Livestock Analysis (VIP) -- Advice -- April 4, 2014

April 4, 2014 09:43 AM


Price action: Lean hog futures fell hard today with the May through October contracts plunging the $3.00 daily limit. The end-of-week decline resulted in hog futures closing below last week's close.

5-day outlook: This week's falloff in wholesale pork prices along with a sharp reduction in movement sets up a negative outlook for cash hog prices next week. Packers, who have cut in the black for an extended period of time, suddenly found their margins solidly in the red. They reduced hours of operation to adjust for the reduction in supplies and in an attempt to boost wholesale prices.

30-day outlook: Hog marketings will be lower going forward, with USDA numbers suggesting supplies will be down about 5% versus a year earlier. But it appears the futures market has already priced in those gains, and cash prices possibly as well. Packers will likely restrain operation hours in order to boost margins and wholesale prices. But with signs the wholesale market has peaked, it will be very difficult for cash prices to move higher.

90-day outlook: Normal seasonal trends call for both hog numbers and weights to rise going into June. But the impact of porcine epidemic diarrhea virus (PEDV) brings new uncertainty to that seasonal pattern. Numbers are expected to decline 3% to 4% below year-earlier levels, according to USDA's Hogs and Pigs Report. Higher weights will offset some of that decline. The key is consumer demand for pork. Consumers have not yet seen the full impact of the recent run-up in wholesale prices, but signs of resistance are already evident. If retailers are unable to pass higher prices on to consumers, look for pressure on prices going forward.

Hedgers: 50% of expected 2nd-qtr. hog marketings and 50% of expected 3rd-qtr. Hog marketing are covered in $126.00 June lean hog put options for $3.90.

Feed needs: Carry all corn-for-feed and meal risk in the cash market for now.



Advice: Fed cattle producers were advised to lift the portion of hedges in April live cattle futures covering 1st-qtr. marketings. Maintain coverage in that contract for 50% of 2nd-qtr. marketings for now. Also, the April $136 put options held against 1st- and 2nd-qtr. marketings expired worthless today.

Price action: Cattle futures closed under heavy pressure today, which also locked in sharp losses for the week.

5-day outlook: Technically, live cattle futures appear toppy, suggesting followthrough selling is possible next week. Tight cattle supplies and the big discount futures hold to the cash market suggest the downside should be limited, but there's no guarantee that will support the market if chart-based selling dominates price action.

30-day outlook: Seasonally, beef demand should start to rise as temps warm. But there are two potential hurdles this year. One, cold temps are hanging around longer than normal. Two, beef prices are near record-high. Those factors could slow spring beef demand.

90-day outlook: After heavy placement of calves into feedlots through winter, there will be more market-ready cattle than previously thought mid-year. But cattle supplies won't be abundant, just more than anticipated. The key to the longer-term price outlook in the cattle market is demand.

Hedgers: NEW ADVICE: Fed cattle producers should lift the portion of hedges in April live cattle futures covering 1st-qtr. marketings. Our exit was $143.60 for a 60-cent profit. Also, the April $136 put options that we purchased for $1.325 against 1st- and 2nd-qtr. marketings expired worthless today. Maintain 50% 2nd-qtr. hedges in April live cattle futures at $144.20.

Feed needs: Carry all corn-for-feed and meal risk in the cash market for now, but be prepared to extend coverage on a price break.

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