Livestock Analysis (VIP) -- March 25, 2014

March 25, 2014 09:35 AM


Price action: Lean hog futures gapped lower and remained under pressure all day, closing down the $3.00 limit in the April through October contracts and down 70 cents to $1.32 1/2 in far deferred contracts.

Fundamental analysis: Profit-taking prompted by Monday's stagnating action. Traders, nervous an overdue correction was about to begin, moved to take profits. That sent futures lower. Negative news of a decline in the pork cutout value sent prices down the limit. Pork cutout values slipped $2.01 this morning on lighter movement, which raised concern prices were trimming demand.

Cash prices were firm to steady, however, as estimated slaughter reached 418,000 head today. That is higher than last week's 415,000 but lower than last year's 430,000 head.

Technical analysis: The gap-down opening and limit-down close is obviously bearish. The plunge broke the parabolic uptrend line of the last month. Such steep lines are rarely sustainable. However, the February/March uptrend line for April lean hogs is at a much-more sustainable 45 degrees and offers support at about $112.00. The March 17 upside gap from $119.60 to $120.40 is the first downside target.

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: Nearby contracts spent some time in negative territory today, but bulls had the advantage heading into the close and futures ended steady to 42 1/2 cents higher.

Fundamental analysis: Reports of light cash cattle trade at $150 in Texas and Kansas -- steady with week-ago and nearly $6 below April futures -- lifted nearby contracts ahead of the close. If trade picks up at these prices, this should limit selling in futures going forward. Traders have also been impressed by the fact boxed beef prices have been able to hover around record highs rather than sharply retreating, though movement has slowed. Still-tight showlist estimates also worked to feedlots' advantage this week.

On the other hand, traders are hesitant to extend long positions considering the higher-than-expected third quarter supplies the Cattle on Feed update signaled Friday.

Technical analysis: April live cattle found buying interest on the dip through last week's low of $143.65, marking it as support. Below that, support stands at the March low of $142.70. Resistance stands at the contract high of $146.92 1/2.


Feeder cattle

Price action: Feeder cattle futures gapped higher on the open and enjoyed an upside day of trade, ending 52 1/2 cents to $1.05 higher, with most contracts at or near the lower end of the range.

Fundamental analysis: Weakness in the corn market, the bullish chart posture of the market and tight supplies supported feeder cattle futures today. Gains in the live cattle market made it easier for feeders to rally, too. The front-month is trading in line with the cash index.

Technical analysis: April feeder cattle futures gapped higher on the open and left a small gap open on the chart. The high-range close signals the contract is likely headed for a test of contract-high resistance at $178.00. The bottom of today's gap at $176.30 is 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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