With Thanksgiving quickly rising on the horizon, cattle buyers and sellers are stepping into a narrow window of likely business this morning. While Monday should be typically slow, limited to the distribution of new showlists, our guess is that cash players will work hard to have marketing chores completed by Wednesday afternoon. Live and feeder futures should open at least moderately lower, pressured by Friday's confirmation of larger-than-expected placement activity in October.
The cash hog market seems likely to start the short week with bids steady to $1 lower. Needless to say, this week's limited slaughter and pork production could work to temporarily support the wholesale market. At the same time, larger kills next week and in early December are surely being staged. Lean futures are set to open on a mixed basis tied to a combination of short-covering and long liquidation.
| BULL SIDE | BEAR SIDE | ||
| 1) | Cattle buyers will start the week with a bigger appetite (i.e., beyond turkey, dressing, and pumpkin pie), needing to line up slaughter numbers for the full production week following the holiday. | 1) | The October placement activity of big lots turned out to be larger than generally expected, 10% larger than the fall of 2016 and the biggest October placement since 2011. |
| 2) | Deferred cattle futures clearly remain optimistic. February and April live continue to carry larger-than-average premiums to spot December. Furthermore, open interest in Dec was mostly offset by gains in the 2018 contracts last week, with total open interest remaining above 385,000 contracts. | 2) | The choice beef cut-out imploded by more than $3 on Friday, further evidence that the late October price surge was overdone and/or late-year holiday demand has been essentially satisfied. |
| 3) | The pork carcass closed moderately higher on Friday, supported by better demand for bellies, loins, and picnics. | 3) | For the week ended November 14, noncommercial traders reduced their net-long position in lean hog futures by 2,000 contracts to 57,400. |
| 4) | The belly market moved higher in strong fashion last week, which was another stout counter-seasonal move. Both domestic and foreign bacon demand appears to be exceptional, a reality that should help offset seasonal weakness in total carcass value. | 4) | Many expect cash hog markets to steadily decline over the next two to four weeks. Hogs prices could lose 10% to 12% from current levels by the middle of next month. |
CATTLE:
(Independent) -- Brazilian meat industry groups denied on Thursday problems with beef and pork shipments to Russia, after reports that food safety bodies there were evaluating possible irregularities that could lead to an import freeze.
Reuters reported on Wednesday that Russia's agriculture safety watchdog was mulling a ban on all pork and beef imports from Brazil after finding the feed additive ractopamine in some shipments.
Ractopamine is banned in Russia, though some countries deem it safe for human consumption.
"All Brazilian meatpacking companies are obliged to check cattle for ractopamine... Our inconformity problems, from what I can remember, do not include that," Antonio Jorge Camardelli, head of beef exporters association Abiec, told Reuters.
He said Brazil ships between 7,000 and 9,000 tonnes of beef to Russia every month and companies are "comfortable" regarding the health status of the cargos.
ABPA, an association representing pork producers, also denied the possibility of shipments containing the additive. Russia buys around 40 percent of all Brazilian pork exports.
Russia is currently in talks with Brazil over the possible start of wheat exports.
Brazil's agriculture ministry did not return a request for comment.
HOGS:
(fb.org) -- This September the farm-to-retail pork price spread hit a new record high of $3.24 per pound. The farm-to-retail price spread is the calculation between how much the farmer receives versus how much the retailer receives on a per-pound basis. There is the assumption that all players along the supply chain must make some money to stay in business and keep product moving. However, the width of that margin varies by sector and the economic environment in which each segment operates. These calculations are done on a monthly basis by USDA's Economic Research Service (ERS).
Over 50 percent of the retail value is in the retail-to-wholesale price spread, but in September that number surged to 68 percent. In part, this is due to the retail portion climbing since the beginning of the year. In January, ERS estimated retail pork values were $3.57 per pound, compared to September's high of $3.98 per pound. In comparison, the wholesale value peaked much earlier this year, in July at $1.86 per pound, compared to October's value of $1.21 per pound. It is this difference that has caused the wholesale--to-retail spread to also have set record-high margins this September. However, the October wholesale--to-retail spread dropped $0.004 per pound from September's record-high spread of $2.69 per pound.
The other side of the farm-to-retail spread is the difference between net farm value and wholesale value, which captures, in essence, the price difference between what a packer pays for an animal and what they can sell it for after processing. This value is closer to the long-term average proportion of the retail value of 13.4 percent. In September, this proportion was slightly higher at 13.7 percent, followed by October coming in below average at 12.2 percent. The farmers' share is typically just over 30 percent, but in September and October of this year that share was under 20 percent.
Despite some compression in packer margins, packers are still making some money on a per-head basis, which has enabled them to purchase hogs at competitive prices. The two new packing plants in Iowa and Michigan -- since opening in September -- have been ramping up production and have increased the demand for slaughter hogs. As a result from the increased competition, slaughter hog prices have rallied through October. Since the last week of September, hog prices have risen $10.54 per hundredweight, before plateauing in the most recent week at $68.01 per hundredweight. This has also bolstered margins on the producer side -- increasing farrow to finishing returns from a loss of $13 per head in September to a loss of $1 per head in October.
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