Most major cattle-feeding states saw the development of light trade volume on Tuesday as some feedlot managers (either hedgers seizing strong basis levels or simply producers unnerved by ever-deepening board discounts) moved to accept significantly lower bids (i.e., $117 to $118 in the South; mostly $188 dressed in the North). Excuse the broken record, but the timing of further cash business this week will depend a great deal upon what the board does Wednesday and through the end of the week. Live and feeder futures should open at least moderately lower, pressed by further long liquidation, technical selling and defensive fundamentals.
How long will it take for lean hog futures to shake off the shock of the new Chinese tariffs? What a tough question to answer. Probably longer than Wednesday. Possibly longer than this week. We expect the bearish reaction to continue Wednesday. To be sure, charts are oversold (even more in the cattle complex). But such technical trivia often just doesn't matter when market psychology like this gets so extreme. The cash hog trade is expected to open with bids steady to $1 lower. It looks like those waiting for supply and demand fundamentals to shift in a price-friendly direction will have a longer wait.
| BULL SIDE | BEAR SIDE | ||
| 1) | As of April 1, Japan has restored lower tariffs on frozen beef from the U.S., ending a hike put in place eight months earlier to protect domestic producers. Between Aug. 1 and March 31, the duty was raised to 50%, from Japan's standard 38.5% rate, as a surge in imports triggered a long-standing "safeguard" mechanism. | 1) | Once again we've seen some early-week cracks in the cash cattle. Given $3 to $4 lower live sales here and there, feedlot managers continue to be spooked by the nonstop, panicky retreat of live and feeder futures. |
| 2) | At the risk of sounding like the lamest of cattle bulls, nothing goes down forever. More specifically, the June contract is in the lower 2% area of the historical price distribution. At the very least point, the market will eventually rally from a veryoversold technical situation. | 2) | Perhaps reacting in part to predictions of an unseasonably cool spring, beef cutouts continue to erode. Carcass value lost more ground on Tuesday with box supplies described as "moderate to heavy." |
| 3) | The increased tariff imposed by China on U.S. pork may hurt less than some assume. U.S. pork prices will drop due to the Chinese tariff and these lower U.S. prices will help sell some added pork domestically. In addition, the increase in EU and Canadian (or other global competitors) export volume to China means they will export less to some countries and the U.S. will pick up some of that export business. | 3) | With no white flags raised over the White House or Beijing, hog traders fearing the worst from a trade war had no place to hide on Tuesday. Lean futures were hammered again Tuesday with all issues posting new life-of-contracts lows. |
| 4) | With the spread between the cash lean index (i.e., $56 as of April 2) and Tuesday's carcass values (i.e., $71) wider than a barn door (i.e., $15), processing margins are excellent. Hog buyers should turn aggressive the moment they sense a tightening in seasonal supplies. | 4) | Although the national carcass base dropped another buck plus on Tuesday, packer cash bids still managed to move more than 11,000 barrows and gilts. Furthermore, we continue to hear stories of an awkward number of 300-pound live market hogs in the slaughter. Country supplies have not yet turned a friendlier corner. |
CATTLE: (The Miami News-Record) -- As analysts projected, beef production thus far in 2018 is higher year over year, with increased cattle slaughter and carcass weights in evidence.
"Beef demand has continued strong carrying forward momentum from 2017," said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist. "Cattle prices, both feeder and fed, along with wholesale and retail beef prices have generally been higher year over year."
Despite the challenges of growing cattle and beef supplies -- in addition to seasonal pressure ahead in many markets -- cattle market fundamentals appear to be supportive and stable at this time. Still, cash cattle prices recently dropped sharply, led by weaker feeder and live futures.
"This reflects the biggest threat to cattle markets, an increasingly turbulent and murky macroeconomic environment," Peel said.
By some measures, the U.S. economy is quite strong after many months of steady if plodding recovery and growth. Unemployment has continued to decline and is projected to average less than 4 percent in 2018. The Federal Reserve, eyeing potential inflationary pressures as growth continues, raised interest rates recently for the sixth time since 2015.
"The recently enacted tax reform measures are an additional expansionary push for the economy that adds to Federal Reserve concerns about inflation and makes additional interest rate increases likely and more frequent," Peel said.
The Federal Reserve currently is projecting the economy to grow at 2.7 percent in 2018.
Simultaneously, the black cloud of trade uncertainty which has hung over markets for months has erupted into a storm. The U.S. announcement of tariffs on imported steel and aluminum roiled markets and has prompted much speculation about potential retaliation among trade partners.
"While recent administration announcements significantly weaken the metal tariffs with numerous exemptions, uncertainty remains high," Peel said.
"Subsequent announcements of tariffs on U.S. products and the extent of a possible trade war are adding to the anxiety, as are the fate of the North American Free Trade Agreement and other trade policies."
Peel explains recent negative reaction in the stock market and futures markets is only the initial impact of a wide range of potential ripple effects in the economy. These negative trade impacts could threaten economic growth going forward.
"It's as though the economy has one foot on the accelerator and another foot on the brakes, making it extremely difficult to figure out what happens next or, perhaps more importantly, what happens after that," Peel said. "Markets, in general, are increasingly scared and running for cover. The fear of the unknown may be the worst of it but the reality of the unknown could be far worse."
