Livestock Analysis (VIP) -- July 22, 2013

July 22, 2013 09:45 AM


Price action: Lean hog futures closed with a mixed tone following a choppy day of price action. The August through December contracts finished firmer, while farther deferred contracts mildly favored the downside.

Fundamental analysis: August lean hog futures were supported by the big discount the contract holds to the cash market. While cash hog bids continue to soften, traders are concerned the discount to the cash market is too wide. But traders aren't too eager to be buyers, suggesting they feel cash hog bids will continue to decline.

Trade in deferred contracts was limited as traders await what was expected to be another bearish Cold Storage Report. But while pork stocks in storage are still hefty, they came in well below expectations.

Cash hog bids were steady to $1 lower today as packers are trying to keep margins from falling deeper into the red. Most plants were bought ahead on slaughter needs to start the week, suggesting cash hog bids will remain soft.

Technical analysis: After a gap-lower open, August lean hog futures posted a bullish reversal. The contract also closed above a 50% retracement price drop from the June high to the July 12 low, which could spark more chart-based buying.

Hedgers: 50% of expected 3rd-qtr. production is hedged in Aug. lean hog futures at an average price of $97.67 1/2 and 50% of expected 4th-qtr. Production is hedged in Dec. lean hog futures at an average price of $82.12 1/2.

Feed needs: All feed coverage has been lifted. Carry all risk in the cash market for now.


Live cattle

Price action: Live cattle futures marked choppy action today with the lead-month August contract trading on both sides of Friday's range. August ended down 10 cents in a mid-range close. Deferred contracts slumped in late trading, closing in the lower third of their range, 17 1/2 to 52 1/4 cents lower.

Fundamental analysis: Traders turned their attention back to the live and wholesale markets after quickly digesting the data from Friday's Cattle on Feed Report, which came in generally as expected. Traders are waiting for a seasonal low in boxed beef market, which saw Choice beef slump another 67 cents this morning and Select drop another $1.10.

Technical analysis: Futures continue to trade in a narrow range with $120.90 offering critical support for the August contract. Resistance starts at $123.10 but it takes a close above $124.10 to break the pattern of lower highs and turn traders' heads. October futures have support at last week's low at $125.20 and resistance at $126.95.


Feeder cattle

Price action: Feeder cattle futures traded higher in a very narrow range today. Futures closed 55 to 67 1/2 cents higher and near the day's high.

Fundamental analysis: While Friday's Cattle-on-Feed Report showed figures about in line with trade expectations which prompted a muted response from the trade, the report did remind traders of the increasingly tight supply of cattle for future placement in feedlots. In addition weakness in corn futures was supportive. The August contract continues to carry a $7 premium to the cash index, which may limit near-term buying interest.

Technical analysis: Futures continue to trade in a very narrow range, with daily ranges tightening. But the overall trend is higher. The August contract has support starting at $150.95 and resistance at $154.40.

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: All feed coverage has been lifted. Carry all risk in the cash market for now.

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