Livestock Analysis (VIP) -- March 17, 2014

March 17, 2014 09:57 AM


Price action: Nearby lean hog futures gapped higher on the open and enjoyed strong gains throughout the day. April through August futures posted gains of $1.17 to $2.92 1/2 for the day, with the June contract leading gains. Far-deferred months settled $1.10 to $1.67 1/2 lower.

Fundamental outlook: Spring- and summer-month lean hog futures benefited from bull spreading activity today amid ongoing concern about the impact of the porcine epidemic diarrhea virus (PEDV). A North Carolina Smithfield Foods plant has reduced its kill schedule from five to four days a week due to reduced supplies. Other operations may follow suit. Meanwhile, cash hog bids are steady to as much as $4 higher today, also due to tight supplies along with strong packer profit margins.

The wholesale pork market continued its record-setting rally with a 17-cent uptick this morning. While movement has slowed at lofty price levels, traders remain optimistic the surge in boxed beef prices will keep demand for relatively inexpensive pork strong.

Technical outlook: April lean hogs gapped above the $120.000 mark today and hit a new all-time high of $122.00 before settling 30 cents off this mark. This is initial resistance, with bulls' next target layered at the psychological levels of $124.00 and $125.00. Support is layered from $120.00 to the bottom of today's gap at $119.60.

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 closed mixed following two-sided trade.

Fundamental outlook: Cattle traders eased into the week as they wait to formulate strong cash cattle opinions. While market-ready cattle supplies remain tight and wholesale beef prices are record-high, there's an expectation that the cash and product markets are near short-term tops. As a result, traders are content to keep futures below the cash market despite bullish cash market fundamentals.

Showlist estimates are lighter across the Plains this week, especially in Nebraska. That should give feedlots a slight upper hand in cash negotiations. But packers may be hesitant to raise cash bids if product movement slows. Packers moved only 46 loads of boxed beef this morning, signaling retailers could be more actively resisting record wholesale beef prices.

Technical outlook: April live cattle futures must push above the contract high at $146.65 to signal a bullish breakout that would point the contract the next leg higher on the daily chart. Key near-term support is at the March 11 low at $142.70 and the bottom of the Feb. 26 upside price gap at $142.60.


Feeder cattle

Price action: Feeder cattle futures posted slight to moderate gains for the day.

Fundamental outlook: Weakness in the corn market supported feeder cattle futures, though a lack of strong buying in live cattle limited the upside. The premium futures hold to the cash index was also a limiting factor today. While calf supplies are tight, traders don't want to push futures too far in front of the cash market.

Technical outlook: April feeder cattle posted a new contract high of $178.00 today. The next upside target is the psychological $179.00 mark and then every $1.00 higher. Uptrending support drawn off last fall's lows intersects around $172.85 tomorrow and rises about 11 cents every day thereafter. That uptrend is key near-term support.

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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