The result is an external environment for cattle markets that is especially difficult to sort out and anticipate. Should cattle producers be running for cover as well?
"Probably not yet but I recommend figuring out where cover is and how you can get there at a moment's notice," Peel said. "Cattle producers need to closely monitor the broad range of macroeconomic and global conditions and be prepared to abruptly switch to a strongly defensive business strategy."
Markets are increasingly volatile and Peel said it will be important for cattle producers to maintain as much short-term flexibility as possible to deal with rapidly changing conditions.
HOGS: (farmdoc daily) -- The 2018 outlook early this year was for modest profitability. Now, it has shifted to losses. The reasons are clear. Higher costs and lost exports as China has implemented a 25 percent tariff on U.S. pork that goes into effect Wednesday, April 2, 2018.
Several forces are driving costs higher, but feed is the primary culprit. Since the start of the year, corn futures are about 27 cents per bushel higher and soybean meal futures are about $55 per ton higher. This means that feed cost are nearly $3 per live hundredweight higher. This is composed of $1.20 higher because of corn prices and $1.75 due to higher meal prices.
Other costs of production are rising as well. Energy costs are expected to rise with the government Energy Information Agency forecasting a nine percent rise for on-road diesel prices this year and a seven percent rise in retail gasoline prices. The tight labor market is expected to result in a three percent rise in wage rates. Interest rates are also rising. The Chicago FED reports the average interest rate on farm operating loans in 2017 was 4.9 percent. If that rate rises by 100 basis points this year to 5.9 percent, that is a 20 percent increase. Finally, the Trump tariffs on steel and aluminum will likely put upward pressure on metal prices that are important to buildings and equipment used in pork production.
China has inflicted a blow to the U.S. pork industry with a 25 percent tariff on pork they are buying from the U.S. effect April 2. The impacts look different from the Chinese side versus the U.S. side of the trade dispute. For the Chinese, tariffs on U.S. pork appear to be a good strategic decision. The reason is that U.S. pork imports were fairly large at $1.1 billion last year, so it gets the attention of the U.S. quickly as retaliation. The tariff will hurt the U.S. pork industry in key states that were generally strong Trump supporters. This gives a potential political victory to China. In addition, China has been increasing their own domestic production and was expected to import less pork this year anyway. Finally, China produced 97 percent of their own pork last year and the 1 percent of their pork consumption they buy from the U.S. can easily be replaced by the European Union and Canada. If China buys no U.S. pork it only has small implications for them.
While China seems to have chosen well by selecting pork for these tariffs, the negative implications are deeper and focused on the U.S. pork industry. So, the view looks different from here in the Midwest pork center.
The U.S. sold China 525 million pounds of pork in 2017 worth $1.1 billion. This was nine percent of our total export volume last year. More importantly, Chinese purchases represented only two percent of U.S. production. The 25 percent tariff will make our pork higher priced in China allowing pork from the European Union and Canada to be cheaper than U.S. origin. We can anticipate losing most of the export business with China.
How big is the downward price impact from lost Chinese business? We can start by looking at the impact if we lost all two percent of our demand represented by Chinese volume. That would be expected to lower U.S. prices by about 4.4 percent or around $2.20 per live hundredweight or about $6 per head. On a carcass basis this about $2.75 per carcass hundredweight that is roughly equivalent to lean hog futures prices.
This is a measure of the biggest potential impact on prices, but the actual price reduction will most likely be less. U.S. pork prices will drop due to the Chinese tariff and these lower U.S. prices will help sell some added pork domestically. In addition, the increase in EU and Canadian export volume to China means they will export less to some countries and the U.S. will pick up some of that export business. The point is that even if we lost all of the Chinese business there will be some compensating increases in the volume sold domestically and to some alternative export destinations.
Clearly, the outlook has weakened! On a live weight basis hogs are now expected to average about $48.50 this year with cost now estimated near $53. Losses of $4.50 per live hundredweight or about $12.50 per head are expected. This hog price forecast is based on lean hog futures for the rest of the year on April 2. Current estimates are for losses per head in every quarter of 2018 at: 1st quarter -$7; 2nd -$11; 3rd -$5; and 4th -$27.
More trouble over trade issues for the pork industry loom in continuing NAFTA negotiations. While China bought two percent of U.S. production in 2017, Mexico purchased seven percent and Canada an additional two percent. That is nine percent of U.S. production that could be affected in NAFTA talks.
The trade hammer has fallen on the U.S. pork industry. Chinese tariffs on U.S. pork along with rising costs have shifted the outlook for 2018 to losses expected to be about $12.50 per head. Uncertainties surrounding NAFTA remain a grave concern as well.
There remains much to be worked out in the early stages of these trade conflicts and U.S. agricultural must continue to argue for the merits of freer and fairer trade. If the current outlook shift toward losses prevails, all expansion projects still currently on the drawing board should be reconsidered. Further, if the current negative outlook prevails, some downsizing of the breeding herd into 2019 may be needed to move supply downward to provide breakeven prices.
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