Livestock Analysis (VIP) -- September 24, 2013

September 24, 2013 09:53 AM


Price action: Lean hog futures closed 90 cents to $2.32 1/2 higher through the August 2014 contract with the lead-month contract pacing gains. Despite the strong price gains, fall- and winter-month contracts could close no better than mid-range, though farther-deferred futures ended high-range.

Fundamental analysis: Hog traders haven't needed much help getting bulled up recently, but there was some positive fundamental news today. The acquisition of Smithfield Foods by China's Shuanghui International Holdings Ltd. fueled thoughts of increased pork exports to the world's top pork consumer. Additionally, yesterday afternoon's Cold Storage Report showed pork stocks at the end of August below expectations, suggesting pork supplies are lighter than expected and/or demand was greater than anticipated.

Cash hog bids were steady to lower across the Midwest today after showing unexpected strength on Monday. Despite profitable margins, some pork plants are trimming kill hours as market-ready hog supplies have been slow to build seasonally.

Technical analysis: December lean hog futures spiked to a contract high after gapping higher, but the contract only ended mid-range and finished 40 cents below the contract-high close. Today's price action is a potential exhaustion tail, but this morning's gap from $87.55 to $86.55 would need to be filled to signal potential topping action.

Hedgers: 50% of expected 4th-qtr. production is hedged in Dec. lean hog futures at an average price of $82.12 1/2.

Feed needs: 25% of 4th-qtr. protein needs are covered in long Dec. meal futures at $422.20 and 25% of 1st-qtr. needs are covered in long March meal futures at $410.80.



Live cattle

Price action: Live cattle futures opened slightly higher and added to their gains through the trading day to close moderately higher. October and December futures both finished up 72 1/2 cents, closing at their highs for the day.

Fundamental analysis: Cattle futures started stronger in reaction to Monday's Cold Storage Report that showed inventory levels at much lower levels than expected. In addition, tightening showlists have traders looking for a boost in cash cattle prices. The wholesale beef market also contributed to the gains by reporting stronger prices, but traders were unimpressed by the low movement. However, the $3 premium that October futures hold to last week's cash trade at $124 in the southern markets limited buying enthusiasm.

Technical analysis: October futures probed deeply into the resistance area that runs up to $129.00. It left Monday's gap area sitting under $126.47 1/2 untested, increasing the strength of that potential support area. The December through June contracts broke through near-term resistance and posted new highs for the May to September rally. The December contract closed at its highest level since March 5. The February to March consolidation area offers resistance up to the $132.50 area.


Feeder cattle

Price action: Feeder cattle futures posted strong gains and finished near their daily highs. The October contract closed up $1.67 1/2 and the January contract closed up $2.37 1/2.

Fundamental analysis: Today's gains in live cattle futures and weakness in corn futures combined with bullish enthusiasm triggered by the tightening supplies indicated in the Cattle on Feed Report to lift prices today. In addition, weakness in interest rates as a result of the Fed's decision not to taper its bond buys immediately added to today's gains.

Technical analysis: October feeder cattle continue to pull away from the former resistance area running from $159.00 to $160.70, making that area look more like a support zone. October futures closed at their highest level since Jan. 29.

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: 25% of 4th-qtr. protein needs are covered in long Dec. meal futures at $422.20 and 25% of 1st-qtr. needs are covered in long March meal futures at $410.80.


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