Livestock Analysis | December 21, 2022
Price action: February lean hogs rose $4.15 to $88.40, the contract’s highest close since Dec. 5.
Fundamental analysis: Hog futures rallied to the highest levels in over two weeks amid beliefs the market may have established a near-term low. An outlook for tighter animal supplies in 2023 is also supporting futures. The primary cash benchmark, the CME lean hog index, has been sending mixed signals, rising 2 cents to $80.86, only 2 cents above the near 11-month low posted the day before. Thursday’s quote is expected to drop 31 cents. With slaughter schedules shortened for the holidays and packers unlikely to actively pursue hogs, a seasonal low in the cash index isn’t likely until early 2023. The national direct five-day rolling average cash hog price today was quoted at $80.10. Pork cutout values fell 63 cents early today to $82.83, led by losses in bellies. Movement at midday was 163 loads.
Despite recent cash softness, the tight longer-term supply outlook continues to encourage buyers. The June 2023 futures contract settled today at $108.425, a premium of nearly $20 to February. USDA’s quarterly USDA Hogs and Pigs Report likely will continue to underscore continued herd contraction. We expect it to indicate the modest decline in hog numbers seen during the second half of 2022 will continue through mid-2023.
Technical analysis: Lean hog bulls have gained the overall near-term technical advantage. The next upside objective for bulls is to close February futures above solid resistance at $91.00. The next downside objective for bears is closing prices below solid support at the December low of $81.525. First resistance is seen at $88.00 and then at $89.00. First support is seen at $86.00 and then at $85.00.
What to do: Get current with advised feed coverage. Be prepared to extend coverage on additional price pressure.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You have all corn-for-feed and soybean meal needs in the cash market through December.
Price action: February live cattle rallied $2.125 to $157.70 after posting a contract high at $157.975. December live cattle ended at $156.125, the highest close for nearby contract since June 2015. January feeder futures edged up 20 cents to $183.825.
Fundamental analysis: Live cattle broke decisively above the past two month’s trading range amid concern over a major Plains storm and expectations a tight supply outlook will keep packers paying up for market-ready animals. While packers have slowed slaughter late in the year, cash prices are still expected to remain elevated with packers likely to bid more aggressively after the holidays, when they will need more supply. We strongly suspect traders expect this week’s cash trade to increase $1.00, possibly significantly more, over last week as a big winter storm bears down on the Plains and Midwest, followed by Arctic temperatures. Price gains may reflect producers seeking to move animals before the temperatures drop, but they’re likely to insist on higher bids from packers. Packers can probably afford to pay a bit more, since Tuesday’s closing price for choice grade beef was $265.05, which essentially matched the November high; those mark the highest quotes since mid-August. The latest estimate of packer margins is $49.65 per head processed, versus a negative $47.80 one week ago. Underlying fundamentals of supply tightening on both a cyclical and seasonal basis, as well as consistently solid consumer demand, suggest the market can continue marching higher in the days and weeks ahead.
Feeder futures posted modest gains despite the strong bullish leadership of the live cattle market. The limited advances almost surely reflected concurrent gains by the grain markets, a modest rise in soybean meal futures, and a $2.00-plus surge in nearby crude oil futures. All those point to higher costs for feedlot operations, which in turn discourages them from paying up for replacement yearlings. The fact that the feeder index is quoted at $178.14 may also be limiting futures gains.
Technical analysis: Today’s surge greatly reinforced the short-term technical advantage owned by bulls in February cattle futures, with the breakout from a week’s-long chart wedge suggesting considerable upside potential for the market. Today’s high places initial resistance at $157.975, with additional resistance unlikely to emerge below the psychological $160.00 level. Look for subsequent resistance around the $5.00 intervals. Initial support seems likely to extend from the former contract high of $157.225 down to $157.00, with further backing from the November and mid-December highs at $156.95 and $156.775, respectively. A drop below the latter mark would have bears targeting the 40-day moving average near $155.25.
Bulls still hold the short-term technical edge in January feeder futures, with the 10-day moving average placing initial support at $183.53 and the daily low implying backing at $182.875. Look for additional support at the 20- and 40-day moving averages near $181.90 and $180.89, respectively. However, bulls are facing a range of stiff resistance extending from today’s high at $184.075 to the Dec. 9 high of $184.90. Conversely, a breakout above the latter point would have bulls targeting the $188.00 area, then $190.00.
What to do: Get current with advised feed coverage. Be prepared to extend coverage on additional price pressure.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You have all corn-for-feed and soybean meal needs in the cash market through December.
