Friday Morning Livestock Market Summary - Cattle Paper to Open Mixed as Traders Jockey Around Cash Potential

GENERAL COMMENTS:

The cash cattle trade will surface sometime Friday with both sides running out of time before breaking for the long Labor Day weekend. Expect opening bids to be around $107 live and $170 dressed. Asking prices should be restated around $111 to $112 live and $175 plus dressed. Live and feeder futures should open on a mixed basis thanks to residual buying on one hand and long liquidation on the other.

Look for the cash hog trade to open with generally steady bids. Packer margins are decent, but so far, country offerings have been large enough to make greater spending for live inventory unnecessary. Lean contracts are set to open moderately higher, supported by late-week short-covering and firming carcass value.

	BULL SIDE		BEAR SIDE
1)	Net beef export sales last week totaled 20,600 metric tons (MT), unchanged from the previous week, but up 13% from the prior four-week average. At the same time actual beef exports totaled 17,800 MT, up 5% from the previous week, but unchanged from the prior four-week average.	1)	Beef cutouts closed significantly lower Thursday with box demand described as no better than "light."
2)	African swine fever has infected 185 pigs on a farm in Wuhu city in eastern China's Anhui province, the Ministry of Agriculture and Rural Affairs said on Thursday, in the country's fifth case of the deadly disease in less than a month.	2)	For the week ending Aug. 19, all cattle averaged 819 pounds, 1 pounds more than the prior week and 1 pounds below 2017; steers averaged 886 pounds, 5 pounds heavier than the week before and 2 pounds more than last year. Only heifers were lighter: 810 pounds, 1 pound smaller than the week before but 4 pounds more than last year.
3)	???Net pork export sales last week jumped to 29,100 MT, up 9% from the previous week and 2% from the prior four-week average. At the same time, actual exports totaled 22,100 MT, up 6% from the previous week and 17% from the prior four-week average.	3)	Spot October lean hogs took a big hit on the chin Thursday, closing under $50 for the first time since Aug. 8. Put another way, the nearby action doesn't suggest much confidence that a cash market bottom is near.
4)	The pork carcass value exploded with strength on Thursday, gaining more than $2 thanks to stronger demand from fresh cuts and bellies.	4)	The short week following Labor Day will start out loaded with pork. In order to keep channels clear, further wholesale discounting may be necessary.

OTHER MARKET SENSITIVE NEWS

CATTLE: (Rabobank) -- Japan and South Korea beef imports are on the rise. In 2017, combined imports by Japan and South Korea were up 9%, and at their highest level since 2002. Along with improved economies and lower global beef prices, the availability of beef from Australia and the U.S. is fueling this growth. Australian exports to Japan and South Korea are up 11% for the YTD (June), while the US appears to be focusing more on South Korea, with exports up 41% while up only 6% to Japan. Japan has also granted access for Argentina to export fresh beef into the country for the first time with the first shipment, albeit small, arriving in July. This decision would be a positive indication for Brazil who is also entertaining the prospect of gaining access to Japan.

At the start of 2018, Rabobank referred to growing competition and complexity in global markets, and the opportunities and pressures this could bring to margins along beef supply chains. Part way through the year we have seen corporate results reflecting this mix of challenge and opportunity. Some global beef companies have revised down their earnings expectations, due to a combination of trade disruptions and ample protein supplies, while others have credited beef with contributing to high earnings. On balance, we see more margin pressure looming.

Several outbreaks of African Swine Fever (ASF) were recorded in China in recent months, which raises the possibility of China -- the world's largest consumer of pork -- being caught short. While the extent and timing of any herd liquidation remain uncertain, if ASF takes hold, it is likely that China will increase imports of pork -- and other meats such as beef -- in 2019. An associated lift in global pork prices could also benefit beef supply chains in other regions.

HOGS: (Rabobank) -- The Chinese animal protein market will continue to be a growth story, but growth will be driven by value rather than volume. Meat consumption will change in three dimensions, related to where, what, and how meat is consumed. Meat companies have three avenues to success -- regionalisation, finding new markets, and adding value/providing a service.

The sheer size of China's consumer base and its rising middle class seems to suggest that its animal protein market will continue to be a strong one, with many growth opportunities. In reality, China's animal protein consumption has been volatile over the past two decades, with little evidence of a consistent growth trend. We forecast that, in the coming years, the average animal protein consumption growth will markedly slow down.

Changes in Friday's society are having a remarkable impact on Chinese consumer behaviour. A better understanding of the current trends helps to predict what will happen in the coming years. Three changes are most relevant: demographics, trading up or down, and new retail and foodservice channels.

With all of the changes in the consumer market, we see three dimensions of change that will take place in animal protein consumption: where the products are consumed, what product attributes are preferred, and how these products are eaten.

"While China's population is expected to peak soon, the demographic dividend will continue to drive value growth in the meat market," according to senior animal protein analyst Chenjun Pan. "To capitalise, meat companies need a regionalisation strategy. They will see greater growth opportunities by expanding into 'new tier-one' cities and surrounding areas, where the population is younger." As live hog production will move away from these regions, it will be even more important to allocate resources to value-added businesses in these new, densely-populated cities, in order to stay attuned to the quickly changing consumer needs.

In a massive market like China, a volume-driven strategy is important. However, given the three dimensions of change discussed above, volume-driven companies will run into the threat of their traditional markets shrinking. They need to find new markets through emerging channels that offer more growth. In combination with maintaining market share in the traditional market, animal protein companies need to look into new concepts in retail and foodservice, which increasingly are taking over the preparation of food from consumers.

The changes in China's consumer market provide excellent opportunities for developing a value-driven strategy. Animal protein companies need to identify what new attributes consumers are looking for. In our view, traditional products -- such as frozen meat, hot (just slaughtered) fresh meat, and cooked meat products sold in traditional agriculture markets -- will likely see a decline, while branded chilled meats in small packages, meat-based snack food, freshly cooked convenience food, and meal kits will see strong growth. These products reflect the new consumer values of convenience, food safety, freshness, variety, and service. Frozen convenience food and Chinese-style/western-style meat products may need to broaden their marketing focus, away from tier-one and tier-two cities to lower-tier cities and rural areas.