Livestock Analysis (VIP) -- April 1, 2014

April 1, 2014 09:41 AM


Price action: Lean hog futures ended 42 1/2 cents to $1.80 higher, with the exception of the August contract that ended 12 1/2 cents lower.

Fundamental analysis: Futures were supported by ideas yesterday's losses were overdone. Traders also point to evidence that USDA's Hogs & Pigs Report didn't fully account for porcine epidemic diarrhea virus (PEDV) losses. This gave traders encouragement to narrow the discount nearbys hold to the cash index. April lean hogs ended the day at around a $2.50 discount to the index, which could trigger followthrough buying tomorrow morning.

The cash hog market was steady to $1 higher today as packers work to secure supplies amid tight marketings. But demand for hogs will soften if pork cutout values soften, as packers' profit margins have tightened. Pork values were 27 cents softer this morning on lackluster movement.

Technical analysis: April lean hog futures gapped higher on the open and closed just above opening levels. Yesterday's high of $126.35 is now support, with resistance layered every $1 higher beginning at $129.00. Futures are oversold according to the Relative Strength Index, which raises the risk of profit-taking.

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.


Live cattle

Price action: Live cattle futures traded lower through the day and finished near their lows of the day with losses of 25 cents in the far deferreds to $1.10 in the nearby April contract.

Fundamental analysis: Expectations of lower cash cattle prices had futures on the defensive throughout the day. Packer margins have shifted sharply into the red, prompting some to decrease slaughter schedules. That cut back is seen as pressuring live prices. In addition, showlists are up across the Southern Plains, boosting leverage away from feedlots and to packers in cash negotiations. Wholesale beef prices rebounded somewhat in morning trading following Monday's deep losses. But movement still remains slow. Slaughter today is estimated at 118,000 head, which is even with a week ago and down from 120,000 from a year earlier.

Technical analysis: June live cattle futures slumped again today. The contract found initial support at the $136.00 area, however. Futures traded below but closed on the February-March short-term uptrend line. The winter uptrend line still offers uptrending support at around $134.50. The gap above Monday's high at $137.85 to $138.12 1/2 is the first level of resistance. The lead April contract filled the upside gap at $144.60 to $146.35 left March 26.


Feeder cattle

Price action: Feeder cattle futures closed 25 cents to $1.07 1/2 cents lower. The May contract lead declines.

Fundamental analysis: Strength in corn futures along with declines in live cattle futures pressured feeder cattle futures. Declines in April feeder futures were limited by their continuing discount to the cash index. That discount was $1.26 at the close of trading.

Technical analysis: Like Monday, May futures gapped lower on the open. But unlike Monday, futures failed to fill the gap and slumped to close near their daily lows. Today's decline saw futures close under the February-March short-term uptrend line. The first layer of support now rests at the $176.00 area. The upside gap from $174.45 to $178.85 left March 7 serves as a downside target if that support is broken. The winter long-term uptrend line offers support at about $171.00 this week.

Hedgers: Fed cattle producers are long April $136.00 put options at $1.325 covering 1st-qtr. and 50% of 2nd-qtr. marketings. The April $144.00 call options that we sold for $1.525 were exercised into a short futures position, meaning we are effectively hedged at $144.20 (the strike price plus the 20 cents we made on the initial sale of these calls compared to what we spent on the puts).

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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