Livestock Analysis (VIP) -- March 6, 2014

March 6, 2014 08:47 AM


Price action: Lean hog futures ended $1.15 to $1.67 1/2 higher through the July contract, with deferreds posting lighter gains.

Fundamental analysis: Ongoing concerns about the impacts of the porcine epidemic diarrhea virus (PEDV), this week's tighter-than-expected marketings and strength in the pork cutout market have kept the cash market and futures pointed higher this week. The cash market was stronger today, with reports of some locations raising bids as much as $4. The CME lean hog index has risen by more than $5 from last Friday.

However, April lean hog futures ended the day at around a $10 premium to the cash index. The steep premium and the fact futures are severely overbought raises the risk of profit-taking and a sharp price correction when buying behind this mature rally wanes.

Technical analysis: April lean hog futures traded near the middle of yesterday's trading range and still posted a contract high close of $112.40. Resistance is at yesterday's high of $114.67 1/2. The contract has posted sharp weekly gains, raising the risk of profit-taking ahead of the weekend. But without a clear-cut technical clue the market has topped, we aren't willing to step in and advise hedges at this point.

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: Live cattle futures closed slightly lower in narrow trading. Futures finished 15 to 52 1/2 cents lower in the April through February contracts. The April 2015 contract closed 20 cents higher. Futures posted mid-range closes.

Fundamental analysis: Futures edged lower on disappointment over additional $2 lower cash cattle trade. Trade started yesterday at $148 in Kansas and expanded across the Plains today at similar levels. Packers weren't willing to pay up for supplies despite lower showlists, as they are focused on improving margins.

The wholesale beef market continues to cooperate. Both Choice and Select beef cuts rose by a $1 or more today but the gains came on declining movement. Packers, who are cutting in the red, are benefiting from the rise in wholesale prices, have reduced slaughter lines in order to press cash prices lower and benefit profit margins. However, the selloff was limited as the lead April contract is nearly $5 below the $148 price level paid in the Southern Plains.

Technical analysis: April futures traded narrowly lower today but quickly found support as it probed the upside gap left Feb. 25. That contract came within 20 cents of filling the gap. The $143.00 area is attempting to act as support. The contract high of $146.65 marked yesterday on the open is resistance.


Feeder cattle

Price action: Feeder cattle futures closed moderately lower with declines of 82 1/2 cents to $1.25. Futures closed near the day's lows.

Fundamental analysis: Feeder cattle futures were under pressure from lower live cattle prices and firming corn futures. However, the expiring March futures contract holds about a $1.00 discount to the cash index. That discount should limit followthrough selling tomorrow.

Technical analysis: April feeder cattle futures traded in a very narrow range, opening and closing at about the same level after failing to muster a small rally. Futures posted a very narrow inside day compared to yesterday's wide trading range. That makes yesterday's high of $175.45 resistance and yesterday's low of $172.25 support.

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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