Livestock Analysis | June 14, 2023
Price action: August lean hog futures surged $2.25 before settling at $89.675. The June contract expired 7.5 cents higher at $87.20 at noon.
Fundamental analysis: Lean hog futures continued the recent uptrend despite mild profit taking on Tuesday. The live cattle futures market continues its recent stumble and hog futures have taken over recent buying interest, implying traders thinking retailers have potentially made the switch from beef to pork features. Underlying cash index strength has also proved fruitful for bulls, with the CME confirming Monday’s quote up 68 cents to $85.41 and Tuesday’s preliminary coming in an additional 84 cents higher to $86.25. While daily gains may be less than one may expect from the late spring/early summer seasonal advance, gains have been persistent with just four down days in the last month and a half. The June future went off the board today at $87.20, still a premium to the cash market, signaling traders’ belief of continued strength into Friday when futures will be cash settled against the official index quote (to be published Friday).
Wholesale prices continue to rise as well, as evidenced by cutout rising $1.64 at midsession to $91.16, with steady gains across the board. After rising $1.32 yesterday, strength so far today implies demand that has been largely missing from the pork market is now returning, sending cutout to the highest levels since December.
Technical analysis: August lean hog futures extended their breakout above the 40-day moving average before the psychologically significant $90 level stalled buying interest. Bulls continue to tighten their grip on the technical advantage as prices reached their highest level since May 3, ultimately targeting the April 28 high of $94.95. Resistance can be expected at today’s high of $90.55, backed by the 100-day moving average at $91.85. Look for support at the June 12 high of $87.975, with backing from the 40-day moving average at $86.15. Bears ultimately want to see a failure below the June 8 low at $81.30.
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: Anticipation of cash market losses sent cattle futures lower Wednesday, with nearby June falling $1.975 to $177.45 and most-active August tumbling $2.95 to $170.925. August feeder cattle futures plunged $4.55 to $235.90.
Fundamental analysis: A few hundred head of cattle changed hands at $186.00 in Nebraska Tuesday, which represented a $4.00 drop from last week’s early trading. Futures traders apparently took that as a likely harbinger of this week’s cash action, with the resulting futures selling clearly overwhelming buying in the market. We view this as a big overreaction, but the futures drop will also have its own impact on the cash market, so chances of fresh gains this week seem quite limited.
Still, renewed cash firmness can’t be ruled out since wholesale prices are still rising. Choice cutout built upon sustained early-week gains, rising another 72 cents to $338.71. Conversely, select cutout dipped $1.15 to $308.33. The choice-select spread surged over $30.00, to $30.38, which reemphasized the comparative tightness of current well-finished fed cattle supplies and high-quality beef. Our work also shows having the cash market hit fresh yearly highs in June often presages sustained strength in the second half of the year, although a seasonal drop during summer is also quite common.
Pessimism about the short-term fed cattle outlook also undercut feeder futures badly despite concurrent weakness in corn and soybean meal prices (which implies renewed support for yearling prices as feedlot expenses for feed decline).
Technical analysis: One can reasonably argue that today’s sharp drop in August live cattle futures gave bears the short-term technical advantage, especially with the daily close at $170.975 representing the lowest day-ending quote since May 31. Look for initial resistance around the $172.00 level, with strong backing from the 10-day moving average near $172.94. A push back above the latter level would have bulls targeting today’s high at $174.40, then the contract high at $178.10. Today’s weak close opened the door to a test of the psychological $170.00 level, with added support potentially not arising above the 20-day moving average at $168.78. A sustained drop would have bears targeting the 40-day moving average near $165.40.
Bears also have the short-term technical advantage in August feeder futures, with support at the daily low of $235.55 looking tentative. Look for bears to try testing pivotal 40-day moving support near $232.63 in short order. Initial resistance is marked by the 20-day moving average near $237.54, with stiff backing from the 10-day moving average near $240.15. A breakout above the latter level would again have bulls targeting the June 7 contract high at $245.175.
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.
