Livestock Analysis | August 10, 2022
Price action: August hog futures rose 5 cents to $122.25, the highest closing price for a nearby contract since June 2021. October futures surged $1.25 to $100.85, a lifetime-high close for the contract.
Fundamental analysis: Hog futures resumed the recent rally following Tuesday's downturn amid ongoing strength in cash fundamentals. Pork cutout values fell 5 cents early today to $123.80 but is still above the wholesale market’s spring highs. The next CME lean hog index is expected fall 16 cents to $122.09, but it still near a 14-month high and only 43 cents below the 2021 peak of $122.68. In contrast, the index had fallen to $110.77 at this time last year on its way to $70.04 in late November 2021. With the cash market defying seasonal tendencies to decline from late June highs illustrates demand strength. Hog supplies are providing few surprises, with weekly kills averaging near the anticipated 1% annual decline.
Still, the fact that hog supplies and slaughter routinely increase significantly during the second half of August will very likely cause both cash and wholesale prices to turn downward through Labor Day. That could exert significant downward pressure upon the whole complex. Futures might also prove vulnerable in such conditions. Conversely, it is not uncommon for the cash market to firm and even rise moderately during September. That could trigger a sizeable October futures advance if traders maintain the large discount still built into that contract through the balance of August.
Technical analysis: October hogs hit a fresh contract high today, which implies bulls hold a strong technical advantage. Today’s low indicates initial support at the psychological $100.00 level will be closely backed near $99.80. Yesterday’s low places additional support near $98.425, with the 10-day moving average marking another support level at $97.93. A drop below that point would have bears targeting the 40-day moving average near $94.13. Today’s high marks resistance at $101.00. The continuation chart suggests additional resistance will emerge around $102.00, with a push above that level likely having bulls targeting $105.00.
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: August live cattle rose $1.225 to $139.20, while October gained $1.30 to $144.475, the contract’s highest closing price since May 4. September feeder futures jumped $2.50 to $185.00.
Fundamental analysis: While fed cattle trading has been minimal so far this week, the industry clearly expects cash prices to build upon last week’s modest gain. A significant portion of that optimism is based upon expectations for cattle slaughter to decline in the days ahead, as it did last year, although the 10-year average implies a modest seasonal increase in production during the run-up to Labor Day. Packers pulled heavily on controlled supplies through late July, which seems to have left them vulnerable to severe market-ready supply tightness here in early August. Persistently firm wholesale beef prices are also offering them considerable incentives for processing those animals. Choice beef cutout values dipped $1.29 early today to $263.44, still near a former all-time high from 2015 (prior to the huge beef price spikes seen in 2020 and 2021). August futures’ upside leadership strongly suggests industry insiders expect continued cash gains in the days ahead.
Feeder futures also ended the day on a strong note, despite concurrent strength in corn and soybean meal futures. However, those two markets could sustain only a portion of their early gains (when nearby soymeal futures hit fresh contract highs), which enabled the yearling market to rebound from midsession lows. Ongoing gains by the feeder index, now at $176.40, are also encouraging bulls, although the August futures premium over the index may limit its upside potential.
Technical analysis: Bulls clearly own the short-term technical advantage in October live cattle, particularly after bears proved unable to force a drop below initial support at the contract’s 10-day moving average near $143.21 yesterday or today. Added support will likely be supplied by the contract’s 20- and 40-day moving averages near $142.33 and $141.35, respectively. Today’s high at $144.475 represents initial resistance, with close backing from Monday’s top at $144.85 and the May 5 high of $145.10. But the toughest resistance likely persists within the huge April 25 chart gap between $144.675 and $145.975 caused by the bearish April 22 Cattle on Feed report. A move above that gap would open the door to a test of the contract high at $147.50.
Bulls also hold the technical advantage in September feeder futures. The contract closed very near resistance at today’s high of $185.275, so a test of resistance at Monday’s high of $186.25 seems quite possible. A close above that point would have bulls targeting the Feb. 15 contract high at $188.15. The 10-day moving average places initial support at $182.83, with backing from the intersection of today’s low and the 20-day moving average near $182.05. A drop below that point would have bears targeting the 40-day moving average at $179.23.
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
