Livestock Analysis | January 17, 2024
Price action: February lean hog futures rose 67.5 cents before settling at $71.45, near session highs.
Fundamental analysis: Lean hog futures faced heavy selling early in the session before rebounding mid-day, further solidifying support under the market. Hog futures showed relative strength despite a negative tone in the commodity markets. Persistent inflation in the US, EU and UK was apparently leading traders to believe inflation could be stickier than initially anticipated, leading to likely higher for longer interest rates. While bulls have failed to rally prices much, the downside has been severely limited, supported by the rising CME lean hog index, which rose 30 cents to $66.85 today (as of Jan. 15). The preliminary calculation puts the index up another 49 cents to $67.34 tomorrow (as of Jan. 16), narrowing the premium that February futures hold to the index to just $4.11. That seems likely to support futures in the latter half of the week, especially considering tomorrow's estimated gain would be the second largest daily gain since the index bottomed in late December.
Wholesale pork prices continue to show robust strength, impressive considering the increase to supplies following last week’s winter storm, which helped support pork cutout. Wholesale cutout firmed $1.07 to $88.86, which would mark the highest quote since Nov. 10 if midsession gains are sustained through afternoon trade. All cuts but butts gained at midsession, with each near their weekly highs as well; this showcases the health of the current rally in wholesale prices.
Technical analysis: Bulls continue to hold the technical advantage in February lean hog futures, with prices seeming to form a bullish pennant pattern on the daily bar chart. Bulls are seeking a daily close above $71.90, which has acted as stiff resistance since November, aside from last week’s brief break above that mark. Further resistance lies at $72.60, then $73.05, which is quickly backed by the 100-day moving average at $73.125. Bulls are seeking to hold support at $70.75 then the psychological $70.00 mark, which limited gains both on Tuesday and today.
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 have all corn-for-feed and soymeal needs covered in the cash market through January.
Price action: After spending much of Wednesday in negative territory, cattle and feeder markets staged a late rebound and closed mostly higher Wednesday. Nearby February live cattle were the exception, skidding 2.5 cents to $173.10, while expiring January feeders surged 87.5 cents to $228.425 and most-active March climbed 95 cents to $229.775.
Fundamental analysis: It’s debatable as to whether the current spell of frigid temperatures is helping or hurting the cattle market. The cold is almost surely exerting a great deal of stress on feedlot cattle but given that it’s coming in midwinter is probably diminishing its impact upon them. Still, the packing industry is facing reduced supplies of lesser quality cattle in the short term. Conversely, the weather is also giving them an excuse to curtail operational activities, thereby reducing their need for cattle. In addition, it’s enabling them to boost wholesale asking prices to grocers. For example, choice beef cutout had tumbled to $275.90 on January 4, then reversed. It was quoted at $297.93 (up $2.94) at noon today, while select cutout has more than kept pace after having leapt almost $7.00 Tuesday. This is good news for the cattle and beef markets, because the select gains imply stronger demand from grocers and consumers. That is, the cold weather is stressing feedlot cattle and is likely lowering their grades at slaughter, which implies the Choice/Select spread should be widening significantly. Ultimately, we view the situation as supportive of the short-term price outlook, although the prospect of compensatory weight gains in the wake of the cold spell could amplify market-ready numbers and undermine prices at that time.
The general release of industry estimates ahead of Friday’s USDA Cattle on Feed report may have sparked today’s late futures rebound. While last month’s marketings estimated at 99.3% of year-ago were unsurprising, traders apparently reacted well to projections for a 4.6% annual drop in December feedlot placements. The combination of those numbers left the average estimate of the Jan. 1, 2024 feedlot population at 102.1% of last year.
Recent corn and soybean meal weakness is probably translating into feeder cattle strength, since the prospect of cheaper feed enables feedyard managers to bid more aggressively for replacement yearlings. Wintry weather also implies ranchers are less likely to be hustling their animals to market. Thus, the latest dip in the feeder index is surprising. It fell $1.57 to $226.43 Tuesday after having previously fluctuated between $227.69 and $229.02. Thus, the drop seems unlikely to persist in current conditions.
Technical analysis: The late-session comeback reaffirmed the bulls’ short-term technical advantage in cattle futures. Bears proved unable to challenge initial support at the contract’s 10-day moving average near $171.47, much less much stronger support at the confluence of the 20- and 40-day moving averages in the $170.48 to $170.26 area. Expect added psychological support at $170.00. The late advance and steady close left the market set to test initial resistance around $173.50. A breakout above that point would have bulls targeting the $175.00 level, then $180.00.
Bulls clearly hold the short-term technical advantage in March feeder futures as well, with the high-range close leaving the market able to quickly retest resistance at the daily high of $229.95, which is essentially a proxy for the psychological $230.00 level. A breakout above that area would open the door to a test of $235.00. Today’s low marked initial support at $227.75, which is stoutly backed by the 10-day moving average near $226.65. The 20- and 40-day moving averages place added support near $225.50 and $223.24, respectively.
What to do: Get current with feed advice. All production risk in the cash market for now but be prepared for some hedge coverage as we have demand concerns.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You have all corn-for-feed and soymeal needs covered in the cash market through January.
