Livestock Analysis (VIP) -- March 7, 2014

March 7, 2014 09:05 AM


Price action: Lean hog futures wrapped up an impressive week of trade with solid gains of 32 1/2 cents to $1.15, with most contracts seeing gains in the upper end of that range. For the week, futures posted strong gains, with the front-month up $6.15.

5-day outlook: Bullish technical and fundamental factors paired to propel hog futures sharply higher this week. However, the market remains technically overbought with the front-month contract well above futures, signaling a time or price correction is due. Recently increased volatility signals a pullback could be near.

30-day outlook: However, hog prices are expected to remain historically high. Lofty boxed beef prices are lifting demand for pork, keeping packer profit margins in the black. Meanwhile, the spread of the porcine epidemic diarrhea virus (PEDV) remains a source of support. The latest news is that some plants on the East Coast have reduced kill hours due to the disease. If this spreads to the Midwest, it would draw even more attention. Of note, hog slaughter declined 3.9% this week while average dressed hog weights held steady with week-ago and are up 5 pounds from year-ago.

90-day outlook: Supplies typically reach their tightest levels in the summer, lifting pork and hog prices. This year that trend could be even more pronounced due to the spread of PEDV and high-priced beef. Cash prices and the pork cutout value are already nearing last summer's peaks, which were record highs.

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.



Price action: Live cattle futures ended the day firmer, with April futures posting slight losses for the week and the rest of the market ending higher for the week. Live cattle remain within the boundaries of the uptrend.

5-day outlook: April live cattle futures posted the first technical clue of a major high being in place on Wednesday's key bearish reversal. What's lacking is a clear-cut technical sign of a high, as the contract remains in its uptrend and saw limited followthrough pressure yesterday and today. Early next week traders will be keeping a close eye on the beef market as prices have risen sharply and movement has slowed. And with packers' profit margins in the red, traders will be watching to see if the cash market has topped.

30-day outlook: Year-to-date beef production is down 7% from year-ago and slaughter is down 7.6% from year-ago as dressed cattle weights are only 7 lbs. heavier than year-ago. This sharp drop in beef production from last year will limit pressure on the beef market and futures through spring.

90-day outlook: The tight supply situation is known. Therefore, we're keeping a close eye on demand. Key during this period will be how aggressively retailers prepare for summer grilling. Beef is still expensive compared to pork, but recent sharp gains in pork could help beef demand this summer.

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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