Livestock Analysis (VIP) -- August 23, 2012

August 23, 2012 10:20 AM


Price action: Lean hog futures saw a choppy day of trade, with pressure limited by short-covering following yesterday's sharp day of price declines. October through February hogs closed 5 to 60 cents lower, with deferreds steady to 55 cents higher.

Fundamental analysis: Sharp weakness in the pork cutout market has weakened the cash hog market and limits traders' willingness to do much more than cover short positions. The cash hog market was steady to mostly $1 lower as packers have seen profit margins tighten slightly this week. Meanwhile, nearby lean hog futures are trading at a sharp discount to the cash index -- signaling traders anticipate more near-term cash weakness.

Yesterday's Cold Storage Report, which showed pork stocks at the end of July below expectations, was put on the back burner, as traders fear stocks could reverse the seasonal downtrend due to stepped up sow liquidation.

Technical analysis: December lean hog futures gapped lower on the open and posted a fresh contract low close of $70.60. The contract has a lot of work ahead in order to signal a low has been posted, as bears clearly have the technical advantage.

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 started the day under slight pressure but firmed as the corn market softened. Live cattle ended 37 1/2 to 90 cents higher.

Fundamental analysis: Choppy price action was also due to traders waiting on cash cattle trade to begin in the Southern Plains. Light cash trade out of Nebraska at slightly lower prices doesn't necessarily mean trade will be lower in Kansas and Texas, though, as supplies are tighter there than week-ago. Futures were also supported in afternoon trade by improvement in the beef market.

Technical analysis: October live cattle futures gapped lightly lower on the open and filled the gap and even saw trade above yesterday's high to post a wider daily trading range.

Feeder cattle

Price action: Feeder cattle futures ended sharply higher on help from weakness in the corn market. Futures ended $1.05 to $1.90 higher.

Fundamental analysis: As corn futures moved sharply lower, traders in the feeder cattle pit were encouraged to cover short positions. August feeder futures are trading at a premium to the cash index as traders recognize calf supplies have tightened considerably.

Technical analysis: October feeder cattle futures still have a lot of work to do to signal a near-term low has been posted. The contract has completed at 25% retracement of the decline from the June high, but needs to post a 38% retracement near $148.00 to signal a low is in place.

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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