Livestock Analysis (VIP) -- February 24, 2014

February 24, 2014 08:44 AM


Price action: Lean hog futures finished narrowly mixed following a light and choppy day of trade. April and December futures posted slight losses, while spring, summer-and fall-month contracts finished slightly higher.

Fundamental analysis: Light profit-taking was seen at points today given strong price runup and the overbought condition of the market. But selling interest remains limited as traders continue to fear porcine epidemic diarrhea virus (PEDV) will limit hog supplies. As a result, traders are comfortable with futures trading well above the cash market. The question is how much more premium they are willing to build into the market. Typically in situations like this, traders overdo the upside and a sharp correction will eventually be seen. But for now, the path of least resistance is up and the downside is limited to modest corrective selling.

Cash hog bids were steady to firmer across the Midwest today as plants work to secure slaughter supplies. While margins have tightened, they remain strong enough to encourage packers to raise cash hog bids to attract animals.

Technical analysis: Despite today's modest losses, April lean hog futures remain overbought based on the Relative Strength Index. While that signals a correction is due, there are no technical indications the rally is running out of steam. Initial support is last Friday's gap from $98.30 to $97.85. If that gap is filled, next support is at the old contract high of $96.45. A close below that level would be a potential sign of a technical top. Today's contract high of $99.80 is resistance, followed by the psychological $100.00 level and then the 2013 double-top at $102.45 on the weekly continuation chart.

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.


Live cattle

Price action: Live cattle futures closed unchanged to 65 cents lower, led by the June contract, with the exception of the lead February contract, which closed up 60 cents. Most contracts finished at or near their lows of the day.

Fundamental analysis: Cattle futures were on the defensive as traders took a mostly bearish reading of Friday's Cattle-on-Feed Report and sold the summer contracts. Limiting declines is the positive Cold Storage Report which showed less frozen beef in storage than expected. The lead contract was higher as it traded in line with the mostly $144 to $145 cash trade posted late last week. In addition, nearby futures found support from the $2.00-plus gains noted in boxed beef prices this morning. Today's slaughter is pegged at 99,000 head, up from 90,000 head last week and last year.

Technical analysis: April live cattle futures slumped to their lowest level in five days but failed to take out Friday's high, as the contract but found support just under Friday's low just above $141.00. Although futures have twice traded up to $143.00, they have only closed above $142.00 only twice, which makes the $142.00 to $142.50 area resistance.


Feeder cattle

Price action: Feeder cattle futures closed 10 to 42 1/2 cents higher, closing near their highs for the day. The exception is the lead March contract, which closed down 50 cents near its lows for the day.

Fundamental analysis: Feeder cattle futures edged higher in very narrow trading in all but the lead March contract. Friday's Cattle-on-Feed Report reminded traders of the tightening supply situation. The setback in the corn market the past two days provided additional support.

Technical analysis: March futures moved higher after gapping lower, filled the gap but finished near the opening level. The downside objective is the upside gap left on Feb. 13, ranging from $169.00 to $169.80. There is hefty support under $169.00 and resistance above $171.00.

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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