Livestock Analysis (VIP) -- May 8, 2013

May 8, 2013 10:01 AM


Price action: Lean hog futures closed 7 1/2 to 52 1/2 cents higher with strongest gains in summer-month contracts.

Fundamental analysis: Interior direct cash hog prices were generally steady to firmer today with terminals running basically flat to as much as $2 higher. Meanwhile, pork trade was steady to slightly weaker with wholesale pork prices down 47 cents at midday. That combination will further weaken packer cutting margins, which are already deep in the red.

Some packers proved a little more aggressive than others as they scrambled to fill slaughter schedules the remainder of this week and into next week amid tightening market-ready supplies. The push is keyed by orders for Memorial Day features, but that demand will wane by end of next week, which could lead to a softening of packer demand.

June lean hog futures continue to trade at a near-$3 premium to the cash index, suggesting traders sense more cash strength into mid-summer.

Technical analysis: June lean hog futures marked a small gap above Tuesday's high at the open, but later filled the gap. The contract remains in a moderately higher stance since marking a low March 20 at $87.20 and a higher low April 15 at $88.22 1/2. The technical outlook would become more positive with a close above the May 2 high of $93.10. If that would occur, it would continue the spring trend of higher lows and higher highs. However, a close above the six-month downtrend from the December high is required to confirm an overall shift in market trend.

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

Feed needs: All feed coverage has been lifted. Carry all risk in the cash market for now.


Live cattle

Price action: Live cattle futures faced pressure most of the day and ended just off session lows with losses of 62 1/2 cents to $1.15.

Fundamental analysis: Choice boxed beef prices soared past last Friday's all-time record price ($201.68) to $204.45 and movement held solid at 111 loads. But this failed to spur any sort of bullish reaction from the market, clearly signaling traders do not see such prices as sustainable.

Rather, they pushed the market lower after the start of light cash cattle trade in the Texas and Kansas at $126 and at $127 in the western Corn Belt. This was down $2 from the bottom of last week's trading range in these regions, but still well above futures prices. Traders are displaying no urgency to narrow this gap, which signals demand concerns are very strong as beef movement as a whole has remained light.

Technical analysis: June live cattle futures appear headed for a test of psychological support at $120.00, followed by the April contract-low of $119.40. Strong resistance stands at the May high of $124.00.


Feeder cattle

Price action: Feeder cattle futures gapped lower on the open, filled the gap, but later softened and ended near opening levels with losses of 90 cents to $1.27 1/2.

Fundamental analysis: Beef demand concerns in the live cattle market spilled over to feeder cattle futures as this translates to worries about feeder cattle demand, especially considering relatively high feed costs. Also, traders worked to narrow the premium nearby contracts hold to the cash index. The May contract is now in line with the index, but the August contract is at roughly a $9.50 premium to the cash index.

Technical analysis: August feeder cattle futures appear headed for a test of contract-low support at $144.75, after which support is layered every 50-cents lower beginning at $144.50. The contract is nearing technically oversold territory, however. A corrective bounce would have bulls targeting the psychological $150.00 level.

Hedgers: Fed cattle producers should carry all risk in the cash market for now. Feeder cattle sellers and buyers should also carry all risk in the cash market for now, but feeder cattle buyers should stay in touch to establish long coverage.

Feed needs: All feed coverage has been lifted. Carry all risk in the cash market for now.

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