Livestock Analysis (VIP) -- July 31, 2012

July 31, 2012 10:05 AM


Price action: Lean hog futures opened with a firmer tone, but bulls quickly lost momentum and losses then built throughout the day. August through February lean hog futures closed $1.15 to $1.67 1/2 lower and just slightly off session lows. Far-deferred contracts posted slight losses.

Fundamental analysis: Concerns rising feed prices will lead to aggressive liquidation of sows and gilts weighed heavily on lean hog futures today. Herd liquidation would increase slaughter supplies at a time when hog numbers start to build seasonally and more than offset any reduction in carcass weights due heat stress.

Cash hog bids were steady to lower across the Midwest today as packers aren't expecting to have problems securing supplies. Instead, their focus is on trying to improve margins.

Technical analysis: After gapping higher on the open, October lean hog futures posted a big bearish reversal today. Followthrough selling tomorrow would point to a test of the contract low at $77.55. Today's high at $82.90 is initial resistance, with tougher resistance at the July high of $84.15.

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

Feed needs: Risk is covered in the cash market for now.


Live cattle

Price action: Live cattle futures closed 20 cents to $142 1/2 cents lower, with the heaviest losses in the October and December contracts.

Fundamental analysis: Initial pressure on live cattle futures stemmed from the big premium they hold to the cash cattle market. But selling interest tied to this was limited as traders are anticipating higher cash cattle prices this week. The greater sources of pressure were heavy spillover from sharp losses in the hog market and concerns surging feed prices will lead to further herd liquidation, which would inflate the beef supply in the near-term.

In cash cattle negotiations, initial bids were established at $113, while feedlots are asking $118 to $119 for this week's supplies. If the boxed beef market builds on the solid start to the week, most traders expect cash prices to rise at least $1 from last week's $114 trade in the Plains.

Technical analysis: October live cattle futures are showing signs of a short-term technical top. If that's confirmed, bears' initial target would be the July 19 low at $122.07 1/2, followed by the July low at $119.77 1/2.


Feeder cattle

Price action: Feeder cattle futures started with a mixed tone, but as the corn market remained under pressure, feeders firmed. Still, gains of only 5 to 65 cents were posted for the day.

Fundamental analysis: The modest corrective losses in the corn market today were enough to encourage light short-covering in feeder cattle. Until there are signs of a major top in the corn market, however, the upside will remain limited to mild corrective buying in feeder cattle.

Technical analysis: The short-term trading boundaries for October feeder cattle extend from the contract low of $138.30 to the July 19 high at $143.60.

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.

Feed needs: Risk is covered in the cash market for now.

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