Livestock Analysis (VIP) -- March 28, 2014

March 28, 2014 09:53 AM


Price action: Lean hog futures ended the day mixed as traders moved to the sidelines ahead of the Hogs & Pigs Report. Increased price volatility was seen this week, but in the end, April futures returned to near contract highs and June futures recouped much of the early week losses.

5-day outlook: Compared to expectations, this afternoon's Hogs & Pigs Report is bearish. Traders expected the report to reflect the porcine epidemic diarrhea virus (PEDV) had a larger impact on the All Hogs & Pigs category, which came in at 97% of year-ago (traders expected 94.5%). Kept for breeding came in about as expected at even with year-ago levels, with Kept for Breeding at 96% -- two percentage points stronger than expected. The report should weigh on lean hog futures Monday morning, as it signals marketings in early spring will be larger than traders expected.

30-day outlook: The weight breakdowns signal near-term marketings will be around 5% below year-ago levels, tapering to 3% below year-ago. Later in the summer and early fall, weights will likely trend 3% to 4% lighter than year-ago. Traders have a much steeper reduction factored into the market, which could result in pressure across all contract months. It is worth noting, however, that the survey on which the report was based was issued in December.

90-day outlook: No one knows for certain the impact of the PEDV outbreak and when or how it will be controlled/slowed. It has resulted in a sharp rise in pork prices the consumers hasn't fully absorbed yet, which raises concerns about how consumers will react during grilling season.

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.



Price action: Live cattle futures finished mixed today, but posted strong gains for the week. Feeder cattle ended lower today, but higher for the week.

5-day outlook: Traders are comfortable with live cattle futures well below the cash market despite tight market-ready supplies. They anticipate packers will soon pull back the reins on recent cash cattle gains amid weakening margins. Because of the big discount futures hold to the cash market, downside risk is limited even if the cash market tops.

30-day outlook: The average grocery beef price nearly hit $5 this week. While grocers are still featuring some beef, more pork and poultry features are likely this spring -- a time when beef is typically predominantly featured heading into grilling season. Given tight supplies, however, a potential decline in beef demand is not overly concerning.

90-day outlook: Heavy cattle placements this winter point to a build in market-ready supplies this summer. But there won't be a "wall" of cattle -- just more than previously expected. On the flip side, heavy placements this winter mean fewer calves to put into feedlots in the months ahead. Looking further ahead, that points to a likely "hole" in marketings next winter.

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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