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Livestock Analysis (VIP) -- March 18, 2014

14:51PM Mar 18, 2014


Price action: Spring and summer lean hog contracts again gapped higher on the open and posted strong gains ranging from $1.05 to $2.75 for the day. Deferred months posted moderate losses.

Fundamental outlook: Traders remain unwilling to bet on the short side of the market as any pullbacks have served as a launching pad for the next move higher and the "hot money" is intent on pushing futures higher. Thus, a number of contracts posted new contract highs today.

The rally is also backed by bullish fundamentals. The porcine epidemic diarrhea virus (PEDV) has already caused one North Carolina plant to reduce its hours of operation due to tight supplies and more are expected to follow suit. Meanwhile, cash hog bids have remained steady to higher thanks to tight supplies and strong demand.

Packer profit margins have remained positive thanks to a record-setting rally in the pork market. Pork prices continue to notch new highs, propelled by record-high beef prices. Pork is still a value relative to beef.

Technical outlook: April lean hogs gapped higher on the open, dipped within 20 cents of support at yesterday's high $122.00, and ultimately settled mid-range. Today's contract high of $124.20 is resistance. Bulls' next target is psychological resistance at $125.00.

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 saw a choppy day of trade and ended likewise, with April and June futures 67 1/2 and 37 1/2 cents higher, respectively.

Fundamental outlook: Futures continue to indicate traders believe a top in the cash cattle market is near, despite tighter showlists and record-high beef prices that would normally point to higher trade. The fact that the April contract is more than $2 below the low end of last week's provided limited support to nearby contracts, but the rest of the market faced mild profit-taking.

The boxed beef market continued its record-setting rally this morning, but movement has slowed notably at these price levels. This may also be a sign a product market top is near.

Technical outlook: April live cattle saw an inside day up today. Resistance remains layered from the $146.00 area to the contract high of $146.65. Support extends from last week's low of $142.70 to the bottom of the market's Feb. 26 upside gap at $142.60.


Feeder cattle

Price action: Feeder cattle futures faced pressure for much of the day and the market ended low-range with losses of 32 1/2 cents to $1.07 1/2.

Fundamental outlook: Strength in the corn market gave traders incentive to take advantage of the market's recent strong gains with some profit-taking today. However, tight supplies and poor pasture conditions will continue to limit the market's downside.

Technical outlook: April feeder cattle gapped lower on the open, filled the gap, but settled near opening levels. However, the uptrend since this summer remains intact. The bottom of Friday's upside gap at $176.40 is initial support, but the market has to drop several more bucks to come up against even steep uptrending support. Monday's contract high of $178.00 marks resistance.

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.