Livestock Analysis (VIP) -- January 29, 2014

January 29, 2014 08:39 AM
 

Hogs

Price action: February lean hog futures finished high-range with a gain of $1.25, while deferred futures were 15 to 77 1/2 cents higher for the day.

Fundamental analysis: A firmer tone in the cash hog market provided fundamental support for lean hog futures today. Given strong packer cutting margins and recent supply disruptions due to inclement weather, traders are anticipating cash hog bids will continue to strengthen near-term. And while hefty hog weights are adding pork to the supply chain, slaughter numbers will decline seasonally into summer. Plus, traders expect longer-term hog supplies to be cut by porcine epidemic diarrhea virus (PEDV).

Traders are also expecting pork demand to pick up as retailers and consumers react to the recent sharp increase in boxed beef prices. Pork features are expected to increase and consumers are likely to turn to more pork instead of beef in the weeks ahead.

Technical analysis: After getting a single close above the November double-top at $94.15 on Monday, the April contract has retreated. While that signals the recent price rally may be running out of steam, a short-term pause after the recent runup could signal the contract is catching its breath for the next push higher. Consecutive higher closes above $94.15 would open the upside to the contract high at $96.45. A close below $93.20 could signal a short-term top is in place and a corrective pullback is underway.

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

Feed needs: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80.

 

Live cattle

Price action: Cattle futures opened under pressure but trimmed early losses to close slightly higher in all but the February and December 2014 contracts. Futures closed high range, suggesting follow-through buying on the open Thursday.

Fundamental analysis: Live cattle futures opened weaker on concerns cash cattle and wholesale beef prices may be posting a top. The wholesale beef market cooperated with that view by posting declines Tuesday afternoon and again Wednesday morning. Choice boxed beef fell $3.31 per cwt. in morning trade while Select beef slipped $1.86.

February futures were weaker in the decline in boxed beef prices. But selling was limited as it is already at a $5 discount to the $147 cash price paid in the Southern Plains last week. But packers are still cutting in the black and supplies are being restricted due to stressful weather. Today's daily estimated slaughter is pegged at 116,000 head, which is down from 119,000 last week and 121,000 a year ago.

Technical analysis: February futures dropped through the bottom of a bullish flag formation but the decline failed to trigger follow-through selling and futures trimmed losses, closing near their daily highs at the bottom of the flag formation. April futures likewise opened lower but quickly found support at last week's lows and moved higher, posting slight gains on the day and closing near Tuesday's high. The small upside gap left Jan. 21 remains open and has served as support on three attempts.

 

Feeder Cattle

Price action: Feeder cattle futures traded on both sides of Tuesday's trading range. Futures surged in late trading closing near daily highs with slight to moderate gains of 27 1/2 to 85 cents.

Fundamental analysis: Feeder cattle futures were under pressure early on weakness in live cattle futures and a strong U.S. dollar index. However, live cattle futures recovered from early losses and the U.S. dollar index trimmed its gains, lifting feeder cattle futures. A late-session selloff in corn futures added to the upward swing in feeder cattle futures. In addition, traders began evening positions ahead of Friday's cattle inventory report. Currently traders are looking for the calf crop to show a decline of 2.1% from a year earlier.

Technical analysis: March feeder cattle futures surged after finding support at Monday's low of $167.65 -- an area that has provided support five times since Jan. 15. The surge took prices to their highest level of the week and highest close since Jan. 23. Resistance starts at $170.00.

Hedgers: Fed cattle producers are long (bought) April $136.00 put options at $1.325 covering remaining 1st-qtr. and 50% of 2nd-qtr. marketings and are short (sold) the same number of April $144.00 call options at $1.525.

Feed needs: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80.

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