Livestock Analysis (VIP) -- December 17, 2012

December 17, 2012 08:37 AM


Price action: Nearby lean hog futures extended losses into the close, with the February through July contracts ending 37 1/2 to 65 cents lower. Far-deferred futures saw lighter losses.

Fundamental analysis: Due to concerns about some packers' profit margins slipping back into the red, traders focused on narrowing the premium nearby contracts hold to the cash index. February hogs ended the day at about a $2.75 premium to the index, which raises the risk of followthrough pressure tomorrow, especially due to the low-range close.

But demand for cash hogs was strong to start the week, with bids steady to $1 higher as cash sources say packers are in need of supplies and are already working to secure next week's holiday-interrupted schedule. Early expectations are for steady to firmer bids again tomorrow, although all eyes are on the pork cutout market, which needs to see some firmness in order to encourage further cash improvement.

Technical analysis: February lean hog futures posted a downside day of trade on the daily chart, with the contract in the middle of last week's trading range that establishes initial resistance at last week's high of $86.25 and support at last week's low of $83.20.

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: December live cattle futures closed $2.10 higher, while deferred months advanced 70 to 90 cents. Contracts closed on or near session highs.

Fundamental analysis: Live cattle futures got much of their support from technical-based buying following a gap-higher open in nearby contracts. Fundamental support came from weather as the first winter storm of the season is forecast to move into the country's midsection mid-week. As a result, traders build some weather premium into the market.

While cash cattle trade is not likely until late in the week, today's strong gains in nearby futures set the stage for the cash market to build on last week's steady to $1 higher prices in the Plains. There are some questions about how many animals packers will need, however, as they are buying for a holiday-shortened slaughter schedule next week.

Technical analysis: February live cattle futures closed above the September high of $133.30 to signal a potential upside breakout from the extended, choppy trading range. To confirm the breakout, consecutive higher closes that turn $133.30 into solid support are needed. A failed breakout attempt would signal a short-term top is in place.


Feeder cattle

Price action: Feeder cattle futures closed 60 cents to $1.30 higher and near session highs.

Fundamental analysis: Feeder cattle pulled strong support from strength in live cattle and pressure on corn futures. This strong spillover support was surprising as many traders were anticipating a relatively quiet start to the week.

Technical analysis: January feeder cattle futures are building on last week's upside breakout from the extended, choppy range. Next resistance is around $155.56 -- a 62% retracement of the price plunge from the contract high to the July low.

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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