Livestock Analysis (VIP) -- January 2, 2014

January 2, 2014 08:50 AM


Price action: Lean hog futures gapped higher on the open and buying interest mounted as the day progressed. Futures settled 80 cents to $1.65 higher through the August contract, with the front-month leading gains.

Fundamental outlook: Lean hog futures benefited from some indications the product and cash markets may be working on seasonal lows today. Cash hog bids were steady to higher today as subzero temps in the upper Midwest makes producers unwilling to transport market-ready hogs. The cash hog index has mildly firmed the past four days. In addition, pork movement surged yesterday despite an uptick in prices. This morning, however, the pork cutout value fell $1.71 and movement moderated to 203.75 loads.

Strength in the hog complex was especially impressive considering a surge in the U.S. dollar index today.

Technical outlook: February lean hog futures ended high-range. Followthrough buying tomorrow would indicate the market may have put in a seasonal low. Bulls' next target is the top of the Dec. 11 downside gap at $88.55. Today's gap from $85.75 to $86.10 marks support.

Hedgers: 50% of expected 1st-qtr. marketings are hedged in Feb. lean hog futures at $89.70.

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 traded slightly to moderately higher in followthrough from early week gains. Futures closed 7 1/2 cents to $1.02 1/2 higher in the February through October contracts with the February contract leading gains. Far deferred contracts closed slightly weaker. February futures finished near their highs while April closed midrange and June through October closed just off their daily lows.

Fundamental outlook: Live cattle futures moved higher as traders looked for cash prices to rise once negotiations got serious. Their expectations were met when reports of a few trades of $135 being paid in the Southern Plains first surfaced, but those were quickly erased as cash prices moved to $137 -- a record high. That cash price compares with last week's range of $132 to $134 on the Southern Plains.

Driving the gain is the combination of rising wholesale beef prices and tight supplies. Boxed beef prices firmed in morning trade, with the Select cuts marking a new record at $196.65 per cwt., up 24 cents from Tuesday. Choice beef rose 29 cents to $200.94 per cwt., as well. But movement was light at 44 loads.

Technical outlook: February live cattle futures moved to their highest price since February 2013, closing the downside gap left Feb. 6 in the process. The next upside target is the gap from $135.80 to $136.00 left on Jan. 16's downswing and Jan. 28's failed attempt to fill that gap. The Dec. 20 gap area from $133.10 to $133.40 offers support, with additional support at the November low of $131.27 1/2.


Feeder cattle

Price action: Feeder cattle futures closed mixed with the January contract up 30 cents, the March contract down 40 cents and deferred contracts 12 1/2 to 27 1/2 cents higher. Futures traded in a very narrow range and closed at or near their daily lows.

Fundamental outlook: Gains in cattle futures and weakness in grains lifted feeder cattle futures, but strength in the U.S. dollar index kept bullish enthusiasm in check. The small premium January futures hold versus the cash index also limited gains.

Technical outlook: January futures remain in their narrow consolidation range between the Dec. 18 low of $166.05 and the December high of $168.45. These levels mark near-term support and resistance, respectively. However, that range is narrowing, with the Dec. 27 high of $167.60 offering resistance.

Hedgers: Fed cattle producers should carry all risk in the cash market for now. Feeder cattle sellers and buyers should also carry all risk in the cash market for now, but feeder cattle buyers should stay in touch to establish long coverage.

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

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