Livestock Analysis (VIP) -- October 2, 2012

October 2, 2012 09:45 AM


Price action: Lean hog futures rallied into the close to finish 85 cents to $1.72 1/2 higher through the April contract. Deferred futures ended 30 to 75 cents higher, which was still a high-range close.

Fundamental analysis: Lean hog futures benefited from followthrough buying, with traders comfortable adding premium into nearby contracts as the pork cutout market continues to strengthen. The cash hog market was steady to $1 higher today, with packers seeking supplies for late-week delivery. This signals market-ready supplies have tightened, which has traders expecting steady to firmer bids the remainder of the week. However, with packers' profit margins hovering above breakeven, demand for hogs could decline if the pork market softens.

Technical analysis: December lean hog futures gapped above last week's high of $75.65 and extended gains to complete a 50% retracement of the decline from the July high to the September low at $76.17 1/2. This area roughly coincides with the May low of $76.40 and is now support. Bulls' next upside objective is the late July high of $80.75.

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 closed 25 to 55 cents higher, which was roughly a mid-range close for most contracts.

Fundamental analysis: Monday's strong close triggered followthrough buying on the open this morning as traders covered short positions after the recent price pullback. With the flip of the calendar, there has also been a fresh influx of money into the long side of the market, although macro-economic concerns are likely to limit additional buying interest until cash cattle trade for the week materializes.

With the early (and unexpected) development of cash cattle bids and asking prices on Monday, many traders are sensing cash cattle trade will be seen sooner than recent weeks. That suggests packer demand for cattle may be increased, but they are still working with highly negative margins, which adds uncertainty to the cash mix.

Technical analysis: December live cattle are hinting at a short-term low on the daily chart. A close above previous support at the late August low of $126.80 would attract fresh chart-based buying needed to confirm a short-term low.

Feeder cattle

Price action: Feeder cattle closed 70 cents to $1.05 higher, although that was well off today's highs and generally closer to session lows.

Fundamental analysis: Gains in live cattle futures in conjunction with mild pressure on the corn market supported feeder cattle futures today. Given the premium futures hold to the CME feeder cattle index, however, gains were pared late.

Technical analysis: Support for October live cattle lies at Monday's low of $143.00 and the Aug. 22 low at $142.00. To the upside, the September high at $148.12 1/2 is resistance.

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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