Livestock Analysis -- Advice (VIP) -- July 23, 2013

July 23, 2013 09:40 AM


Advice: Exit the 50% hedge coverage in August lean hog futures. We are maintaining the 50% 4th-qtr. hedge coverage in December lean hog futures.

Price action: Lean hog futures gapped higher on the open and surged to close at the day's highs. The August contract finished $2.05 higher. The October through April contracts ended 27 1/2 cents to $1.05 higher.

Fundamental analysis: Futures surged in reaction to the surprising drop in frozen pork stocks detailed in Monday's Cold Storage Report. The largest monthly decline on record suggests pork demand is much stronger than expected. Today's wholesale trade added to the positive outlook for hogs as the pork cutout value rose $2.66 in morning trade and movement was a solid 203.5 loads. The decline corn futures, however, had traders concerned declining feed costs could stimulate herd expansion. That view contributed to the bull spreading which saw the summer 2014 contracts closing slightly weaker.

Technical analysis: August futures gapped higher and traded higher throughout the day, never challenging the dollar-wide gap. The August contract has resistance at the June high at $99.65 and support at today's low and top of the gap at $98.25.

The October contract also gapped higher, traded into the gap and then surged to close at the day's high. Resistance stands at the June double-top of $87.00. Initial support is at today's low of $85.60.

Hedgers: NEW ADVICE: Exit the 50% hedge coverage in August lean hog futures. Our exit was at $98.32 1/2 for a loss of 65 cents on the position. 50% of expected 4th-qtr. production is hedged in Dec. lean hog futures at an average price of $82.12 1/2.

Feed needs: All feed coverage has been lifted. Carry all risk in the cash market for now.



Live cattle

Price action: Live cattle futures enjoyed gains for most of the day, but buying interest dried up ahead of the close and futures ended low-range and mixed for the day, with 2013 contracts 2 1/2 to 30 cents higher and deferreds steady to 30 cents lower.

Fundamental analysis: Pressure on the corn market and gains in lean hogs lifted the live cattle market in early trade. In addition, traders are looking ahead to seasonal supply tightening that they expect to help the cash and product markets to put in a low. But buying interest faded as the boxed beef market has yet to confirm such ideas. Choice and Select cuts fell again this morning, though movement picked up. The ongoing decline could make it tough for feedlots to get better than steady cash prices this week, despite tighter market-ready supplies.

Technical analysis: August live cattle have been chopping in a narrow range between the June high of $123.10 and the July low of $121.17 1/2 for more than three weeks. A failed test of the upper end of this range today spurred some late profit-taking.

Feeder cattle

Price action: Feeder cattle futures gapped higher on the open and enjoyed strong gains at times today. However, buying interest faded into the close and futures ended at or near session lows with gains of 55 to 75 cents.

Fundamental analysis: Feeder cattle futures benefited from a dip in corn prices to their lowest level in more than two and a half years today. This along with a tightening of feeder cattle supplies gave futures a boost today. The market also enjoyed some technical buying thanks to the markets' big upside gap this morning.

Technical analysis: August feeder cattle futures gapped above the psychological $154.00 mark today, but settled below this level. Another move through it would set up a test of the April high of $154.40. But the low-range close could give bears the near-term advantage. Their initial target is the $150.00 level, which roughly coincides with the July low.

Hedgers: Fed cattle producers should carry all risk in the cash market for now. Feeder cattle sellers and buyers should also carry all risk in the cash market for now, but feeder cattle buyers should stay in touch to establish long coverage.

Feed needs: All feed coverage has been lifted. Carry all risk in the cash market for now.


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