Livestock Analysis (VIP) -- February 28, 2014

February 28, 2014 08:55 AM
 

Hogs

Price action: April lean hogs settled their $3.00 limit higher today, while May through August futures closed $2.10 to $2.57 1/2 higher. Deferreds saw lighter gains. The market posted sharp gains for the week.

5-day outlook: Lean hog futures are sharply overbought according to the Relative Strength Index, signaling a time or price correction is overdue. Any selloff would likely be rapid, as the move to the upside was steep. However, ongoing bullish fundamentals should limit the markets' risk to the downside, especially with a winter storm expected this weekend, followed by another blast of cold air.

30-day outlook: Cash hog bids and the pork market typically pull back through March before moving the next leg higher into spring and summer. However, ongoing concerns about the porcine epidemic diarrhea virus (PEDV) could limit any such pullback. Such ideas are reflected by spring contracts with $110 now serving as psychological support.

90-day outlook: As temps warm this spring, consumers will fire up the grill, which typically boosts red meat demand. This year, pork stands to benefit from lofty beef prices (although that will be tempered if pork values continue to climb). Meanwhile, supplies will tighten seasonally into the summer -- this could be even more pronounced this year due to the impact of PEDV.

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: February live cattle futures expired $1.90 higher at $151.95. The rest of the market favored an upside bias in mixed trade today, but for the week, posted sharp gains. Feeder cattle futures ended slightly lower today, but posted gains for the week.

5-day outlook: April live cattle now have the responsibility as the lead-month contract and are trading at a sharp discount to this week's record $150 to $152 cash trade in the Plain. Market bulls will use the all-time high of $153.00 for a front-month contract (posted today by February live cattle) as the upside target for the April contract.

30-day outlook: Traders are keeping a very close watch on the boxed beef market, which saw values surge but movement slow as the week progressed. While Choice values are around $20-per-cwt. below the all-time high posted last month, they have reached levels that are slowing demand. As a result, traders could be cautious about extending long positions early next week as they fear the cash market may be nearing a major high.

90-day outlook: Price volatility will remain high this year given the tight supply situation. One factor that could limit further price gains (behind high prices curing high prices) is an influx of feeder calves from Canada and Mexico. However, this will not greatly impact marketings until 2015. If producers increase their herd rebuilding efforts, it would further reduce the beef supply and strengthen 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: 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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