Livestock Analysis (VIP) -- March 14, 2014

March 14, 2014 09:43 AM


Price action: Lean hog futures settled mixed with the April through June contracts 25 to 60 cents higher while July and later contracts finished 22 1/2 to $1.00 lower. For the week, the market again posted strong gains.

5-day outlook: So far, modest corrective setbacks in lean hog futures have been seen as launching points to propel the market even higher. But with the relative strength index indicating futures are heavily overbought and April futures sharply above the cash index, a downside correction is possible at any time.

30-day outlook: Even if futures decline, cash hog and pork product prices are expected to stay at historically high levels. This can be attributed to retailers seeking alternatives to record boxed beef prices, strong packer demand amid tightening supplies and concerns about the porcine epidemic diarrhea virus (PEDV).

90-day outlook: USDA's Livestock, Dairy and Poultry Outlook today noted that despite a surge in hog prices the latter half of February, slaughter data signals hog supplies were ample. Rather, the report notes the rise may be attributed to unusually high pork stocks accumulation in anticipation of PEDV shortages later this year. This may be realized this summer when supplies normally hit their tightest level seasonally and grilling demand is high.

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.



Price action: April live cattle futures posted sharp gains for the week, though it failed to post a contract high. But the rest of the market rose to contract highs today on support from news of steady to $2 higher cash cattle trade.

5-day outlook: Strength to end the week in futures bodes well early next week, as it signals traders' attitudes remain bullish. But all eyes will be on the boxed beef market next week as prices rose to record levels this week, which slowed demand. If wholesale beef values soften, it would raise concern about packer demand, as this week marks the first in several their margins were in the black.

30-day outlook: USDA will release its monthly Cattle on Feed Report next Friday, which will remind the market of the tight supply situation. In fact, On Feed numbers will remain below year-ago throughout 2014 due to tight calf supplies.

90-day outlook: In its March Supply & Demand Report, USDA raised its 2014 average cash steer price projection by $6 from last month to $142, which is up from just under $126 in 2013. USDA cites tight supplies and rising prices as the reasons for the increase.

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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