Livestock Analysis (VIP) -- February 14, 2014

February 14, 2014 08:53 AM


Price action: Lean hog futures closed 90 cents to $1.25 higher in the April through August contracts today, while the lead-month February contract and far-deferred futures posted lighter gains. For the week, all but the lead-month contract sharply extended the price rally, with summer-month futures leading gains.

5-day outlook: With spring- and summer-month hog futures closing on weekly highs, bulls carry strong momentum into next week. But given Monday's holiday, the markets won't reopen until Tuesday morning. That's a long time for traders to ponder taking profits after a very strong runup. Aside from corrective buying, however, the downside is limited.

30-day outlook: Retailer demand for pork has been helped by high wholesale beef prices. But with the pork cutout value above $93.00, we are watching for signs the pork rally has extended too far. There have been hints of that, but no strong signs yet.

90-day outlook: USDA is projecting a 1% increase in pork production this year, but its forecast is declining given the spread of porcine epidemic diarrhea virus (PEDV). With summer-month hog futures trading above $100.00, traders have production losses due to PEDV factored into the market. We'll wait on upward momentum to stall before advising 2nd-qtr. hedge coverage, but hedges are coming.

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

Feed needs: Profits on the 1st-qtr. meal hedges have been claimed. Carry all corn-for-feed and meal risk in the cash market for now.



Price action: Cattle futures were softer today, but posted solid weekly gains to maintain the strong uptrend. April live cattle ended the week 70 cents above last week's close and $2.10 below the contract high.

5-day outlook: The bullish fundamental outlook has not changed as supplies will remain tight well into 2015. Adding to the bullish tone this week was an uptick in boxed beef movement, which signals beef values are starting to attract improved business. While we don't consider Choice beef values above $210 per cwt. a "value," we are encouraged by improvement in movement.

30-day outlook: Of immediate concern for the cattle market is packer demand. At press time, only light cash trade has occurred in Kansas. If cash trade doesn't pick up today it would mark consecutive weeks of lackluster cash movement. This is a concern not only because feedlot supplies are backing up (although slightly), but it also reflects softer packer demand due to negative profit margins.

90-day outlook: USDA raised its 2014 cash steer price projection in this week's February Supply & Demand Report by $3 on the bottom end of the range and $2 on the top to a range of $132 to $140, reflecting tight supplies and recent strength in the cash market.

Hedgers: Fed cattle producers are long April $136.00 put options at $1.325 covering remaining 1st-qtr. and 50% of 2nd-qtr. marketings and are short the same number of April $144.00 call options at $1.525.

Feed needs: Profits on the 1st-qtr. meal hedges have been claimed. Carry all corn-for-feed and meal risk in the cash market for now.

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