Livestock Analysis | June 6, 2023
Price action: Expiring June hog futures jumped $2.975 to $88.30 Tuesday, while the August contract leapt $2.875 to $84.50.
Fundamental analysis: Soaring cattle prices seemed to power a sympathetic reaction in the hog and pork complex Tuesday, with traders likely thinking the spike in cattle and beef costs will finally convince grocers to become much more aggressive in buying and featuring pork in the weeks ahead. It’s not that the hog and pork complex is suffering from a glut of product. For example, recent hog slaughter totals have generally matched last year’s low levels, but depressed consumer demand (which we have viewed as a consequence of grocers maintaining retail pork prices well above year-ago levels) has kept a lid on usage, as well as hog and wholesale pork prices.
The cash and wholesale markets have turned higher lately but haven’t offered all that much encouragement to the industry. For example, the official CME lean hog index, for last Friday, rose 69 cents to $81.21 when published today. Monday’s preliminary calculation added another 65 cents to $81.86. Moreover, after leaping to $89.06 yesterday, today’s midsession quote for pork cutout dropped $3.78 to $85.28. And yet, today’s June futures surge above $88.00 implies traders expect the cash rally to accelerate over the next week (with the June contract expiring next Wednesday, June 14), since the closing quote was about $6.45 above Monday’s preliminary quote. The July contract is trading roughly on par with June, implying traders don’t expect much bullish follow-through from the short-term high in the days ahead. Given the hog market’s spring 2023 struggles, this seems like a reasonable assumption. But spiking cattle and beef prices may cause a sea-change in grocer buying patterns. If they elect to start featuring pork more aggressively in the weeks ahead, summer futures may be significantly underpriced. Recall that the hog index peaked around $122.00 the past two years with similar hog supplies.
Technical analysis: Bulls seem to have gained the short-term technical advantage in August lean hog futures. Bears can still hope that bulls won’t prove able to force a move above stiff resistance at the contract’s 40-day moving average near $86.74. A close above that level would open the door to a test of the psychological $90.00 level, with a follow-through moving then having bulls targeting $95.00. Today’s gap higher created an ‘island’ formation consisting of the previous four days of trading between $78.975 and $82.55. That suggests a potential follow-through to at least the 40-day moving average. Today’s low of $82.60 essentially coincided with the contract’s 20-day moving average near $82.70., thereby marking initial support. That’s backed by the 10-day moving average near $80.11 and the psychological $80.00 level. A drop below that area would have bears again targeting the $75.00 level.
What to do: Get current with advised feed coverage. Be prepared to extend coverage when the markets signal lows are in place.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You should have all corn-for-feed and soymeal needs covered in the cash market through mid-June.
Price action: August live cattle futures rose $2.225 to a record close at $175.5, while expiring June futures rose $2.675 to $176.825. August feeder futures rose 65 cents to close at a contract high $243.25.
Fundamental analysis: August live cattle futures marched higher for the eighth contract high in as many trading days. Conditions remain severely overbought, but that has not deterred bulls frenzied buying. Open interest on August futures has begun to decline slightly, indicating shorts exiting the market and a potential interim top in place. That being said, cash trading continues to showcase the tight supply, rocketing past last week’s record average of $182.03 with light trade taking place at $190 Monday, further extending past nearby futures.
Choice cutout reflected cash and futures strength rising $5.32 to $319.51. Choice tested $300 in the latter half of May before rebounding back to the highs here in the last few days. Select cutout rose $2.46 to $299.16, bringing the Choice/Select spread back out to $20.32. Both pork and beef have proved strong the last few days, indicating grocers are busy stocking up for the upcoming Father’s Day and Independence Day holidays. Strength is likely to persist in the interim, but some weakness can be expected once grocers finish purchases.
The August feeder contract reached $244.475 before setting back. That was less than $1.00 below the all-time record for nearby feeder futures at $245.20 from October 2014. Today’s early corn and soybean strength likely limited the feeder advance. Conversely, having the feeder index leap almost $8.00 to $216.18 last Friday probably encouraged yearling market bulls.
Technical analysis: August live cattle pressed into another contract high today and posted a bullish high-range close. Cattle futures are now trading at unprecedented levels, nearly $10 above the 2014 high. Today’s contract high will stand as first resistance at $175.95 followed by resistance at $177.00, then psychological resistance at $180.00. Bulls are looking to defend initial support at $172.50 on corrective selling, followed by the 10-day moving average at $169.85. Bulls want to defend concerns of a “blow-off top” by keeping losses minimal.
August feeder futures proved resilient despite a soaring corn market today, making a new contract high. Feeders fell short of making a new all-time high, which now stands as the bull’s target. Resistance stands at today’s high of $244.475 and is backed by the 2014 high at $245.2. First support stands at $242.00, backed by the June 2 low at $240.70. Further selling will encounter support at the 10-day moving average near $239.00.
What to do: Get current with advised feed coverage. Be prepared to extend coverage when the markets signal lows are in place.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You should have all corn-for-feed and soymeal needs covered in the cash market through mid-June.
