Activity in the cash cattle market Tuesday may depend upon perceived basis opportunities. If the board keeps drifting lower, early-week packer bids near steady with last week could look relatively attractive to some risk managers. On the other hand, if the board falls sharply lower, it will be very difficult for sellers to hold cash steady. If futures dig in and work higher, significant trade volume in cattle country could be delayed until later in the week. Live and feeder futures will probably open moderately lower thanks to Monday's late sell-off and cash uncertainty.
Look for hog buyers to resume procurement chores Tuesday with basically steady bids. While the jury remains out, there are a few signs that supplies may be slowly becoming more manageable. That said, this week's kill could total right at 2.4 million head. This could be the largest kill we see going forward in months. Lean futures should open at least moderately higher, supported by residual buying and seasonal optimism.
| BULL SIDE | BEAR SIDE | ||
| 1) | Although the national beef cutout dropped more than $3 last night, out-front sales (i.e., with delivery of 22 days or more) jumped to 1,218 loads. This seems to be a hopeful sign that retailers and food managers are beginning to think ahead in terms of aggressive seasonal features of late spring and early summer. | 1) |
New showlists distributed in feedlot country look generally larger than last week, especially in Texas.
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| 2) | Early-bird number-crunchers expect March placement activity to come in later this month as much as 10% to 15% below 2017. | 2) | The inability of live and feeder futures to hold the high ground on Monday clearly indicated that specs and commercials remain nervous about early-spring cash cattle and beef prospects. |
| 3) | The impressive rally in lean hog futures Monday, together with decent strength in the soybean market, suggests that traders in general are becoming less fearful of a trade war with China. | 3) | While Monday's triple-digit rally was a brief boon to psychology, the move was probably just a technical bounce and does not represent a change in near-term sentiment or trend. |
| 4) |
NAFTA optimism is increasingly significant in all three corners with more and more observers believing that a new deal will actually be inked (see article below).
| 4) | During the week ending April 3, noncommercial traders were net sellers of lean hog futures, decreasing their net-long position by 4,300 contracts to the 3,100 level. |
CATTLE: (Marfrig Global Foods) -- Marfrig Global Foods, one of the world's largest animal protein producers, announces that on Monday it reached an agreement for the acquisition of 51% of the membership interests in National Beef Packing Company, LLC, the fourth-largest beef processor in the United States.
Marfrig has agreed to pay US$ 969 million for the equity interest and, once the transaction is concluded, will become the world's second-largest beef processor, with consolidated sales of R$ 43 billion (US$ 13 billion).
Founded in 1992, National Beef reported sales of US$ 7.3 billion (R$ 24.3 billion) in 2017 and, since 2011, has been controlled by Leucadia National Corporation, which currently holds a 79% interest. National Beef has a slaughtering capacity of 12,000 heads of cattle per day and is headquartered in Kansas City. It has 2 slaughterhouses located in Dodge City and Liberal, Kansas and accounts for approximately 13% of total U.S. cattle slaughtering capacity. National Beef is one of the most profitable beef companies in the United States. Once the transaction closes, Leucadia will transfer control to Marfrig and remain a minority shareholder in National Beef, with a 31% interest. The US Premium Beef, an association of American producers, will hold 15% and other shareholders with the remaining 3%.
Leucadia and the other investors have agreed not to sell their shares in National Beef for at least five years.
The transaction imputes an enterprise value to National Beef of US$ 2.3 billion, including debt, which results in an EV/LTM EBITDA multiple of 4.4 times.
With the acquisition of National Beef, Marfrig achieves two key objectives outlined in its strategic plan. First, it consolidates its strong position in the beef industry, which is the Marfrig's original core business. A leader in the U.S. beef industry, National Beef exports to 40 countries, including Japan, which is a market currently closed to beef exports from Brazil. In 2017, Marfrig reported adjusted EBITDA of R$ 1.7 billion (US$ 516 billion). With National Beef, its pro-forma EBITDA will increase to R$ 3.4 billion (US$ 1.0 billion).
"The acquisition of National Beef represents the realization of a unique opportunity," said MartÃn Secco, CEO of Marfrig. "With the transaction, we will have operations in the world's two largest beef markets, will gain access to extremely sophisticated consumer countries and will be able to grow while maintaining rigorous financial discipline."
The second key objective the transaction achieves is improving Marfrig's leverage ratio. Upon closing, Marfrig will consolidate 100% of the results of National Beef. Last year, Marfrig's total debt corresponded to 4.55 times its Ebitda. With the acquisition, this ratio decreases to 3.35 times. The transaction will be financed by a loan from Rabobank.
Other measures to deleverage Marfrig are in place including the decision of selling Keystone Foods, a leading supplier of high-quality, value-added food products to the world's leading foodservice, retail and convenience, and industrial brands. This sale together with the National Beef transaction, should help Marfrig to achieve its goal of reaching a leverage ratio of 2.5 times by the end of 2018. "The acquisition of National Beef reflects our sustainable growth strategy," says Marcos Molina, chairman of the Board of Directors of Marfrig Global Foods. "From now on, we have become the Brazilian company of the sector with the best financial health, proved into the lowest rates of leverage."
