Livestock Analysis (VIP) -- March 26, 2014

March 26, 2014 09:40 AM


Price action: Several lean hog futures contracts gapped sharply lower on the open but quickly filled the gap and then some. April through August contracts settled 45 cents to $1.10 higher, while deferred months were choppy.

Fundamental analysis: The lean hog market initially saw heavy followthrough sales on the open, but once again the lean hog market signaled it may not be ready to roll over just yet. Futures reversed course and posted decent gains on the day. Improved pork movement the past two days along with some unease ahead of the Quarterly Hogs and Pigs Report encouraged some short-covering.

Traders expect the report to show all hogs and pigs at 94.5% of year-ago levels, reflecting the impact of the porcine epidemic diarrhea virus (PEDV). But the bigger story may be USDA's revisions to past data.

Technical analysis: After gapping lower on the open, April lean hogs not only closed that gap, but they also made a run at closing yesterday's downside gap on the chart. The top of this gap at $124.00 is initial resistance. Support is layered from today's low of $120.25 to the bottom of the March 17 gap at $119.60.

Hedgers: 50% of expected 2nd-qtr. hog marketings and 50% of expected 3rd-qtr. Hog marketing 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: April and June live cattle futures finished $1.42 1/2 and $1.20 higher, respectively. The August contract forward posted gains of generally 35 to 95 cents.

Fundamental analysis: Today was a catch-up day of trade in cattle futures. Traders reacted to news of $152 (Kansas and Texas) to $154 (Nebraska and Colorado) cash cattle trade late Tuesday. While this triggered strong buying in nearby futures, these contracts remain at a big discount to the cash market, signaling traders believe a short-term top is coming.

Choice boxed beef prices were firmer this morning, while Select values were weaker. Perhaps more telling, however, was the very light movement. That suggests retailers are becoming increasingly hesitant to increase bookings due to historically high beef prices. Unless that unexpectedly changes, it will eventually limit packers' willingness to keep actively competing for tight market-ready supplies with higher cash cattle prices.

Technical analysis: April live cattle futures gapped sharply higher and left an upside gap on the daily chart today, but didn't advance beyond the opening level. Contract-high resistance stands above today's high at $146.92 1/2 and must be cleared to build fresh upside momentum. The bottom of today's gap at $144.60 is initial support, with stronger support at yesterday's low of $143.10 and the bottom of the March 26 gap at $142.60.


Feeder cattle

Price action: Feeder cattle futures finished 72 1/2 cents to $1.27 1/2 higher through the September contract.

Fundamental analysis: Strong gains in nearby live cattle futures provided much of the price support for feeder cattle today. Tight calf supplies are an ongoing source of support, though traders aren't wanting to push futures too far in front of the cash index.

Technical analysis: April feeder cattle futures gapped to a new contract high, signaling the contract is ready to move the next leg higher technically. Upside targets are psychological levels at this point, with the first being $179.00 and then every $1.00 higher.

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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