As cattle market watchers step into a new week, cash and futures seem to be pulling in opposite directions. Which side has more horsepower will be the big question to resolve. Yet it could remain in play until Thursday or Friday. At any rate, Monday's activity will be limited to the distribution of new showlists. Our guess is that the new offering will be steady to somewhat larger than last week. Look for live and feeder futures to open on a mixed basis thanks to follow-through selling on one hand and cash premiums on the other.
Look for cash hog buyers to resume work Monday with bids steady to $1 higher. The country trade definitely had a firm undertone last week. But how much of that was tied to a temporary disruption in ready numbers linked to bitter cold temperatures. On the other hand, numbers should be seasonally tightening as we cut into the traditionally smaller summer pig crop. Lean contracts should also open mixed linked to a combination of technical buying and the discounted cash index.
| BULL SIDE | BEAR SIDE | ||
| 1) | Ignoring Friday's sharp break in live futures, the late-week feedlot trade held up reasonably well. Southern cattle were sold just a buck lower than the prior week (and nearly $3 over spot Feb), and dressed deals in the North were marked mostly steady at $195. It would appear feedlot managers still have plenty of leverage. | 1) | In the wake of triple-digit losses through the CME cattle complex on Friday, the board starts the week looking technically challenged (to say the least). All live contracts are all starting the week well below 100-day moving averages. |
| 2) | Beef packers will start out the first full production week of January still short bought and needing cattle. Further processing margins have improved significantly (e.g., from Friday to Friday, the choice and select surged $6.61 and $9.34, respectively; daily box volume through the short week was 13% greater than the short week following Christmas). | 2) | Given extreme winter weather stalking the East Coast since late last week, it's a good bet that meat case movement and restaurant business over the weekend was less than stellar. |
| 3) | Though smaller than expected, December job growth totaled 148,000, the 87th consecutive month of job growth. Average hourly earnings grew by 9 cents, to $26.63, bringing the year-over-year increase to 2.5%. | 3) | Stronger cash hog prices last week were support in part by bitter cold temperatures across much of production country and slower movement out of finishing barns. Moderating weather this week could permit more barrows and gilts to come to market and pressure prices. |
| 4) |
Weekly export numbers stayed strong throughout end of 2017; starting 2018 in similar fashion; expected to exceed last year's increase by 8%.
| 4) | Nearby lean hog futures may be over extended (e.g., spot Feb is currently $7 over the latest cash index) for the moment until there is solid evidence that the cash market can consistently move higher. |
CATTLE:(beefmagazine.com) -- There's something important going on in the beef market -- namely, the relative contribution of middle versus end meats to the overall cutout is diverging.
First, some quick review for context. Around 90% of the cutout is comprised of the four major primals: round, loin, rib and chuck. USDA explains that, "The boxed beef cutout represents the estimated gross value of a beef carcass based on FOB prices paid for individual beef items derived from the carcass."
In other words, packers report individual item wholesale values based on their respective sales to customers. Those prices are then aggregated by USDA into an index for each primal and then subsequently compiled into an overall cutout value.
There has been a strong surge in the contribution of the middle meats (rib and loin) that started in early-January 2015. That surge peaked late summer 2016. However, as the relative middle-meat contribution waned, the new low marks are almost equal to the longer-running resistance points -- hence reflecting the divergence over time.
Based on this data, it appears the rib and loin are finding new pricing power in the marketplace. Stated another way, consumers are clamoring for quality and high-end beef cuts.
As a result, the rib and loin has consistently been deriving a greater portion of carcass value versus the chuck and round. That's a favorable sign for beef demand and underscores the importance of de-commoditizing beef versus pork and poultry.
HOGS:(Successful Farming) -- The history of the former Premium Standard Farms (PSF) hog operation in northern Missouri is as tortured as any in the modern swine industry.
When Smithfield Foods bought the formerly bankrupt 221,000-sow complex in 2006, PSF was the second largest pork producer in the U.S. (behind Smithfield). It was bogged down in nuisance lawsuits, the barns were in disrepair, and pig performance was poor.
Keeping the operation running was a struggle for several years after the purchase. One industry analyst told Successful Farming magazine in 2011, "I advised them to get a bunch of bulldozers and push it in a hole and walk away. That would be cheaper than feeding it."
Smithfield stuck with the business, now called Smithfield Hog Production - Missouri, bringing in a new general manager, Michael Rainwater, more than six years ago and infusing substantial capital to turn the operation around.
A tour of the headquarters and a winding drive up and down rolling hills between Princeton and Milan showcases the improvements made to the pork complex, which includes 56 sow farms over 600 square miles. (There are also 7,500 sows in Wayne County, Illinois, as part of gilt multiplication.)
Sow units are in clusters with three to 16 barns in a cluster. The finishing sites are in clusters of eight barns, with sites ranging from five to 17 clusters. Each barn holds 1,100 pigs.
These tight building clusters reflected historic design practices that had to be overcome.
"All this was built before PRRS was a big problem," says Rainwater. "These large concentrations of animals can involve ongoing animal health challenges."
Rainwater, who joined Smithfield in 2008 to run its Oklahoma sow farms, was assigned in 2011 to run the struggling northern Missouri operations. At the time, Premium Standard Farms was facing nuisance lawsuits, a federal and a state consent decree, and a corporate farming law issue. Most importantly, the operation was struggling to be competitive in the Smithfield system.
Monday, Smithfield-Missouri is producing more pigs from fewer sows, has resolved the disease and labor issues, and has settled most legal issues. "We've been on a growth path in the last five years. That's all been about understanding our role within Smithfield and making the most with what we've got," says Rainwater."
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