Livestock Analysis (VIP) -- March 27, 2014

March 27, 2014 09:56 AM


Price action: April through August lean hogs closed their $3.00 limit higher today as the market gapped higher on the open and didn't look back. Far deferred months posted gains between 80 cents and $2.37 1/2.

Fundamental analysis: Traders responded to a setback in the lean hog market with a surge in "bargain" buying yesterday and more of the same was seen today. As a result, many of those thinking a top was in place being washed out of the market. Fundamentally, support stemmed from recently improved movement despite near-record-high pork prices. Plus, futures are now at a discount to the cash index.

Traders are also preparing for the Quarterly Hogs & Pigs Report tomorrow, which is expected to reflect a drawdown in supplies due to the porcine epidemic diarrhea virus (PEDV). Talk today the report will not reflect the true impact of PEDV since the survey went out in December signals traders may discount the report if it reflects higher than anticipated supplies.

Technical analysis: April lean hogs gapped through psychological resistance levels of $123.00, $124.00 and $125.00 today, turning these levels into support. Bulls' next target is the contract high of $126.30.

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: Live cattle futures got off to a choppy start, but the market firmed as the day progressed. Futures ended high-range with gains of 20 to 90 cents.

Fundamental analysis: Traders put a bit more effort into aligning nearby futures with the cash cattle market. Trade took place at $152 to $154 this week and cash prices have remained near such elevated throughout the month despite traders' assertions such prices are not sustainable.

Meanwhile, boxed beef prices are still hovering around record highs, though Choice and Select values softened this morning. Movement also pulled back a bit this morning.

Technical analysis: April live cattle futures hit a new weekly high of $146.50 today and the contract appears poised for a test of last week's contract high of $146.92 1/2. Support stretches from $145.00 to the bottom of yesterday's big upside gap at $144.60.


Feeder cattle

Price action: Feeder cattle futures again gapped higher on the open and ended 60 to 87 1/2 cents higher for the day, which was a high-range close. The March contract expired 60 cents higher at $178.55 today.

Fundamental analysis: Gains in the live cattle market and strong spillover from the hog market supported feeder cattle futures today. Traders are not yet concerned about narrowing the slight premium the April contract holds to the cash index as quite a few weeks remain before its expiration. Plus the cash idex continues to trend higher.

Technical analysis: April feeder cattle futures gapped higher on the open and settled near opening levels. The bottom of today's gap at $178.80 is initial support, followed by the mid-month high of $178.00. The contract finished just 50 cents off tough resistance at $180.00.

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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