Livestock Analysis (VIP) -- March 24, 2014

March 24, 2014 09:40 AM


Price action: Lean hog futures ended mixed, with the April through August contracts ending 90 cents to $2.12 1/2 lower and deferred futures closing 35 to 97 1/2 cents higher.

Fundamental analysis: Nearbys saw early pressure from Friday's Cold Storage Report that showed a build in frozen pork stocks compared to month- and year-ago levels. This caught some traders off guard given the tightening of supplies caused by the porcine epidemic diarrhea virus (PEDV), although others countered retailers were working to build their inventories for grilling season.

Meanwhile, the cash hog market was as much as $3 higher to start the week to reflect still-strong demand for tighter-than-expected supplies. April lean hog futures have trimmed their premium to the cash index to end the day around $2 higher the index.

Technical analysis: April lean hog futures started the day 10 cents above Friday's high but softened and saw trade below Friday's low. But the contract closed mid-range to avoid posting a downside day of trade on the chart. The contract has violated steep uptrending support, but it would have to violate the $113.00 level to break the longer-lasting uptrend. Meanwhile, June lean hog futures filled in last week's gap area. Followthrough pressure tomorrow would suggest a top has been posted.

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.


Live cattle

Price action: Live cattle futures finished slightly to moderately higher, closing at or near their daily highs. The lead April contract posted the smallest increase, a 15-cent rise, while the December contract posted the strongest finish, up $1.00.

Fundamental analysis: Live cattle futures opened weaker under pressure from the bearishly construed Cattle on Feed Report. That report showed Placements rising 15% above year-ago, a figure well above trade expectations. That surprise had deferred futures under pressure in the early going.

A return to positive news in the wholesale beef market lifted nearby futures along with the low level of frozen beef in cold storage at the end of February as indicated by Friday's Cold Storage Report. The lift saw technical traders moving into the market on the buy side as futures found buying support at Friday's lows.

Estimated cattle slaughter today totaled 115,000 head, down from last week's 116,000 but up from 106,000 head a year ago.

Technical analysis: Cattle futures found buying support at Friday's low and moved higher. The April through August contracts posted higher closes but failed to take out Friday's highs. However, the October through April 2015 contracts all surged well above Friday's highs, giving them a very positive cast on the chart. The April 2014 contract has support at $142.70 and resistance at the $145 area. That contract needs to close above the contract high at $146.92 1/2 to reignite the bull move.


Feeder cattle

Price action: Feeder cattle futures closed moderately higher at or near their daily highs. Futures finished $1.02 1/2 to $1.65 1/2 higher with the expiring March contract leading gains.

Fundamental analysis: Feeder cattle futures opened higher on spillover from the Cattle on Feed Report, which again confirms tightening feeder cattle supplies going forward. The lead March contract gapped higher and held gains through the day, closing at daily highs. The ongoing drought in the Plains continues to restrain cow-calf operators from retaining cows and heifers to rebuild the herd. Rather, the drought continues to force heifers into feedlots, restricting future supplies. The tightening outlook resulted in cattle traders shrugging off the stronger gain market.

Technical analysis: April futures found support just above $175.00 and moved higher into resistance at $176.30. Resistance runs from that level up to contract highs at $178.00. The February-March uptrend line triggered support at Thursday's and Friday's lows and offers support at $175.00 tomorrow.

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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