Livestock Analysis (VIP) -- March 13, 2014

March 13, 2014 09:45 AM


Price action: Traders viewed yesterday's weakness as a buying opportunity and lean hog futures gapped higher on the open and extended gains. April hogs ended limit higher, with the May through August contracts posting gains in excess of $2.00. Deferred futures posted lighter gains.

Fundamental outlook: Buy stops were triggered on this morning's higher open, which signals attitudes remain bullish. While nearby futures are trading at a sharp premium to the cash index, traders note a significant number of positive porcine epidemic diarrhea virus (PEDV) cases continue to be reported (see "Evening Report") and losses are hard to estimate. Plus, this week's slaughter is running lighter than expected, which is maintaining strength in the cash hog market. Plus, gains in the pork cutout market this week have kept packers' profit margins in the black.

Early expectations are for mostly $1 higher cash hog bids again tomorrow as packers work to keep kill lines running as full as possible.

Technical outlook: April lean hog futures gapped higher on the open, filled the gap, but returned higher to post a contract high of $118.92 1/2. June futures gapped higher on the open and left a small gap open on the chart and posted a high of $127.80, making bulls' next target the $130.00 level.

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 ended narrowly mixed, with April down 25 cents and June up 20 cents.

Fundamental outlook: Futures were choppy today, but pressure was limited by the sharp recovery in lean hog futures. Additional support came from building expectations for at least steady to $1 higher cash cattle trade compared with last week's $148 trade on the Southern Plains due to tighter market-ready supplies and strength in the beef market since last week that has lifted packers' profit margins back into the black.

So far, feedlots are rejecting packers' bids for $146 cattle, as they are hoping for $148 to $150 trade. This morning Choice beef values softened by 50 cents, but Select values rose $1.04 to narrow the premium Choice holds to the cut.

Technical outlook: April live cattle futures saw limited trade below yesterday's low, which prompted bulls to return and push futures back to the $144.00 level. But futures posted a mid-range close. Near-term boundaries are resistance at this week's high of $144.50, followed by the contract high of $146.65, with support at this week's low of $142.70.


Feeder cattle

Price action: Price action in the feeder cattle pit was limited today, with futures ending steady to 37 1/2 cents higher.

Fundamental outlook: Pressure was limited by slight strength in nearby live cattle futures, as well as tight calf supplies. But with futures historically high, traders are hesitant to extend long positions. Nearby futures have closely tracked the cash index, which continues to firm. The cash index stands at a near-record $173.60.

Technical outlook: April feeder futures matched Tuesday's high of $176.40, but couldn't push above it. Futures, however, posted a contract-high close of $175.92 1/2 to keep the trend clearly in bulls' favor.

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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