Livestock Analysis (VIP) -- March 31, 2014

March 31, 2014 09:55 AM


Price action: April lean hogs gapped lower on the open but the market rebounded to a new contract high and settled just off this level with gains of 42 1/2 cents, marking a bullish reversal. Deferred contracts also gapped lower but settled high-range, but these contracts still settled 65 cents to $2.45 lower on the day.

Fundamental analysis: April lean hogs benefited from the $4 discount it holds to the cash hog index, along with as much as $4 higher cash hog bids in some areas today. But the rest of the market was pressured by bearish Quarterly Hogs & Pigs data released after the market closed Friday. All hogs and pigs came in well above expectations, signaling the impact of the porcine epidemic diarrhea virus (PEDV) was not as high as anticipated.

However, some discrepancy between the slaughter pace and the weight breakdown signals USDA's report may not have fully accounted for PEDV (see "Evening Report"). This helped many contracts to settle well off their lows.

Technical analysis: April lean hogs notched yet another contract high of $126.35, marking this as near-term resistance. Bulls' next target is $126.50, followed by $127.00. The $124.00 area is initial support for the contract.

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 trimmed early losses and closed 10 to 85 cents lower, with nearbys leading losses.

Fundamental analysis: Much of today's pressure came on spillover from sharp losses in the lean hog pit, as traders reacted to the bearish Hogs & Pigs Report. But with little other fresh news for the market to digest, cattle were also vulnerable to profit-taking. It's encouraging for bulls to see futures move well off the session lows, as it suggests there is still "value buying" in this market. But there is also concern lofty beef prices are running into resistance, which could trim packer demand for cash cattle.

Technical analysis: June live cattle gapped sharply lower on the open and trimmed losses, but still left a 27-1/2 cent gap on the chart. Futures avoided doing any chart damage, as the market respected uptrending support. Filling today's gap would reopen upside potential to last week's contract high of $139.00.


Feeder cattle

Price action: Feeder cattle futures faced stepped up price pressure as corn futures rose in reaction to USDA reports (see "Evening Report" for more). Futures closed $1.32 1/2 to $1.65 lower.

Fundamental analysis: As corn futures rallied in reaction to the smaller-than-expected 2014 acreage figure, pressure on feeder futures intensified. Weakness in live cattle futures added to the negative tone. April feeder futures ended the day at a small discount to the cash index.

Technical analysis: April feeder futures gapped lower on the open, filled the gap, but returned to opening levels to post a downside day of trade on the daily chart. The contract remained within the boundaries of the uptrending channel, but settled near support levels. Therefore, followthrough pressure tomorrow could result in sell stops being triggered.

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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