Livestock Analysis (VIP) -- October 12, 2012

October 12, 2012 09:38 AM


Price action: Lean hog futures closed 25 to 87 1/2 cents higher through the May contracts today. October hogs expired 42 1/2 cents higher. Far-deferred contracts were mildly weaker. For the week, hog futures extended the price recovery from the summer lows.

5-day outlook: With October hogs exiting the board, the December contract takes over lead-month status at just over a $4 discount to the cash market. That signals traders anticipate pressure on the cash market over the next two months, but it also opens additional upside potential in December futures if the recent cash strength persists. With cutting margins solidly in the black, the cash hog market should remain steady to firmer next week.

30-day outlook: With an ample supply of market-ready hogs and numbers expected to build seasonally into year-end, there are questions about how much longer the contra-seasonal rise in cash hog prices will continue. The key is packer cutting margins. With packers making money on every hog they push through kill lines, there's still solid support for the cash hog market. If margins turn negative, however, the incentive for packers to raise cash hog bids will be gone and the cash hog market would soften. And without support from the cash market, buying interest in lean hog futures would dry up.

90-day outlook: Hog producers are expected to face an extended period of unprofitable returns. Let the current uptrend in hog futures and downtrend and feed prices work in your favor, but you must be prepared to lock in feed prices on signs of a low and hedge hog futures when the recovery rally runs out of steam.

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

Feed needs: Risk is covered in the cash market for now.




Price action: Live cattle futures ended the week under pressure despite late-week cash strength. While October futures posted gains for the week, December and February live cattle posted slight losses. Feeder cattle futures ended the day mixed, but posted losses for the week.

5-day outlook: Cash cattle trade picked up at $125 today, which is up a dollar from the bulk of last week's trade. Tighter market-ready supplies and strength in the boxed beef market gave feedlots the upper hand in this week's negotiations. But packers were hesitant to raise bids due to negative profit margins. As a result, key to building on this week's cash improvement will be whether the beef market continues to improve.

30-day outlook: Weight data suggests feedlots are slightly backed up. Dressed cattle weights are running 17 lbs. heavier than year-ago. Year-to-date cattle slaughter is down 4.2% from year-ago and year-to-date beef production is down 2% from year-ago. If weights decline, it would tighten supplies considerably.

90-day outlook: Market-ready supplies will continue to tighten into next year, limiting pressure on live cattle futures and the cash market. This opens strong upside potential, especially as we head into the timeframe of the 10-year cycle high, due the first half of next year.

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.

Feed needs: Risk is covered in the cash market for now.


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