The key executives of National Beef, including its CEO Tim Klein, will continue to manage and remain at the company. The Board of Managers of National Beef will consist of nine members, of which five will be nominated by Marfrig, two by Leucadia and two by the other minority members. "We are pleased to remain a significant shareholder in National Beef and to partner with Marfrig and the company's management team in its continued development", said Rich Handler, CEO at Leucadia and Brian Friedman, President of Leucadia.
Rabo Securities USA acted as Marfrig's financial advisor in the acquisition transaction of the National Beef stock control. Linklaters LLP acted as international counsel and Lefosse Advogados acted as Brazilian counsel to Marfrig.
HOGS: (CNBC) -- President Donald Trump and his Mexican and Canadian counterparts are likely to publicly tout signs of progress in renegotiating NAFTA when they meet in Peru on Friday, even if the hard details are not resolved. Analysts say the anticipated nod of endorsement from the three leaders at the Summit of the Americas will be a likely prelude to a renegotiated North American Free Trade Agreement in coming weeks.
Negotiations between the three countries, previously mired by unpalatable U.S. demands, have made progress just as Trump's rhetoric against China's trade policies increased. Trump last week threatened tariffs on another $100 billion in Chinese goods after China retaliated with threats of its own tariffs on American agricultural and other products. That was in response to the Trump administration's earlier proposed $50 billion in tariffs on Chinese goods.
As for North American trade, there has been an effort to reach an agreement in principle this month as election activity in Mexico ramps up ahead of a July 1 vote. There even appears to be progress on the thorniest issue -- the U.S. demand for more NAFTA and U.S. components in automobiles.
"From a policy point of view, they all have an incentive to make this work. The Republicans need to demonstrate to the agricultural places in this country that are going to be important for the House and Senate races that trade policy is not going to just be hurting them," said Tom Block, Fundstrat Washington policy advisor. Block notes that the farm states, which would be hurt by proposed Chinese tariffs on grains, are all Republican strongholds that had voted for Trump.
"I think that they're looking for a way of demonstrating that they're going... to be tough on China but show they have an ability to walk and chew gum at the same time and they can be more accommodating toward NAFTA," said Block. "I think that's going to send a signal to the agricultural and business communities that 'we're going to be smart about this and not just blindly anti-trade.'"
Trump said Monday there was progress on NAFTA, and he repeated his threat to end the deal if the U.S. does not get a favorable agreement. He also commented directly on farmers, saying if China hits farmers because they think it hurts him, the administration will make it up to the farmers, suggesting some form of aid or subsidy.
"We're fairly close on NAFTA, and if we don't make the right deal, we'll terminate NAFTA and make the right deal after that," he told the media after a cabinet meeting. "We have a chance to make a deal on NAFTA."
Trump's economic team over the weekend emphasized the potential for negotiating trade concessions with China after the violent stock market reaction Friday to the president's threat.
"There are still issues to be resolved and the U.S. will not get everything Trump wants on issues such as a dispute resolution mechanism and agribusiness subsidies, but sources continue to believe that an agreement in principle could be unveiled in the next few weeks, especially since all sides apparently have agreed on auto content rules," notes Greg Valliere, chief global analyst at Horizon Investments.
The Trump administration may also be concerned more broadly about what could happen to business activity if the U.S. appears protectionist and inflexible. "I think they're starting to understand how you negotiate these deals has an effect on your economy," said Juan Carlos Hartasanchez, a senior director of Albright Stonebridge Group.
On Monday, Mexico's economy minister, Ildefonso Guajardo, said in a television interview that he sees an 80 percent chance for a new deal by the first week of May.
White House economic advisor Larry Kudlow on Monday told CNBC that talks are moving forward and "good progress is being made." He noted that Trump exempted both Canada and Mexico from aluminum and steel tariffs, pending a successful reworking of NAFTA.
Valliere said even rough outlines of a deal would be encouraging for the markets.
"Many Republican lawmakers fear the electoral implications of a China dispute in the U.S. farm belt, and supply-siders -- including Larry Kudlow -- fear the dollar amount of potential tariffs could negate some of the impact of tax cuts, even though the overall GDP impact of the trade dispute still looks modest -- for now," Valliere said.
Analysts say Canada and Mexico may have more leverage in the negotiations now that the U.S. has become more interested in a deal.
"It's become a win-win for Trump. He has a double consideration," said Carlos Peterson, Mexico analyst at Eurasia Group. "He has the Midwest manufacturing states that want to see NAFTA change, and he has the traditional Republican states [in the farm belt] that want to see him preserve most of NAFTA and what has benefited most of these other states."
Peterson said the talks between the negotiators are now very technical. While there has been more agreement on auto content, he said there is not total agreement. For instance, Mexico is unlikely to give in to a U.S. demand that automotive salaries be raised to $15 an hour for workers in the auto sector. The U.S. has sought 85 percent NAFTA content in all vehicles and 50 percent U.S. content. Peterson said components are being grouped in five categories and some components will receive stricter content requirements than others.
Canada has also pushed for dispute resolution to remain as something arbitrated among the three NAFTA members, instead of having complaints go to local courts, as the U.S. demands.
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