Livestock Analysis | July 5, 2023
Price action: August lean hog futures rallied $3.125 before settling at $97.45, the highest close in four months. Nearby July futures leapt $3.45 to $101.275.
Fundamental analysis: Lean hog futures rocketed higher today as prices continue their technical breakout piggybacking on the bullish seasonal advance in cash prices. Monday saw sustained buying, pushing above the June 21 high and today saw continued buying as July futures crossed the $100 mark for the first time since March. The seasonal advance in cash prices continues, with Friday’s CME lean hog index quote rising 39 cents to $94.31. Monday’s preliminary quote came in an additional 37 cents higher to $94.68. While the seasonal advance is generally over by now, this year has proved later than normal due to the delayed rally compared to normal years. We believe the rally could extend further into summer due to smaller daily gains, a prolonged bear market in the spring and tighter supplies than anticipated.
Wholesale prices have exploded over the last week, stoking the bulls’ fire. The midsession saw carcass prices up $2.85, led by a $13.36 rise in bellies. Monday, wholesale values jumped $5.55, led by a $23.21 jump in belly prices. Carcass values have leapt $11.77 in the last week, confirming our belief of the grocer switch to pork features and providing continued demand, improving underlying support in the futures market.
Technical analysis: August futures gapped higher this morning and pushed to the highest level since March 16. Price is currently in the cliff that saw prices lose $10 in three sessions in the middle of March. Bulls are in full control of the technical advantage as they are targeting $103 resistance. Additional resistance will come in at the psychological $100.00 area, backed by $102.00. Price took out the 200-day moving average today, which will act as initial support at $96.00. Further support will come in at Monday’s close of $94.325 with firmer backing at $93.40.
What to do: Get current with feed advice. Carry all production risk in the cash market for now.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You should have half of your soymeal needs covered for both July and August in the cash market. You are hand-to-mouth on corn-for-feed needs.
Price action: Cattle futures slipped Wednesday despite firming wholesale prices. August live cattle fell $1.875 to $174.95, while August feeder futures dove $3.325 cents to $244.70.
Fundamental analysis: Cash prices declined just $1.24 to $181.33 last week, which is likely a big reason futures finished last week so strongly. However, this week’s early weakness implies traders expect continued cash losses, especially with the August future ending the day over $6.00 below last week’s cash average. The futures discount reflects general cash market weakness experienced by the cattle market during summer. However, years similar to 2023 in the past, when the cash market surged to fresh highs in June, as well as the events of summer 2021, seemingly make such slippage less likely. That is, previous years when cash prices moved to new highs in June have often been marked by rallies to even higher levels later in the year. In fact, December futures are essentially signaling something similar.
The summer of 2021 was marked by choice beef cutout surging to their second highest levels all-time in June (trailing only the Covid-driven spike of spring 2020), an early-summer setback, then a surge to a fresh annual high in August. After climbing to a new 2023 high at $343.09 on June 16, choice beef cutout tumbled to $327.90 by June 28. But it stabilized at that level and bounced $2.08 to $330.42 at noon today. The recent drop compares to an approximate $75.00 drop in early-summer 2021. Moreover, the choice-select spread surged to $36.56 at noon, implying the supply of choice-grade beef (and cattle) remains extremely tight. We suspect the cash market will slip again this week but would not be at all surprised by a mid-July rebound.
After retracing their late-spring rally over the past two weeks, December corn futures stabilized today. When combined with today’s fed cattle weakness, this explains concurrent losses in feeder futures. The large futures premiums over the CME feeder index also suggest vulnerability to short-term losses. Nevertheless, the combination of cyclically declining yearling supplies and improved feedlot demand in response to the feed cost reduction stemming from corn market weakness, suggest the feeder market will prove quite strong this fall.
Technical analysis: Although bulls still seem to hold the short-term technical advantage in August live cattle futures, bears are looking to turn the tide. Bulls’ recent inability to push the market to a peak above last month’s contract high at $178.10 confirms stiff resistance at that level. The highs posted last Friday and Monday place initial resistance near $177.25. Today’s low marks initial support at $174.825, although psychological support around the $175.00 level may still be persisting. A drop below those levels would have bears targeting the contract’s 10- and 20-day moving averages near $173.19 and $172.77, respectively.
Bulls clearly hold the short-term technical advantage in August feeder futures. Indeed, a look at a weekly bar chart suggests last Friday’s bullish breakout began a follow-through upward leg from a huge bull flag formation. Today’s reversal from a new all-time high at $248.85 marks initial resistance, with added resistance at the psychological $250.00 level seeming quite probable. Still, the bull flag suggests the potential to reach $260.00 in the near future. Today’s low places initial support at $244.35. A resumption of today’s late drop would open the door to a test of the contract’s 10- and 20-day moving averages in the $238.71-$238.18 range.
What to do: Get current with feed advice. Carry all production risk in the cash market for now.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You should have half of your soymeal needs covered for both July and August in the cash market. You are hand-to-mouth on corn-for-feed needs
