Livestock Analysis | June 21, 2023
Price action: Nearby July lean hog futures fell $1.10 to $94.75 Wednesday, while most-active August dipped 42.5 cents to $92.775.
Fundamental analysis: Advancing cash and wholesale markets continue supporting hog futures. Futures opened weakly today, likely in response to bearish spillover from live and feeder cattle futures this morning, with surging grain and soy prices likely playing a role in undercutting the livestock markets as well (due to the implied livestock industry reduction in demand for those animals as feed costs rise). But the cash hog and wholesale pork markets are also posting strong seasonal gains, which brought hog futures off their early lows. The official CME lean hog index for Monday matched the preliminary figure at $88.75, up 54 cents from last Friday, while Tuesday’s preliminary calculation put the index at $89.62, up another 87 cents. Moreover, after slipping yesterday, the midsession quote for pork cutout leapt $4.04 to $98.66.
It seems clear that pork demand from grocers and consumers is improving in response to beef prices recently surging to their third highest level of all time. Pork demand also tends to climb as grilling season hits its stride between Memorial Day and Independence Day. One factor that isn’t getting a great deal of attention is the seasonal and cyclical reduction in hog and pork supplies. After routinely topping 2022 levels through the first quarter, then more recently matching year-ago levels, last week’s hog kill fell 1.4% under the same week last year. Moreover, the tightening of market-ready supplies appears to be causing producers to market their hogs more aggressively, which has resulted in average weights dropping significantly. For example, after slipping just 1.4 pounds below the year-ago level in mid-May, recent readings for Iowa-southern Minnesota hog weights are running five pounds or more below last year. This is putting a serious dent in weekly pork production. We don’t see this changing quickly, which in turn implies hog/pork supplies will likely remain very tight through Independence Day.
Technical analysis: Bulls still own the short-term technical advantage in August lean hog futures. Today’s high marks initial resistance at $93.70, with the April high of $94.95 likely representing much stiffer resistance, especially with it being backed by psychological resistance at $95.00. A close above that level could open the door to a challenge of the important $100.00 level. The bears’ inability to force the market below today’s early low of $91.90 implies solid initial support at that level. Psychological support at $90.00 also seems likely to be strong, especially with the hog index looking set to top that level when today’s official quote is published Friday. But a close below that level would likely have bears targeting the 40-day moving average at $86.13.
What to do: Carry all risk in the cash market for now.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You are hand-to-mouth on all corn-for-feed and soymeal needs at this time.
Price action: August live cattle futures rose 5 cents to $169.75 despite early session weakness, while expiring June futures rose 12.5 cents to $177.25. August feeder futures fell $4.425 after gapping lower on the open and closed near session lows.
Fundamental analysis: Live cattle futures pared early losses to close near unchanged on the day. Cash trade continues to develop below last week’s average of $184.92, which was nearly $4.00 below the week prior. Futures remain well below cash prices, which make hedges risky and point to traders believing the summer high is already in and prices are going to succumb to seasonal pressure. Our research proves contrary to this and indicates the cattle market has a tendency to move higher later in the year when cash cattle tops prior first-half highs in June. The recent strength in pork and hogs indicate a potential shift from beef to pork features, which could make a late-season cattle rally quite challenging.
Cutout values continue to fall from last week’s high despite volume moving higher with 102 loads trading hands. History shows that volume will move lower in the latter half of this week as grocers have finished buying for Independence Day specials. Choice cutout fell $2.58 at midsession to $334.33 while select fell $305.65, bringing the Choice/Select spread to $28.68.
Feeder cattle succumbed to weakness as feed prices soared with new-crop corn rising nearly a quarter on the day. There is a clear correlation between recent corn strength and weakness in feeder cattle prices, but Tuesday’s drop shows a weakening yearling market despite stagnant feed prices, implying recent weakness may not be caused by the turnaround in corn prices.
Technical analysis: August live cattle futures remain in a clear short-term downtrend on the daily bar chart. Today’s low at $168.10 marked support, but prices were unable to overcome the 20-day moving average at $169.75. Both of these levels will remain key going into the latter half of the week, with additional resistance coming in at $171.00, backed by Tuesday’s high at $171.975. Additional pressure from bears will target the 40-day moving average at $167.375, penetration of which opens the door for extensive selling to $165.00.
August feeder cattle gapped open below the 40-day moving average and harsh selling ensued. The move negated a steep uptrend stemming from the March 24 low. Bears have the technical advantage, although corrective buying is not out of the question as prices have fallen nearly $20.00 in the past two weeks. Initial resistance can be expected at today’s high of $230.65, backed by the 40-day moving average at $232.75. Bears are targeting a break below today’s low of $226.70, which is backed by the 100-day moving average at $224.25.
What to do: Carry all risk in the cash market for now.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You are hand-to-mouth on corn-for-feed and soybean meal coverage.
