DTN Early Word Opening Livestock

Meat Futures Staged for Mixed Opening

(DTN file photo)
   

Cattle: Higher Futures: mixed Live Equiv $138.30 + 0.09*
Hogs: Steady to $1 HR Futures: mixed Lean Equiv $ 93.20 + $1.89**

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

GENERAL COMMENTS:

The cash cattle trade will be higher sometime Friday, pulling out of the ugly nosedive that has persisted since Labor Day. As far as we can tell, the only real question is: How much higher? Understandably, asking prices will be tied to the premium of spot October. That means live steers and heifers should be priced around $130 or better (i.e., $205-plus dressed). Packers seem to be quite short-bought, yet still wary about early fall beef demand. Live and feeder futures are set to open on a mixed basis thanks to a combination of follow-through buying and pre-cash profit-taking.

Hog buyers should resume work this morning with bids steady to $1 higher. Saturday kill should total close to 120,000, possibly pushing the weekly total to 2.23 million head. Lean contracts are also likely to begin with uneven price action linked to spillover buying on one hand and long liquidation on the other.

BULL SIDE BEAR SIDE
1) For the first time in nine weeks, steer carcass weights fell lower, 920 pounds for the week ended September 26, 3 pounds lighter than the prior week and 27 pounds greater than 2014. At the same time, heifers averaged 830 pounds, 3 pounds below the week before and 20 pounds heavier than last year. All cattle averaged 848 pounds, 4 pounds smaller than the previous week and 25 pounds bigger than 2014. 1) Beef cut-outs were little better than flat Thursday with box supplies still described as "heavy." Such stubborn sluggishness in the wholesale may work like an anchor on packer spending.
2) Boxed beef demand described as "good" on Thursday and surging cattle futures displayed new confidence and determination to lead feedlot cash higher. 2) Though still relatively modest, delivery interest against October seems to be increasing. CME officials report 58 new delivery intentions Thursday, 11 at Columbus (4 heifers, 7 steers) and 47 at Worthing (19 heifers, 28 steers).
3) The pork carcass value surged higher on Thursday with all primals appreciated nicely except the butt. 3) Though the timeline on retail meat pricing is always "iffy," the next major featuring shift in the meat case could hurt pork sales by significantly marking beef cuts lower.
4) Although pork export sales last week slowed to 14,700 mt (i.e., down 43% from the previous week and 19% from the prior 4-week average), actual weekly shipments remain quite healthy at 17,200 mt, up 2% from the previous week and 7% from the prior 4-week average. 4) The persistence of the deep discount of December lean futures seems to bespeak of a real nervousness among traders, one fearing both larger late-year supplies and softening pork demand (both domestic and foreign).

OTHER MARKET SENSITIVE NEWS

CATTLE: (Dow Jones) -- Average beef prices rose for the second consecutive week in grocery-store advertisements while average pork prices fell, according to the latest Wall Street Journal retail-meat survey.

The 15-cut average for beef increased to $5.59 a pound from $5.50 last week. It declined versus $5.77 a year earlier, the Journal survey found.

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Grocers listed higher prices for some steak cuts, including sirloin, T-bone, rib-eye and round.

The five-cut average for pork prices fell to $3.21 a pound from $3.29 last week. Prices were lower than the $3.67 average a year earlier.

Chicken prices decreased. The two-cut average fell to $1.80 a pound from $1.85 last week and was down from $2.04 a year earlier.

HOGS: (farmdocdaily.illinois.edu) -- The pork industry has largely overcome the impacts of the 2014 PED virus. Pork producers have been disciplined in limiting expansion after record 2014 profits. As a result, pork supplies should be only modestly higher in 2016 and provide prices which cover all costs of production. However, there are some concerns for the longer-run as global meat and poultry supplies continue to expand with a weak world income base.

The industry is rapidly leaving behind the impacts of the 2014 PED virus. The number of pigs per litter has set new quarterly highs in each of the three quarters so far this year. In the most recent summer quarter, the number of pigs per litter reached an all-time high of 10.39.

The PED virus left a deficit in market hogs a year ago, but that deficit will rapidly close by the end of this year. This can be seen in the current count of market hogs compared to year-ago levels. Pigs that were 180 pounds or larger on September 1 were up ten percent. While ten percent higher is a large increase, it is a reflection of the deficit of market hogs one year ago. The number of market hogs weighing 120 to 179 pounds that will come to market in October and early November was up eight percent, but the number of 50 to 119 pound pigs that will come to market from late November to early January was up only three percent. Finally the under 50 pound pigs that will be the foundation of the first quarter 2016 supplies were down modestly.

In USDA's September Hogs and Pigs report, producers indicated that they had expanded the breeding herd by just one percent. In addition they were going to decrease fall farrowings by two percent and winter farrowings by one percent.

Pork supplies are expected to be up four percent in the final quarter of 2015 with a combination of five percent more hogs and one percent lower weights. For 2015, pork supplies are expected to be seven percent higher than supplies in 2014. Supplies for 2016 should be about one percent higher than in 2015 with the first three quarters being down one percent, unchanged, and up one percent, respectively.

Hog prices averaged near $55 per live hundredweight for the third quarter of 2015 and are expected to drop to an average in the higher-$40s in the final quarter. Prices are expected to average near $50 in the winter and then move up seasonally to the mid-$50s in the second and the third quarters of 2016. Prices in the final quarter of 2016 are anticipated to be in the mid-to-higher $40s.

For the 2015 calendar year, hog prices are expected to average about $51 on a live weight basis. Current projections for 2016 are for a similar average price. These prices are in sharp contrast to the $76 record high prices of 2014 when PED reduced pork supplies.

Costs of production in both 2015 and 2016 are expected to be similar, around $51 per hundredweight. Costs for both years are the same as the projected price, and thus at breakeven. These cost projections include costs for full depreciation and a normal rate of return for all capital and labor. Therefore, breakeven means all costs are covered.

After the record profits of 2014, there has been concern that the industry would over-expand. At this point that concern has not developed with supply and demand anticipated to be in balance for the coming 12 months. This also serves as a warning to the industry to make sure that further expansion plans remain moderate.

There seem to be growing threats in the future for the meats sector. Those include continued expansion of total meat supplies into 2016 and 2017 with rapid expansion of poultry and increased beef supplies. The large drop in finished cattle prices in recent weeks suggest that retail beef prices could begin to drop this fall and provide added competition for pork. In the longer run, beef supplies will continue to expand for multiple years. Potential weakness of meat and poultry exports is also a concern with slowing world economic growth and a strong U.S. dollar.

Feed prices will remain low for the next 9 months due to strong yields for 2014 and 2015 crops and weakened exports. Animal product producers will want to take advantage of harvest price lows this fall. However, longer-term, managers need to remain aware that low feed prices are not guaranteed if weather should turn more adverse in some important growing areas.

John Harrington can be reached at feelofthemarket@yahoo.com
Follow John Harrington on Twitter @feelofthemarket

(CZ)

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