Livestock Analysis (VIP) -- January 27, 2014

January 27, 2014 08:52 AM


Price action: Lean hog futures were choppy through the day and favored a firmer tone on the close. February hogs ended 80 cents lower, but April and May hogs were 27 1/2 and 30 cents higher, respectively. Deferred futures were mostly 10 to 20 cents higher.

Fundamental analysis: Pressure on February hogs came as the contract holds more than a $4 premium to the cash index and will have the responsibility of following cash more closely next month as traders prepare for expiration. But that's still a ways off, and traders feel comfortable with some premium in the market due to winter weather conditions limiting marketings. Additionally, pork cutout values firmed 47 cents this morning, which further helped to lift packer profit margins.

With many packers working under reduced hours today due to poor road conditions, general expectations are for firmer bids tomorrow as packers are short bought coming into the week.

Technical analysis: While February lean hog futures gapped lower on the open and extended losses, April lean hog futures posted an upside day of trade on the daily chart. The April contract rose above last week's high of $94.50, turning it into initial support. Bulls' next target on followthrough buying is the October contract high of $96.45.

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

Feed needs: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80.


Live cattle

Price action: Live cattle futures reversed early losses to close mixed and near their daily highs. February and June cattle ended 25 and 7 1/2 cents lower, respectively, while remaining contracts ended 5 to 45 cents higher.

Fundamental analysis: Live cattle futures opened under pressure as traders reacted negatively to Friday's Cattle on Feed Report (COF) and a setback in wholesale beef trade. The COF indicated slightly more cattle placed in feedlots and marketings were not as current as expected. Meanwhile, both Choice and Select boxed beef fell on Friday, raising concerns that wholesale beef prices are topping out.

However, news of renewed strength in the wholesale beef market prompted short-covering into the close. Choice boxed beef rose $1.05 in morning trade, reaching $238.31 per cwt., while Select boxed beef surged $2.37 to $238.62 per cwt. This places Select beef at a 31-cent premium to Choice, confirming tightening supplies. Movement was a light 60 loads, however, but possibly not alarming in light of the tight supply situation. Estimated slaughter is pegged at 111,000 head versus 117,000 head a week ago and 125,000 head a year ago.

Technical analysis: The late-session rebound in futures saw February futures post a potential bullish flag formation. A higher close Tuesday would result in an upside breakout of the bullish flag projecting a test of resistance at $144.55 and a move $2.50 higher. The April contract posted a small bullish reversal with futures first moving to a lower low than the previous day but taking out and closing above Friday's high. That is normally a positive sign for the opening of trading the following day. The $143.00 area marks resistance.


Feeder Cattle

Price action: Feeder cattle futures closed slightly lower in all but the January contract. March and later contracts finished 7 1/2 to 37 1/2 cents lower. January futures finished 27 1/2 cents higher and at a slight (63 1/2 cents) premium to the cash index.

Fundamental analysis: Feeder cattle futures opened lower in reaction to Friday's COF which indicated feeder cattle supplies are slightly higher than anticipated due possibly to imports from both Canada and Mexico. Futures were also under pressure due to the lower opening in live cattle futures. However, the short-covering rally in live cattle futures prompted spillover short covering in feeder cattle futures. But slight gains in corn futures limited gains.

Technical analysis: March feeder cattle futures gapped lower on the open but filled the gap and posted a high-range close. The $170.67 1/2 high posted Jan. 22 is resistance.

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

Feed needs: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80.

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