Livestock Analysis (VIP) -- January 28, 2014

January 28, 2014 08:46 AM


Price action: Lean hog futures saw a choppy day of trade and ended likewise with February and April futures 30 to 72 1/2 cents lower, respectively, and May through August contracts 15 to 55 cents higher.

Fundamental analysis: Traders' focus was on bear spreading, but pressure on nearby futures was limited by a strengthening cash hog market. Packers continue to enjoy profitable margins and are expected to ramp up kill requirements the remainder of the week due to recent weather disruptions. Pork cutout values have improved so far this week, which further strengthens packer demand for supplies.

Meanwhile, nearby contracts still hold a sizable premium to the cash index, which raises the risk of additional near-term pressure. But deferred futures were supported by concerns supplies will be tighter than indicated because of the ongoing porcine epidemic diarrhea virus (PEDV) situation in the U.S. and now Canada.

Technical analysis: February lean hog futures gapped lower on the open and extended losses. While the contract closed near opening levels, the gap was left open. Near-term boundaries are support at the January low of $84.55 and resistance at last week's high of $86.65.

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 faced pressure for much of the day and ended mid- to low-range with losses of 20 to 60 cents. Nearbys led the decline.

Fundamental analysis: Futures saw light profit-taking pressure after yesterday's late-session recovery. News of $1 lower cash cattle trade beginning in Texas, relative to last week at $146 added to the negative tone, although the beef market firmed this morning due to the tightness of supplies. February live cattle continue to trade at a sizable discount to the start of this week's cash trade as traders suspect last week's prices will stand as records -- at least for the immediate future.

This week's slightly larger showlist gives feedlots less bargaining power in cash negotiations, which also points to a softer tone in the cash market once volume picks up. However, bitter cold is also limiting or stopping cattle weight gain.

Technical analysis: February live cattle violated support at yesterday's low of $142.50 in late trade. The low-range close gives bears more momentum heading into tomorrow's open. Important support is at $141.23, which marks a 25% retracement of the rally from the November low. Closes below this level would suggest a high has been posted.


Feeder Cattle

Price action: January feeder futures closed 45 cents higher, with the rest of the market 30 to 50 cents lower on spillover from live cattle.

Fundamental analysis: Feeder cattle futures faced spillover pressure from live cattle today. Choppy price action in the corn market also limited buying, but traders still have Friday's Cattle on Feed Report on their minds that showed the placements category above expectations and year-ago levels. Given the small calf crop, traders suspect this is due to an increase in calf supplies coming from Canada and Mexico.

Technical analysis: April feeder cattle futures saw limited price action but tested support at yesterday's low of $168.50. Violation of this support would also violate uptrending support drawn off November and January reaction lows, suggesting a high has been posted.

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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