Livestock Analysis | January 3, 2023
Hogs
Price action: Nearby February lean hog futures led the complex lower Tuesday, falling $2.625 to $85.075.
Fundamental analysis: The hog market continued reducing the large premiums built into the various contracts Tuesday. A portion of that selling almost surely reflected recent cash market weakness. For example, the CME lean hog index for last Friday declined 55 cents to $80.19 cents per pound and the preliminary quote for Monday fell another 74 cents to $79.45 this morning. The February contract’s premium to the cash equivalent price remained above $5.00. Bears apparently believe the potential for a rally from current values to the contract’s mid-February expiration is quite modest. Conversely, history suggests that rise will be a good bit larger, with the gain averaging about $7.50 from late-December to mid-February. Given the ongoing cyclical reduction in hog numbers, which the USDA implied would run about 2% below year-ago levels through the first half of 2023, we are inclined to expect an above-average seasonal advance.
Technical analysis: Today’s breakdown shifted the short-term technical advantage to the bears, especially given the downside follow-through to the drop below the contract’s 40-day moving average near $87.56. Initial resistance at the level is backed by the 10-day moving average at $87.92, with a push back above that level likely opening the door to a retest of the $90.00 level, then last week’s high at $91.60. Today’s low places initial support at $84.60, with backing from the Dec. 21 low of $83.90, then the Dec. 15 low of $81.53. Bears are likely targeting the psychological $80.00 level.
What to do: We’ll wait on an extended price pullback to extend feed coverage.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You are hand-to-mouth on all corn-for-feed and soymeal coverage.
Cattle
Price action: February live cattle fell $1.05 to $156.85, the lowest close since Dec. 20. March feeders fell $1.45 to $184.775, the lowest close since Dec. 21.
Fundamental analysis: Live cattle dove to start the new year, despite firming cash fundamentals and wholesale beef prices. Packers were more aggressive than expected with cash cattle prices last week, indicating they were short-bought on supplies after the holidays. Cash sources expect packers to be active buyers of cattle this week after light purchases over the past few weeks. Cash cattle trade was up $1.55 last week, to $157.81, with firming cash trade to continue this week. Packers also strengthened their margins during their margins during the final weeks of last year and are now solidly in the black. National daily boxed beef values jumped an additional $4.88 in choice and $4.08 rise in select, putting the choice/select spread at $31.85. Given its discount to cash, as well as the cash market’s history of early-year strength, the February contract looks undervalued.
Feeder cattle futures gapped lower at the open, turning lower for the second straight session after touching levels not seen since mid-September. The drop was rather surprising when viewed in light of sizeable grain and soy complex losses, since those essentially lowered the cost of feed to feedlots.
Technical analysis: February live cattle traded a $1.50 range, dipping below support near $157.48 and the 10-day moving average around $156.38. Attempts lower will find additional support at the 20-day moving average of $156.25, then the 40-day moving average near $155.57. A turn higher, however, will face resistance around $158.63, again at $159.35 and $159.78.
March feeders traded a $1.975 range, falling below the 10 and 20-day moving averages at $185.71 and $185.34, respectively. Further support lies at the respective 40 and 100-day moving averages near $183.89 and $184.14. Conversely, resistance stands $186.97, $187.71, and $188.39.
What to do: We’ll wait on an extended price pullback to extend feed coverage.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You are hand-to-mouth on all corn-for-feed and soymeal coverage.
