Livestock Analysis (VIP) -- August 8, 2012

August 8, 2012 09:58 AM


Price action: August through February lean hog futures settled with gains of 25 cents to $1.65, with nearby contracts leading to the move higher. Farther deferred months ended steady to 20 cents lower amid bull spreading.

Fundamental analysis: Rather than focusing on a steep decline in pork cutout prices yesterday, traders zeroed in on the impressive movement the softer prices encouraged. But additional upside potential will likely be limited to corrective short-covering as the price decline pulled some packer profit margins back into the red. Packers will be unwilling to aggressively bid for hogs until pork prices improve along with movement, especially as supplies are building.

Technical analysis: October lean hog futures ended high-range, but within the bounds of yesterday's trading range. The contract must close the Aug. 3 downside gap at $78.20 before it can challenge the July 31 high of $82.90. Support lies at today and yesterday's low of $74.90.

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 extended gains into the close to finish 82 1/2 cents to $1.85 higher.

Fundamental analysis: Futures were supported by ongoing strength in the boxed beef market, which is raising traders' expectations for higher cash cattle trade. Not only have boxed beef prices risen this week, but movement has also improved to signal retailers are actively preparing for Labor Day features. Additionally, this week's smaller showlist gives feedlots more bargaining power. Cash trade could be delayed until later in the week, though, as asking prices and bids remain several dollars apart.

Technical analysis: October live cattle gapped higher on the open, filled the gap, but then extended early gains. A move above resistance at last week's high of $126.45 and the May high of $127.05 are needed to generate fresh buying interest.

Feeder cattle

Price action: Feeder cattle futures were supported by spillover from live cattle to end 75 cents to $1.32 1/2 higher.

Fundamental analysis: The CME feeder index stands at $137.43, with August futures trading at around a $2 premium to the index. If corn futures continue to strengthen, traders would be less willing to hold positions that are above the cash market as traders fear demand for feeder cattle supplies will remain low given high feed costs.

Technical analysis: October lean hog futures gapped higher on the open and trimmed gains, but left a gap open. Near-term boundaries are contract-low support at $138.30 and last week's high of $142.90.

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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