Livestock Analysis (VIP) -- March 12, 2014

March 12, 2014 09:57 AM


Price action: Lean hog futures closed mostly lower today, with the exceptions being the June and July contracts that were 37 1/2 and 5 cents higher, respectively. April hogs finished $1.17 1/2 lower on the day.

Fundamental outlook: Some profit-taking was seen in the hog market today as traders looked to capitalize on recent extreme price gains. But selling was neither strong nor widespread as concerns with porcine epidemic diarrhea virus (PEDV) linger. While a top in a market like this often comes unannounced, today's corrective price action sure doesn't "feel" like topping action. After the parabolic move higher, the market is likely to give a dramatic topping signal when the rally is over.

Cash hog bids were firmer again today as packers continue to compete for market-ready supplies. Profitable margins continue to give packers incentive to push as many hogs through kill plants as possible, but supplies are tightening.

Technical outlook: Despite today's decline, April lean hog futures remain heavily overbought on the Relative Strength Index, suggesting a further correction is needed. For perspective, the contract could correct roughly $8 to $10 without doing major technical damage. A correction of that magnitude would still keep the uptrend from the mid-February low intact and would only retrace 38% of the rally from the January low.

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

Feed needs: Profits on the 1st-qtr. meal hedges have been claimed. Carry all corn-for-feed and meal risk in the cash market for now.


Live cattle

Price action: Live cattle futures extended gains into the close to finish 25 to 65 cents higher. The high-range close bodes well for bulls heading into tomorrow's open.

Fundamental outlook: Futures were supported today by indications of improved packer demand, which raises expectations for at least steady cash cattle trade with last week's $148 trade in the Southern Plains. The run to record beef values this week has lifted packer margins back into the black and with showlists tighter than last week, feedlots have more bargaining power.

April live cattle ended the day at around a $4 discount to last week's cash trade, which gives bulls more encouragement to maintain their positions. But with beef prices in uncharted territory, traders expect beef demand to soften.

Technical outlook: April live cattle posted an inside day up on the daily chart. Near-term boundaries are support at yesterday's low of $142.70 to the late February low of $141.17 1/2. The contract high of $146.65 is key resistance.


Feeder cattle

Price action: Feeder futures favored a firmer tone through the day, although price action was limited. Futures ended 5 to 52 1/2 cents higher.

Fundamental outlook: Feeder futures were supported by spillover from live cattle, as well as tight calf supplies. Price action was limited, however, as March futures are trading in line with the cash index, which stands at $173.70.

Technical outlook: April feeder futures posted a contract-high close of $175.87 1/2 and are hovering just beneath resistance of yesterday's contract high of $176.40. Futures could correct to last week's low of $171.50 without doing any serious chart damage.

Hedgers: Fed cattle producers are long April $136.00 put options at $1.325 covering 1st-qtr. and 50% of 2nd-qtr. marketings. The April $144.00 call options that we sold for $1.525 were exercised into a short futures position, meaning we are effectively hedged at $144.20 (the strike price plus the 20 cents we made on the initial sale of these calls compared to what we spent on the puts).

Feed needs: Carry all corn-for-feed and meal risk in the cash market for now, but be prepared to extend coverage on a price break.

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