Livestock Analysis | January 24, 2023
Hogs
Price action: Nearby February hog futures slid 47.5 cents to $77.10, while the summer contracts posted larger losses.
Fundamental analysis: Large hog slaughter is raising serious questions about the population reduction indicated in the December USDA Hogs & Pigs report. That report implied hog numbers and slaughter would routinely average 2% under year-ago levels through the first half of this year, but after topping the year-ago figure by 13% in the first full work week of the year, last week’s total represented a 3.9% annual increase. We are still willing to give the benefit of a doubt to USDA at this point. However, this week’s early kills have also exceeded year-ago levels, with the Monday-Tuesday sum topping last year by 5.4%. Sustained cash weakness was indicated by the 52-cent drop to Friday’s official quote for the hog index at $72.13. Monday’s preliminary figure looks set to drop another 2 cents to $72.11.
Bulls and the USDA seem likely to be justified by seasonally and cyclically smaller supplies in the weeks ahead, but futures will probably remain under downward pressure until the market sees some definitive signs on that score. The other factor that might spark a bullish reversal would be sustained wholesale gains. Pork cutout had dipped to $77.89 last Wednesday, then has worked back up since that point, reaching $81.60 at midsession Tuesday. An acceleration of those gains would certainly catch the attention of futures traders and likely spur a larger advance, but that seems rather unlikely at the moment.
Technical analysis: Although the recent advance had alleviated the oversold condition somewhat, bears still hold the short-term technical advantage in February hogs. Initial resistance at today’s high of $78.10 is closely backed by the 10-day moving average near $78.16. A breakout above that area would have bulls targeting the psychological $80.00 area, then the December low at $81.525. Today’s low of $76.425 essentially confirmed solid support at last week’s low, as well as that from last October, at $76.40. A drop below that level would open the door to a test of the psychological $75.00 area.
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 soymeal needs covered in the cash market through February.
Cattle
Price action: February live cattle futures edged up 37.5 cents to $157.85 Tuesday, while most-active March feeder futures gained 33.5 cents to $183.60.
Fundamental analysis: The industry seemed to get the backlog of fed cattle built during the holiday season cleaned up last week, since the weekly kill fell from 661,000 head to 646,000 and the percent annual change fell from 7.0% over year-ago to just 1.4%. And while this week’s early kills are still running well above year-ago (251,000 vs. 239,000), a likely reduction in weekend slaughter should bring kills back to levels comparable to the cattle on feed population (down 2%-3% from year-ago). Steer weights well below year-ago levels imply the supply of market-ready animals remains relatively limited, especially when compared to early 2021.
Unlike the pork market, which has firmed lately, beef values remain under pressure. Choice beef cutout fell 47 cents to $270.97 at midsession Tuesday, while select cutout declined 72 cents to $253.77. The Choice-Select spread has narrowed substantially over the past 10 days, being quoted at $17.20 at noon today. As discussed above, we believe the supply of market-ready animals has tightened considerably over the past two weeks, which should translate into higher beef prices, with Choice cutout again leading the way higher.
Monday’s combination of fed cattle strength and grain sector losses likely powered the big feeder advance, but today’s gains in corn and wheat seemed to rob the yearling market of upward momentum. Traders are soon going to start looking ahead to next week’s USDA Cattle report, since it will hold major implications for the feeder supply going forward.
Technical analysis: Bulls again hold the strong short-term technical advantage in February live cattle, especially after bears proved unable to force a close below trendline support last week. Today’s gain flipped the short-term moving averages (i.e. 20- and 10-day) near $157.43 and $157.25, respectively, to initial support, with strong backing at the confluence of the contract’s 40-day moving average and the four-month uptrend line near $156.45. Today’s high placed initial resistance at $157.95, but a breakout above that point would have bulls targeting the contract high of $159.175, then the psychological $160.00 level. A close above the latter point would open the door to a test of $165.00.
Bears still hold the short-term technical advantage in March feeder futures, but this week’s action has greatly diminished their edge. Today’s rise flipped the 10-day moving average near $183.02 from resistance to initial support. It’s backed by yesterday’s low at $181.40, then the psychological $180.00 level. A drop back below that point would have bears looking to test $175.00. Initial resistance at today’s high of $182.875 is closely backed by the intersection of the 20- and 40-day moving averages near $184.50. A close above that point would open the door to a test of $185.00, then the Jan. 4 high of $188.75.
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 soymeal needs covered in the cash market through February.
