Livestock Analysis (VIP) -- March 5, 2014

March 5, 2014 08:45 AM


Price action: May through August lean hog futures posted gains of $1.15 to $2.00 today, though they finished well off session highs. The lead-month April contract and far-deferred futures finished under slight to moderate pressure.

Fundamental analysis: April lean hog futures traded limit up today, but weren't able to hold those gains. In addition to profit-taking, the lead-month contract was also pressured by the roughly $10 premium it carries to the cash market. While there's still five weeks until the contract expires and the cash market is pointed higher, the cash market hasn't been close to keeping pace with recent gains in futures.

Summer-month lean hog futures continue to be supported by concerns with porcine epidemic diarrhea virus (PEDV). While production losses from the disease are a moving target, traders are confident production will be lower than previous forecasts.

Technical analysis: Despite today's losses, April lean hog futures remain severely overbought, signaling a deeper correction is likely. Typically, very strong bull runs like this end with a sharp technical signal as the upside gets vastly overdone and the move lower is as steep, if not steeper than the move higher. Today's price action may turn into an exhaustion tail in April lean hog futures but there are no major topping signs yet.

Hedgers: Carry all risk in the cash market for now.

Feed needs: Profits on the 1st-qtr. meal hedges have been claimed. Carry all corn-for-feed and meal risk in the cash market for now.


Live cattle

Price action: Nearby live cattle gapped higher on the open and turned south, ending $1.22 1/2 to $1.95 lower, although off session lows. Far-deferred futures ended 35 to 92 1/2 cents lower.

Fundamental analysis: Early support came on followthrough buying from lean hog futures, but that was met with profit-taking and fund liquidation. Then talk that cash cattle trade had begun at $148 in Kansas, which if realized is down $2 from last week's record prices, added to price pressure. Rumors are the cash trade was isolated and light, and therefore doesn't necessarily set this week's cash tone.

Meanwhile, tight supplies are keeping the wholesale beef market supported. Choice values surged $2.99 this morning and Select rose $2.31 on decent morning movement of 89 loads. But with packer margins in the red, they are not anxious to raise cash bids even though supplies are tight.

Technical analysis: April live cattle futures posted a key bearish reversal for the day. After gapping to a new high of $146.65 on the open, the contract quickly filled the gap and eventually slipped below yesterday's low. While finishing off the daily low, the contract still closed well below yesterday's low to complete the reversal. Key for the market tomorrow is whether or not today's performance attracts followthrough selling, which would provide a stronger clue a high has been posted.


Feeder cattle

Price action: Feeder cattle futures saw spillover from weakness in live cattle futures, but came well off session lows into the close to finish with losses of 25 to 67 1/2 cents.

Fundamental analysis: Feeder cattle saw spillover from live cattle, with traders also working to narrow the premium March futures hold to the cash index. The contract is now trading in line with the index.

Technical analysis: April feeder futures saw a volatile day of price action and ended mid-range. The contract posted a new high of $175.45 and a daily low of $174.00. While ending off the low, the contract still posted a key bearish reversal, though it remains within the boundaries of the uptrending channel.

Hedgers: Fed cattle producers are long April $136.00 put options at $1.325 covering remaining 1st-qtr. and 50% of 2nd-qtr. marketings and are short the same number of April $144.00 call options at $1.525.

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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