Livestock Analysis (VIP) -- December 11, 2013

December 11, 2013 08:46 AM


Price action: Lean hog futures finished widely mixed today. The soon-to-expire December contract along with some far-deferred contracts posted slight gains, while the February through July 2014 contracts were 15 cents to $1.05 lower.

Fundamental analysis: The big premium February through May lean hog futures hold to the cash index weighed on those contracts today. While hog supplies will decline seasonally into next summer, traders are concerned futures have too much premium over the cash market.

Additional pressure came from weakness in the cash hog market. Despite inclement weather across the Midwest, packers aren't having to raise cash hog bids to get needed supplies. Part of that is because average hog weights continue to climb, which is lessening the need to kill as many hogs.

Recent price action also signals attitudes have changed in the hog market. Instead of looking to buy weakness, traders are now looking for reasons to sell. This shift in attitude signals a seasonal low is not yet in place.

Technical analysis: February lean hog futures violated support at last week's low and also dropped below support at the Sept. 20 low of $87.75, though the contract recovered to close just above the latter level. A drop through today's low at $87.30 would open the downside to the $86.50 level, which is a 50% retracement of the price rally from the March contract low.

Hedgers: 50% of expected 1st-qtr. marketings are hedged in Feb. lean hog futures at $89.70.

Feed needs: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80.


Live cattle

Price action: Live cattle futures saw a mixed day of trade, but bulls had a slight advantage heading into the close. Futures settled steady to 22 1/2 cents higher, with the exception of the April and December 2014 contracts, which posted slight losses.

Fundamental analysis: Cash cattle trade has yet to get underway, but this morning's improvement in the boxed beef market is seen as upping feedlots' chances for steady cash cattle trade with last week's $132 action. Choice cuts rose 81 cents this morning and Select fell 39 cents, but even more impressive was a surge in movement to 155 loads. Frigid temps in the Midwest and Plains also works to feedlots' advantage as this stresses animals and slows weight gain.

On the other hand, showlist estimates are up in all locations except Kansas this week and packers continue to deal with negative cutting margins.

Technical analysis: February live cattle continue to respect uptrending support drawn off the May and November lows, which intersects around $132.10 tomorrow. A move through that level would open support to the November low of $131.27 1/2, followed by $130.00. Bulls' initial target is the early November low of $133.20.

Feeder cattle

Price action: Feeder cattle futures also saw a choppy day of trade, but most contracts posted gains of 2 1/2 to 22 1/2 cents for the day.

Fundamental analysis: Feeder cattle futures saw mild followthrough buying after yesterday's high-range close. A weaker U.S. dollar index and an upside bias in the live cattle market added to the positive tone. But so far futures have respected near-term levels of resistance. Gains in the corn market also curbed buying enthusiasm.

Technical analysis: January feeder cattle futures tested but respected resistance at last week's double-top of $165.65. The next level of resistance lies shortly thereafter at the November double-top of $166.00. The December low of $163.87 1/2 marks initial support.

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, but feeder cattle buyers should stay in touch to establish long coverage.

Feed needs: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80.

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