Livestock Analysis -- July 19, 2012

July 19, 2012 09:41 AM


Price action: Lean hog futures got off to a strong start, but softened late in the session and closed low-range. August futures ended 42 1/2 cents higher thanks to its discount to the cash hog index, but deferred months were mostly 5 to 95 cents lower.

Fundamental analysis: Lean hog futures were initially supported by recent signs from pork cutout values that a low may be near and a steady to firmer cash hog market. But recognition that pork gains have not been enough to pull packer profit margins out of the red and that these are only being pulled more deeply negative by firmer cash prices. Pork cutout values must continue to improve packer demand.

Plus, traders expect USDA's Cold Storage Report tomorrow to show record-high pork stocks for the month of June.

Technical analysis: August lean hogs gapped higher on the open and settled low-range but just above today's low at $93.00, leaving it as bears' initial target. A return of buying interest would have the contract headed toward a test of the July high of $96.15.

Hedgers: Carry all risk in the cash market for now.

Feed needs: Risk is covered in the cash market for now.


Live cattle

Price action: Live cattle futures got off to a lower start but improved as the day progressed to finish 2 1/2 cents to $1.57 1/2 higher, with 2012 contracts leading gains.

Fundamental analysis: Ideas Japan may soon ease its beef import restrictions and signs a near-term low may be near for the beef market led to some followthrough buying in cattle futures today. Though beef prices did pull back this morning, movement remained strong.

Traders also readied positions for the Cattle Inventory and Cattle on Feed Reports tomorrow, which are expected to show tightening supplies over the near- and long-term, via herd contraction and lower Placements for June compared to last year due to drought and high feed costs. See "Evening Report" for expectations.

Technical analysis: August live cattle settled high-range, giving market bulls the upper hand to start the next trading session. The contract needs closes above the late June high of $120.55 to signal a low is in place. Tuesday's low of $115.45 is strong support.


Feeder cattle

Price action: Feeder cattle futures enjoyed more corrective short-covering today and finished high-range with gains of $1.52 1/2 to $2.07 1/2.

Fundamental analysis: Feeder cattle futures benefited from choppy trade in the corn market, which livestock producers hope is a sign the market is near a top. Adding incentive for traders to cover short positions was a weaker dollar and improved investor risk appetite. Traders also readied positions for USDA's Cattle Inventory Report tomorrow, which is expected to show tightening calf supplies.

Technical analysis: August feeder cattle gapped lower on the open, but quickly filled the gap and posted a bullish reversal for the day and closed Monday's wide downside gap. The next area of resistance is the top of last week's gap lower at $141.22 1/2.

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.

Feed needs: Risk is covered in the cash market for now.

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