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Livestock Analysis (VIP) -- September 25, 2013

15:01PM Sep 25, 2013


Price action: Lean hog futures ended mixed, but the front-month contract saw strong followthrough buying to end $1.20 higher. December hogs ended 52 1/2 cents higher, with the rest of the pit ending narrowly mixed.

Fundamental analysis: Sharp followthrough buying in the October contract signals there is still more upside potential as traders work to narrow the discount it holds to the cash index. October hogs ended the day at around a $4 discount to the index. Tighter-than-expected supplies continue to give bulls the upper hand, but packers have been more hesitant to raise bids this week as they work to improve margins.

Traders are also focused on evening positions ahead of Friday afternoon's Quarterly Hogs & Pigs Report, which is expected to reflect slight expansion in the industry due to rising prices. While All Hogs & Pigs are expected to come in around 98.6% of year-ago levels, Kept for Breeding is seen at 101.5% of year-ago.

Technical analysis: October lean hog futures have moved into overbought territory according to the 9-day Relative Strength Index, which signals a time or price correction is due. But technicals currently point to even higher prices as today's followthrough buying confirms yesterday's upside breakout.

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 favored a firmer tone throughout the day and finished slightly higher in all but the April contract, which ended 5 cents lower.

Fundamental analysis: Cattle traders are anticipating higher cash cattle prices in the Plains this week after packers raised bids $1 last week. But with October live cattle already trading at roughly a $3.50 premium to last week's cash trade, buying interest was muted today as traders wait for cash trade to develop. Unless there are strong indications packers will raise cash bids more than $1, buying interest is likely to remain limited tomorrow.

Traders have some uncertainty toward the boxed beef market. There seems to be retailer resistance to current prices, though packers moved a strong 161 loads of product this morning, albeit amid a drop in Choice boxed beef values.

Technical analysis: December live cattle futures showed modest followthrough buying today after posting a breakout above the August high yesterday. This price action suggests the contract is ready to move the next leg higher on the daily chart. To do so, the contract must push above a 62% retracement of the price plunge from the contract high to the contract low, which stands around $131.90. Uptrending support from the May and June lows intersects at $129.59 1/2.


Feeder cattle

Price action: September feeder cattle closed 72 1/2 cents higher, while the October through March contracts ended 57 1/2 to 85 cents lower.

Fundamental analysis: Recent strong gains in feeder cattle and strength in the corn market today caused traders to take profits today. But the downside was limited to corrective selling as live cattle favored a firmer tone and traders are anticipating cash feeder cattle prices to rise amid tight supplies.

Technical analysis: January feeder cattle futures posted a modest inside day down today following five days of gains. Tuesday's high at $163.65 is followed closely by the contract high of $163.95 as key resistance. To the downside, support lies at Tuesday's gap from $162.45 to $161.75.

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.