Livestock Analysis (VIP) -- October 23, 2013

October 23, 2013 09:43 AM


Price action: Lean hog futures slumped in early trading but trimmed losses as the day progressed and closed near their daily highs in bear spreading. December and February futures closed slightly weaker while April and later deferred contracts finished slightly higher.

Fundamental outlook: Profit-taking following Tuesday's sharp surge coupled with weakness in the wholesale market combined to press hog futures lower in early trading. Tuesday's strong upside move came as traders moved to narrow the discount between December futures and the CME lean hog index, which was released for the first time following the government shutdown. Traders continue to look for hog supplies to rise and cash prices to weaken seasonally, thus they took profits today on ideas there is still plenty of time for the lean hog index to decline and narrow the discount to December futures.

Weakness in the pork cutout market today added to the negative tone. The cutout fell $1.29 in the morning update from USDA. However, slaughter is pegged at 430,000 head, below the 433,000 mark of a week earlier and below the 434,000 level of a year earlier.

Technical outlook: December lean hogs gapped lower on the open and left a small gap on the chart open, despite the high-range finish. The top of today's downside gap at $88.45 is resistance with heavier resistance starting at $89.00 up to the contract high at $89.50. The $88.00 area, the bottom of Tuesday's upside gap, provided support today with further support starting at $86.27 1/2.

Hedgers: 50% of expected 4th-qtr. production is hedged in Dec. lean hog futures at an average price of $82.12 1/2.

Feed needs: 25% of 4th-qtr. protein needs are covered in long Dec. meal futures at $422.20 and 25% of 1st-qtr. needs are covered in long March meal futures at $410.80.


Live Cattle

Price action: Live cattle futures finished mixed, with October up 70 cents. December through June contracts ended 27 1/2 to 50 cents lower, with far-deferred futures slightly higher.

Fundamental outlook: News that cash cattle trade began in Texas at $132 -- a new record -- lifted October live cattle futures. The contract ended the day at around a 20 cent discount to the index. December live cattle already hold a premium to the cash market, which resulted in some light profit-taking.

Choice beef values improved again this morning to return above the $200-per-cwt. level on decent movement. It will take continued strength in the beef market to keep futures supported, as traders recognize that packers' profit margins are in the red.

Technical outlook: December live cattle futures gapped higher on the open and extended gains before filling the gap and ending slightly lower. Futures continue in the uptrend, but increased volatility at high prices signals a high could be near.


Feeder Cattle

Price action: October feeder cattle futures ended 1 cent higher, with November through March down 22 1/2 to 45 cents.

Fundamental outlook: Gains in the corn market keeps buying in check in the feeder cattle pit. Tight calf supplies continue to limit pressure on futures. October feeders are trading at around a $1 premium to the cash index.

Technical outlook: November feeder futures posted a daily high of $168.60, which is initial resistance, followed by the contract high of $169.60. Support lies at Monday's low of $166.35.

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: 25% of 4th-qtr. protein needs are covered in long Dec. meal futures at $422.20 and 25% of 1st-qtr. needs are covered in long March meal futures at $410.80.

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