Livestock Analysis (VIP) -- March 21, 2014

March 21, 2014 10:06 AM



Price action: Lean hog futures closed mixed with the lead April contract closing 87 1/2 cents higher (a new high close) sharply higher for the week and up more than $25 the past four weeks. The May through August contracts and the distant February contract closed 20 to 65 cents lower. The October and December contracts closed $1.27 1/2 and $1.35 higher, respectively.

5-day outlook: The ability of wholesale pork prices to hold current levels will dictate the direction for cash and hog futures early in the week. Hog slaughter continues to run under earlier levels, which will provide support. By week's end traders will turn their attention to the Quarterly Hogs and Pigs Report, which will be released Friday afternoon. Traders will look for guidance on how much projected hog supplies have been restricted due to the porcine epidemic diarrhea virus (PEDV).

30-day outlook: Whether or not wholesale beef and pork prices can move higher from already high levels will determine how much higher cash hog prices can go. The April futures contract has already priced in a $7 rise in cash prices versus current cash prices. Meanwhile traders are becoming increasingly gun-shy about the parabolic rise in futures, which means they will be quicker than normal to react to any negative news about supply or demand.

90-day outlook: The March Hogs and Pigs Report will help quantify the amount of lost production due to PEDV. But reduced supply is only part of the story. Demand has held up well in the face of record high beef and pork prices. But eventually consumers will balk at the steep increases in beef prices. While that has helped pork prices so far, consumers could decide pork has become overpriced as well. When that occurs, that would prompt a downdraft in hog prices across the board.

Hedgers: 50% of expected 2nd-qtr. hog marketings and 50% of expected 3rd-qtr. hog marketings are covered in $126.00 June lean hog put options for $3.90.

Feed needs: Carry all corn-for-feed and meal risk in the cash market for now.



Price action: Live cattle futures ended mixed, with nearbys weaker and deferreds firmer amid spreading ahead of this afternoon's Cattle on Feed Report. For the week, April live cattle posted losses but didn't do any chart damage. Feeder futures were higher today and March posted a new high of $175.02 1/2, which is up slightly from week-ago.

5-day outlook: Futures could see some light pressure based on this afternoon's Cattle on Feed Report, as Placements came in well above the average trade guess (see "Evening Report" for more), but the Cold Storage Report showed beef stocks down from month- and year-ago, which reminds of the tight supply situation.

30-day outlook: Traders are comfortable with the discount structure nearby live cattle hold to the cash market, as they don't expect cash to trade at current values for an extended period even though packer margins have returned to the black.

90-day outlook: The well-known "10-year cattle cycle" is at least an 11-year cycle, as futures posted a major high last month on the monthly continuation chart. Even though there is risk of an extended correction, ultimately, pressure should be limited by tight supplies and strong cash price projections by USDA for 2014.

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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