Livestock Analysis (VIP) --Advice -- March 19, 2014

March 19, 2014 10:03 AM


New Advice: Cover 50% of expected 2nd-qtr. hog marketings and 50% of expected 3rd-qtr. hog marketings by buying $126.00 June lean hog put options (purchased for $3.90).

Price action: Nearby lean hog contracts faced pressure early today, but the market improved as the day progressed. April hogs ended 92 1/2 cents higher; May through August closed narrowly mixed; and farther deferred months posted strong gains.

Fundamental outlook: Mild strength in the U.S. dollar index encouraged some profit-taking as well as some bull spread unwinding in early trade, but this eventually gave way to some bargain buying in nearby contracts. Uncertainty is high regarding just how much steam is left in the hog rally. The market is technically overbought, but that has been the case for a long time. The same is true for the wide premium April futures hold to the cash index.

The fundamentals still favor market bulls. Strong packer profit margins have made them willing to pay up for tightening supplies. And there is concern about just how tight supplies will get in the months ahead due to the porcine epidemic diarrhea virus. Traders were also encouraged by improved movement on a pullback in pork prices today.

Technical outlook: April lean hogs hit a contract high of $124.40 today and settled just off this level, opening upside potential to the psychologically significant $125.00 mark. Initial support is at the bottom of yesterday's upside gap at $122.00 followed by the $120.00 area.

Hedgers: 50% of expected 2nd-qtr. hog marketings and 50% of expected 3rd-qtr. hog marketings are covered in $126.00 June lean hog put options for $3.90.

Feed needs: Carry all corn-for-feed and meal risk in the cash market for now.


Live cattle

Price action: Live cattle futures were choppy today and closed mixed, which was good for a high-range close. April futures ended 42 1/2 cents higher, with June down 7 1/2 cents and August down 5 cents.

Fundamental outlook: Futures opened weaker, but early losses were viewed as a buying opportunity given strength in the beef market and tight market-ready supplies. Choice beef values softened just 18 cents this morning, with Select up 72 cents on solid movement of 124 loads. Meanwhile, traders are also hesitant to extend positions as they wait on cash trade to develop. This week's showlist is down slightly from last week, which has feedlots demanding $151 to $152 for cattle, with packers not yet aggressively bidding for cattle. The bulk of last week's trade was at $148 in the Southern Plains.

Technical outlook: Bulls still hold the technical advantage, as April live cattle futures posted an upside day of trade on the daily chart and came within 30 cents of contract-high resistance of $146.65. The contract still managed to post a contract high close of $146.12 1/2. Support is at the January high of $143.20.


Feeder cattle

Price action: Feeder futures ended mostly 20 to 42 1/2 cents higher, with the exception being 25-cents losses in April futures.

Fundamental outlook: Feeder futures followed price action in the fed cattle pit by favoring a firmer tone on the close. Tight calf supplies continue to keep the market supported, with March futures trading at around a $1 premium to the cash index, which has hovered around the $173.50 level over the last week.

Technical outlook: April feeder futures gapped slightly lower on the open and later filled the gap. But the contract closed near opening levels to post a mid-range finish. The contract remains within the boundaries of the uptrend, with support around the $175.00 level and resistance around $178.00.

Hedgers: Fed cattle producers are long April $136.00 put options at $1.325 covering 1st-qtr. and 50% of 2nd-qtr. marketings. The April $144.00 call options that we sold for $1.525 were exercised into a short futures position, meaning we are effectively hedged at $144.20 (the strike price plus the 20 cents we made on the initial sale of these calls compared to what we spent on the puts).

Feed needs: Carry all corn-for-feed and meal risk in the cash market for now, but be prepared to extend coverage on a price break.

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