Livestock Analysis (VIP) -- September 27, 2013

September 27, 2013 09:39 AM


Price action: Lean hog futures posted slight gains through the July 2014 contract today and finished sharply higher for the week after ending near weekly lows last Friday. Price action was very volatile this week, which could be a sign that the market is working on a top, though traders are still very willing to buy price breaks.

5-day outlook: USDA's Hogs & Pigs Report was bearish, which should put heavy pressure on hog futures Monday, especially given recent strong gains. Key to price action the remainder of the week will be how traders respond after the initial wave of selling. If there's followthrough selling after the initial wave, it would signal a top has been posted.

30-day outlook: Seasonally, hog futures typically come under pressure during fall as supplies build. Based on USDA's market hog inventory numbers, slaughter should run roughly 1% above year-ago through fall.

90-day outlook: Concerns the porcine epidemic diarrhea virus (PEDV) outbreak will cut deeper into hog supplies than previously thought has kept lean hog futures well supported. But USDA's report data didn't reflect significant losses due to the disease. Eventually, either USDA or the industry will be proven wrong.

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.



Price action: Cattle futures firmed through the trading day, closing slightly to moderately higher and finishing near the day's highs. Feeder cattle posted slight losses for the day. But both markets closed sharply higher on the week.

5-day outlook: Traders continue to look for cash prices to rise as supplies of market-ready cattle are down and the wholesale beef trade has seen recent strength. However, October futures are already trading at a $4-plus premium to last week's $124 price paid in the Southern Plains. Cash prices will have to show some strength to allow October futures to rise.

30-day outlook: The seasonal trend continues to favor higher cash cattle prices as wholesale demand normally improves in the fall while live supplies slip. The Cattle on Feed Report points to a decline in available supplies. So that puts pressure on demand to carry prices higher. The key to higher prices will be whether retailers can pass higher beef prices on to consumers.

90-day outlook: Cattle supplies will continue to decline, which will put additional pressure on retailers to pass higher beef prices on to consumers. Retailers have been reluctant to do so as consumers are already facing record beef prices. But consumer resistance to higher prices may weaken as prices for pork rise. Meanwhile, dwindling calf numbers means feeder cattle prices will be on the rise as well.

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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