Livestock Analysis (VIP) -- December 11, 2012

December 11, 2012 08:41 AM


Price action: December lean hog futures finished 5 cents lower, while deferred contracts were 22 1/2 to 80 cents higher. Most contracts finished near session highs.

Fundamental analysis: A strong rally in cattle futures and supportive outside markets helped encourage short-covering in deferred lean hog futures today following recent sharp price pressure. But pressure on the cash hog market limited the upside to corrective buying. The upside will remain limited unless the cash market starts to strengthen.

Cash hog bids were as much as $2 lower today on limited packer demand. While cutting margins have moved back into the black, packers are having no problems securing slaughter needs, which suggests the cash market will continue to weaken.

Technical analysis: After completing a 38% retracement of the rally from the September low to the November high last Friday, February lean hog futures have rebounded the past two sessions. That suggests the sharp price pullback was a correction in a bull market and the corrective phase is complete. If the contract drops below last Friday's low at $83.20, however, it would signal at least a 50% retracement of the rally around $82.56 is likely.

Hedgers: Carry all risk in the cash market for now.

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



Live cattle

Price action: Live cattle futures were lifted by technical buying and unexpected strength in the boxed beef market. Futures ended 80 cents to $1.67 1/2 higher.

Fundamental analysis: Early support in the cattle pit came from technical buying as traders covered short positions. And gains were extended by strength in the beef market. Choice values rose $2.27 this morning and Select was up $1.51 on solid movement. Given the fact this week's overall showlist is tighter than last week, traders are more optimistic of a near-term low in place for the cash market. Feedlots passed on packers' initial bids, as they are down from last week's $124 cash trade.

Technical analysis: February live cattle posted a big upside day of trade on the daily chart as buy stops were triggered on the move through last week's high of $131.35. Next resistance is the November high of $132.90. Closes above that level would have bulls targeting the September high of $133.30. Support lies at last week's low of $129.77 1/2.


Feeder cattle

Price action: Feeder cattle futures gapped sharply higher on the open in reaction to weakness in the corn market. Futures ended near session highs with gains of $2.05 to $2.30.

Fundamental analysis: Futures were supported by weakness in the corn market, as well as expectations calf supplies will tighten dramatically in 2013. January feeder futures are now trading at around a $5 premium to the cash index, which raises the risk of profit-taking pressure tomorrow.

Technical analysis: January feeder futures penetrated and closed above resistance at the September high of $151.40. Followthrough buying tomorrow would confirm a low has been posted and open significant near-term upside potential.

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


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