DTN Early Word Opening Livestock

Cattle Futures Likely to Open New-Week Business With Moderate Weakness

(DTN file photo)

Cattle: Steady Futures: 10-30 LR Live Equiv $148.42- $1.31*

Hogs: Steady-$1 HR Futures: 25-50 HR Lean Equiv $ 81.77 + $1.13**

*based on formula estimating live cattle equivalent of gross packer revenue

** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

Once again, cattle buyers chose to burn the midnight oil late last week in an effort to finalize procurement chores. But when the last country cat was put out Friday, they didn't seem to own many cattle for all their overtime. Several thousand steers and heifers in Kansas were marked at $136, which was $2 lower than the previous week. Earlier in the day, Northern packers managed to generate light trade volume with most dressed deals marked at a $210, essentially steady with the previous week. Both sides will be regrouping Monday with buyers short bought and sellers probably pasting together longer showlists (i.e., a combo of unsold cattle and additional ready numbers). Our guess is that showlists will be initially priced around $140 in the South and $215 in the North. Live and feeder contracts seem set to open moderately lower, pressured by follow-through selling and uninspiring fundamentals.

Expect cash hog buyers to resume work Monday with bids steady to $1 higher. Ready numbers should continue to shrink for another 30 days or so, a fact of life that should force packers to spend more in the country whether they like it or not. And by the way, they continue to like it a bunch as carcass value is keeping decent pace with the accelerating pace of live hogs. Lean futures are likely to open moderately higher, boosted by residual buying and promising cash/product prospects.

BULL SIDE BEAR SIDE
Given extremely light trade volume totals generated last week, short bought cattle buyers should start the week especially hungry and displaying a general lack of leverage in feedlot country. Despite last week's reduction in chain speed and beef production, cutouts closed the week sharply higher and on the defensive. Late-winter demand can be quite undependable.

While placement no doubt increased last month from light activity in December, early bird estimates still anticipate an official total (i.e., due out on Feb. 19) that is 2% to 3% smaller than 2015.

Monday marks first notice day for February live cattle. Until the early waters of delivery interest are tested, specs may be reluctant to support the nearby board.
The pork carcass value jumped more than a buck higher on Friday with all primals reflecting better demand except the picnic. Despite the steady increase in the cost of live inventory in recent weeks, processing margins remain excellent.

With spot February lean hog futures set to expire on Friday and soon-to-be-spot April already $6 above the cash index, buying interest on nearby lean contracts could start to slow.

For the week ending Feb. 2, noncommercial traders were buyers of lean hog futures (i.e., up 6,700 contracts) and are now net-long 11,300 contracts.

While the lean hog futures market has rallied rather sharply since the first of the year, this strength has yet to test long-term overhead resistance on the weekly close charts.

OTHER MARKET SENSITIVE NEWS

CATTLE: (thecattlesite.com) -- The recent USDA Cattle report showed total US inventory of all cattle and calves (beef-type and dairy), both on farms/ranchers and in feedlots as of January 1, 2016 totaled 92.0 million head, up 3 per cent year-over-year.

Importantly, USDA lowered their prior estimates including dropping the size of the 2014 calf crop. The US cattle herd, beef cow count, and the number of heifers being retained for breeding purposes all grew significantly.

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One of the aspects of the report is that it provides the best survey-based assessment of the total number of cattle on-feed in the US. Remember, the monthly Cattle on Feed report includes only feedlots that have 1000 head or more capacity.

The monthly report showed as of January 1, 2016 that there were 10.6 million head in those surveyed feedlots, slightly fewer animals than a year ago (down 0.5 per cent). In contrast, the annual Cattle report gave a total feedlot inventory of 13.2 million head, 1.2 per cent above 2015's.

The implication is that the smaller feedlots (those under 1000 head capacity and often referred to as "farmer feeders") after tending to become less-and-less interested in feeding cattle during most recent years jumped back into the game during 2015.

The proportion of animals in the larger feedlots actually was below 2015's as of January 1st of this year, cattle on-feed in 1000 head and larger capacity lots as of January 1, 2016 was 80.2 per cent of all animals on-feed, down about 1 per cent from a year ago.

Factors that likely contributed to renewed interest by farmer feeders included lower corn prices and growing trend in urban areas for sourcing locally raised food.

Based on recent cattle industry reports from USDA-NASS, what does the balance of 2016 and 2017 seem to hold in terms of US beef production?

A larger calf crop was produced in 2015 (up 780,000 head or 2.3 per cent above 2014's and the largest since 2011). An even larger calf crop will be produced in 2016.

Those numbers suggest that steer and heifer slaughter numbers will clearly be posting year-over-year increases, with the largest percentage increases during 2016 occurring in the second half of the calendar year.

Besides steers and heifers processed into beef, an important source for US beef tonnage comes from cull cows slaughtered. The Livestock Marketing Information Center (LMIC) forecasts year-over-year increases in US Federally Inspected cow slaughter in both 2016 and 2017.

However, levels of cow slaughter are forecast to remain below the drought-induced huge levels posted annually from 2007 into 2014.

So, without another severe US drought, the increase in beef produced from steers and heifer slaughter is expected to be much larger than beef from cows.

For example, in 2016, steer and heifer slaughter could increase 3 per cent to 4 per cent compared to 2015's, while the number of cows processed rises by 2 per cent to 3 per cent.

Given the biological time lags between calf crops and increases in beef production, forecast cow slaughter levels, and forecast dressed weights; US beef production in 2016 is estimated to be 2 per cent to 4 per cent above 2015's.

In 2017, output could grow in the range of another 4 per cent to 5 per cent year-over-year. Still, LMIC expects US beef production in 2017 to be at to slightly below 2013's. That is important context.

HOGS: (agebb.missouri.edu) -- Weather was a big factor in last week's hog trade as a winter snowstorm in the Midwest caused several slaughter plants to stop operations for a day. Hog prices were higher despite idle slaughter plants and weakness in both the cutout value and the futures market.

Part of the shortfall in slaughter will be made up on Saturday when USDA expects 200 thousand hogs to be processed. Last week's hog slaughter was 2.182 million head, down 6.3% from last week and down 3.4% from the same week last year.

It appears the closed PM Beef slaughter plant in Windom, Minnesota will be reopened as a hog slaughter facility. Glen Taylor, who owns the NBA's Minnesota Timberwolves, and a partner plan to invest $20-25 million to remodel the old cattle plant to slaughter 4,000 hogs per day. To be called Prime Pork, the business will focus on selling high quality pork products, mostly to restaurants.

Hog prices are higher for the fifth consecutive week. The national negotiated barrow and gilt price on Friday morning report averaged $60.26/cwt, up 70 cents from last Friday morning.

Friday morning's pork cutout value was $76.86/cwt FOB the plants. That is down 53 cents from the week before, but up $2.49 from a year ago. Loin, ham and belly prices were each lower this week. Monday's national negotiated hog price was 78.4% of the cutout value.

The average live slaughter weight of barrows and gilts in Iowa-Minnesota for the week ending January 30 was 284.1 pounds, down 0.5 pound from the week before and down 2.3 pounds from a year ago. Iowa-Minnesota slaughter weights have been below the year-ago level for 44 of the last 45 weeks.

The February hog futures contract ended last week at $64.80/cwt, down $1.00 from the week before. April hogs lost 40 cents last week to close at $70.30/cwt. The June lean hog futures contract ended the week at $80.425/cwt, down 23 cents from the preceding week.

John Harrington can be contacted at john.harrington@dtn.com

For more from John Harrington, see www.feelofthemarket.com

(BAS)

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