Livestock Analysis (VIP) -- October 17, 2012

October 17, 2012 09:51 AM


Price action: Lean hog futures favored a firmer tone on the close, but still finished mixed. Nearby futures ended 55 to 57 1/2 cents higher, which was a high-range close.

Fundamental analysis: Nearby futures were supported by weakness in the U.S. dollar index and signs of still-strong pork demand. But buying was limited as traders suspect the pork market is nearing a seasonal shift, especially given rising supplies. The cash hog market was mostly steady as packers are having no difficulty securing needed supplies. But with their profit margins still in the black, packers are willing to move as many hogs through plants as possible. As a result, steady cash bids are expected again tomorrow.

The CME lean hog index is projected up 28 cents to stand at $83.49. December hogs are trading at around a $4 discount to the index, which signals there is more near-term upside potential for the contract. But it also suggests traders anticipate building supplies will soon weaken the cash hog market.

Technical analysis: February lean hog futures posted a bullish reversal, closing just off the session high of $85.00. Followthrough buying tomorrow would make bulls' next target the July high of $86.20. Support lies at the June high of $82.80.

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

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


Live cattle

Price action: Live cattle futures finished 57 1/2 to 92 1/2 cents higher, which was a high-range close for fall- and winter-month contracts, while far-deferred futures ended mostly mid-range.

Fundamental analysis: Strength in live cattle futures so far this week has come from improving boxed beef prices, which have traders expecting firmer cash cattle prices compared with last week's mostly $125 trade in the Plains. But with cutting margins in the red and USDA's Cattle on Feed Report out Friday afternoon, packers will remain reluctant to raise cash cattle bids. Given the slight premium October live cattle futures now hold to the bulk of last week's cash trade, followthrough buying interest could be hard to find.

Additional support for live cattle came from pressure on the U.S. dollar, which encouraged general commodity buying.

Technical analysis: Buy stops were triggered on the push above last week's high of $127.32 1/2 in December live cattle futures. Consecutive higher closes above that level are needed to turn it into solid support. Tough resistance is layered from the $129.00 area to the September spike high at $131.15.

Feeder cattle

Price action: Feeder cattle closed 85 cents to $1.55 higher, which was high-range for most contracts although off session highs.

Fundamental analysis: Feeder cattle futures were supported by short-covering, which was encouraged by a firm tone in live cattle. Traders ignored strength in the corn market, although additional strength in corn would make it hard for feeders to find followthrough buying interest.

Technical analysis: January feeder cattle are nearing key resistance at the September double-top at $151.40, which marks the top of the nearly two-month choppy range. A push above that level would likely trigger buy stops.

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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