Livestock Analysis | August 2, 2022
Price action: August lean hog futures dipped 60 cents to $119.85, while October contract matched the 60-cent drop, settling at $96.225.
Fundamental analysis: Hog futures fell amid expectations for a downward cash trend through the second half of 2022. The CME lean hog Index rose 45 cents to a 14-month high at $121.87. But hog slaughter will surely increase in the coming weeks. A September price bounce is likely, but will probably prove limited, with prices then dropping seasonally through much of the fourth quarter. Still, the market is apparently seeing a last bullish hurrah, as indicated by an early jump in pork cutout values to $130.22, up $2.52 from Monday and a 14-month high.
A key question for the hog industry at this time of year is how much prices may drop in the coming months. The 10-year average implies an approximate $16.00 drop from early August (around $91.00) to the week following Labor Day (near $75.00), with the subsequent rally carrying the market back up about $2.00 to around $77.00 in the second week of October. That’s traditionally followed by an approximate $11.00 decline to a year-end low around $66.00. The market is well above the long-term average at this point. Subtracting the 10-year average decline from the current price would put the index around $94.00 in December, whereas October and December settled at $96.225 and $87.75, respectively, today. Those are not attractive hedge points at this juncture.
Technical analysis: Bulls still own a technical advantage in August futures, with recent action seeming to have formed a small bullish “pennant” on the bar chart. That suggests further upside potential, especially if the CME index keeps climbing. Bulls also hold the short-term advantage in October futures, with bears having proven unable to force a close below initial support at the contract’s 10-day moving average near $95.60 since July 26. That support is backed by yesterday’s low at $95.025, then at the contract’s 20- and 40-day moving averages at $94.63 and $93.24, respectively. A drop below the latter level would have bears targeting the July 6 low of $90.225. Today’s high placed initial resistance at $97.075, with backing from last Thursday’s top at $97.875. A breakout above that point would have bulls targeting the psychological $100.00 level.
What to do: Be prepared to extend feed coverage when market bottoms are in place.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You are hand-to-mouth on corn-for-feed and soybean meal needs.
Price action: October live cattle fell 50 cents to $142.125, near the middle of today’s range. September feeder cattle fell $1.65 to $181.45.
Fundamental analysis: Live cattle futures fell amid expectations the cash market will extend recent weakness. Feeder cattle erased initial gains fueled by weakness in corn. Cash cattle prices likely will erode for a fifth consecutive week, sources report. Packer margins have climbed near two-month highs and buyers don’t appear inclined to aggressively pursue supplies, but feedlots remain current, which should help limit downside. USDA-reported live steers averaged $139.83 last week, down from $141.12 the previous week and the fourth straight weekly decline. Retail beef demand appears to be holding up relatively well. Choice beef cutout values fell $1.45 early today to $269.15 but movement by midday was a solid 79 loads.
What to do: Be prepared to extend feed coverage when market bottoms are in place.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You are hand-to-mouth on corn-for-feed and soybean meal needs.
