Livestock Analysis (VIP) -- September 21, 2012

September 21, 2012 09:55 AM


Price action: Lean hog futures closed as much as 95 cents higher today as the rebound from the recent lows continued. For the week, futures ended near weekly highs and posted strong weekly gains.

5-day outlook: Bulls have short-term momentum on their side as traders are covering short positions after the extended price plunge. But to build on this week's price gains, the cash hog market must continue to strengthen. While overall market-ready supplies are plentiful, they aren't as abundant as over the past month-plus and packers are working with profitable margins. That should keep the cash market pointed higher and allow hog futures to build on recent, corrective gains.

30-day outlook: While there are indications the glut of hog supplies has passed, hog numbers will remain seasonally heavy into winter. That caps upside potential. And if hog futures build too much of a premium to the cash index, it would create a hedging opportunity.

90-day outlook: There will be pressure on demand to chew through abundant supplies through the end of the year. Pork has a competitive price advantage over beef domestically, but there are some questions on the export front, specifically Chinese demand. While China is concerned about rising food prices, Chinese demand for U.S. pork has slowed, leaving more product for domestic demand to chew through.

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 posted sharp losses this week as traders feel the cash market has run out of steam. Feeder futures posted slight gains for the week in all but the front-month contract, with weaker corn futures providing support.

5-day outlook: Traders have some positive USDA data to factor into prices to start next week, as total beef stocks in frozen storage as well as total cattle on feed came in below traders' expectations (see "Evening Report" for more). The data goes hand in hand, as a tightening feedlot situation translates into smaller available supplies in cold storage. This reflects demand is "strong enough" and supports higher beef prices.

30-day outlook: But to encourage packers to pay up for cash supplies, their profit margins must improve. Feedlots were forced to accept steady to $1 lower cash cattle bids this week and the cash market could face additional near-term price pressure unless the beef market continues to improve.

90-day outlook: Beef prices have reached a level that has slowed demand dramatically in the past, but the recent softening of the U.S. dollar index could help to improve export demand. Meanwhile, drought conditions across the Plains and the Midwest are not encouraging producers to hold back heifers, which points to tightening supplies well into 2014.

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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