Livestock Analysis (VIP) -- February 26, 2014

February 26, 2014 08:59 AM


Price action: Lean hog futures saw a choppy day of trade and ended 45 cents higher in the April contract and a dime higher in May. Deferred months closed 10 to 80 cents lower. While many contracts gapped higher on the open, most settled near session lows.

Fundamental analysis: Lean hog futures gapped higher on the open, propelled by bullish technical and fundamental factors. Nearby contracts gapped higher on the open and traded up to new contract highs. This eventually gave way to profit-taking, however, as most contracts are technically overbought. Strength in the U.S. dollar index added incentive to book profits.

Fundamental support included continued strength in the cash and product markets, along with underlying concerns about the impact of the porcine epidemic diarrhea virus (PEDV). The pork cutout value rose slightly this morning but even more impressive was strong movement at higher prices. Packers also paid up for supplies as they looked to book supplies so they can take advantage of wide profit-margins ahead of another winter storm event.

Technical analysis: April lean hogs gapped higher on the open and traded up to a new contract high of $101.57 1/2, before reversing course and finishing in the lower half of today's trading range. The contract did leave a slight gap on the charts from $100.60 to $100.72 1/2, which acts as near-term support, followed by $100.00. Today's high is resistance.

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 $1.05 to $2.20 higher and near session highs through the August contract, with lead-month February futures leading gains. Far-deferred contracts posted lesser gains.

Fundamental analysis: Bullish attitudes amid tight supplies continue to fuel buying interest in the cattle market. Reports that packers sharply raised cash cattle bids in the Plains sparked the high-range close in nearby contracts. Traders are now looking for cash trade of at least $148 in Kansas and Texas, while light sales started at $152 in Nebraska. Traders aren't eager to push futures above cash expectations at these record levels, but they are looking to keep February live cattle futures in line with the cash market as the contract nears expiration at week's end.

Wholesale beef prices continued the price surge this morning, with Choice and Select boxes gaining more than $2.00. Traders aren't showing concern over the slowdown in movement yet.

Technical analysis: Contract highs were were scored in February and April live cattle futures today, with the February contract's high marking an all-time record on the weekly continuation chart. Wherever the February contract exits the board on Friday will then become the upside target for April live cattle futures. Technically, the upside breakout in April live cattle futures today after a sharp pullback from the January peak is a very bullish technical signal.


Feeder cattle

Price action: Feeder cattle futures closed 92 1/2 cents to $1.40 higher, which was high-range.

Fundamental analysis: Explosive gains in live cattle provided much of the support in feeder cattle futures today. Underlying support comes from tight calf supplies. With fed cattle prices surging, demand for cash feeder cattle is expected to remain strong despite record prices. Unlike live cattle, nearby feeders are maintaining a premium to the cash index.

Technical analysis: April live cattle futures pushed out to a new contract high today. That turns the old high at $173.32 1/2 into support. Resistance is now at psychological levels, starting at $174.00 and then every 50 cents higher.

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: Carry all corn-for-feed and meal risk in the cash market for now, but be prepared to extend coverage on a price break.

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