earlier, but net placements on feed have been substantially above the prior year every month except February. The placement build-up means that, despite a good marketing pace throughout 2017, pushed the on feed inventory up with a July 1 inventory that was 4.5 percent above the prior year. The combination of a larger cattle on feed inventory and larger placements both point to fed cattle marketings during the last half of 2017 remaining above 2016's.
Commercial cattle slaughter was 6.5 percent larger during the first half of 2017 than in 2016. But cattle weights were lower than a year earlier, averaging 1.7 percent below the January-June 2016 average. As a result, beef production during 2017's first half increased just 4.8 percent compared to the same period in 2016. The on feed inventory and placement pattern both point to beef production remaining above a year earlier throughout the rest of 2017, although the year-over-year increases are expected to moderate.
Recent eastern Corn Belt calf prices, although based on seasonally small summer calf marketings, have been modestly higher than a year ago. Prices in Kentucky markets reported by USDA for 500-600 pound steers averaged in the mid-$150s during the first half of July, compared to the mid-$140s a year earlier. Prices are likely to remain near that range, with seasonal weakness expected in October when calf marketings increase. Last year prices for 500-600 pound steers in Kentucky dropped into the $112 to $120 range in October and early November. Prices for 500-600 pound Kentucky steers this fall are expected to be somewhat stronger than in fall 2016, but feed grain price movement between now and fall could have an effect on prices. If feed prices remain near recent levels, prices in Kentucky markets for 500-600 pound steers could average in the $120s to the $130s.
HOGS: (Rabobank) -- Global pork trade is facing new dynamics, driven by price developments, new trade deals, and more challenging business environments, according to RaboResearch's latest Global Pork Quarterly.
"While China's pork imports have begun to slow down, other traditional importing countries have reported significant growth," says Chenjun Pan, RaboResearch Senior Analyst -- Animal Protein. "Looking to the second half of 2017, global pork supply is expected to increase further, and competition for global consumers will intensify." This potential softening bias on prices contrasts with the stability of the Rabobank Five-Nation Hog Price Index thus far in 2017. In the first five months of 2017, China's pork imports were flat, which contrasts with the significant growth seen in 1H 2016. The recovery of local production and strong international prices is believed to be responsible for slower imports. In China, pork prices have declined by 30%, from the record levels of last year. As a result, Chinese traders are taking a more cautious approach to imports in 2017.
Rabobank holds the view that China's pork production will increase by about 2% in 2017. Hog production recovery was faster than expected in 1H, as many producers shared a positive view of the market and made rapid herd replenishments. While the expansion of hog production should continue in 2H 2017, it has been slowed by the price plunge in Q2.
"The emergence of these new trade dynamics will be the most important market development in the second half of this year," according to Justin Sherrard, RaboResearch Global Strategist -- Animal Protein.
Tight supply and firm demand have maintained upward pressure on prices and starting to challenge exporters. In this context, the recently announced trade pact with Japan, offering tariff reductions, is good news for European exporters.
US pork exports still face uncertainty due to potential trade policy changes and a strong currency, but have been better than expected thus far in 2017. With weaker demand from China offset by stronger demand from Mexico, total exports are expected to increase by about 10%, compared with 2016. Increasing US exports are becoming even more important as production continues to expand.
Brazil faces great challenges due to political turmoil, and exports in recent months have declined significantly. However, even with these challenges, Brazil's pork market is still expected to deliver a positive result, due to lower supply, favourable feed prices, and a favourable exchange rate.
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