Livestock Analysis | December 12, 2023
Price action: Hog futures traded mixed Tuesday, with the expiring December contract slipping 42.5 cents to $67.825 and most-active February climbing 92.5 cents to $68.25.
Fundamental analysis: Hog traders apparently expect the cash hog market to stabilize around current levels into the weekend, and more distantly into mid-February as indicated by current cash versus futures relationships. That is, the latest official quote (as of last Friday) for the CME lean hog index is $67.93, down 83 cents from Thursday. But it’s seen dropping only another 23 cents to $67.70 when officially quoted (for Monday) tomorrow. Thus, the December future implies traders expect the cash market to firm slightly by Thursday’s (12/14) December futures’ noon expiration. Moreover, today’s February futures advance brought it into line with December and also just slightly above the index. Actually, traders probably expect continued cash market weakness into the end of the year, followed by a modest recovery during the first six weeks of 2024.
The industry is apparently unwilling to go out on a limb anticipating a substantial price move before spring, which is understandable given the potential results of next Friday’s (12/22) USDA Hogs & Pigs report and the sustained weakness seen in early 2023. This year’s pattern has certainly been for hog supplies to exceed USDA estimates around unchanged levels. Conversely, consumer and export demand have proven surprisingly strong since wholesale prices sank early this year and grocers finally began passing along those savings to consumers (via lower retail pork prices) in June. We see little reason to argue with the indicated price prospects at this juncture.
Technical analysis: Bears still own the short-term technical advantage in February hog futures. Bulls found modest support around yesterday’s close at $67.325, with more solid support emerging near yesterday’s low of $66.725, as seconded by today’s low at $66.80. Still, bears are likely targeting the Nov. 28 low of $65.80, then the psychological $65.00 level. Today’s high marked initial resistance at $68.625. That’s likely backed by the 10-day moving average near $69.33, then by yesterday’s high of $70.225. A close above that point would have bulls targeting the 40-day moving average near $72.27.
What to do: Get current with feed advice. Carry all production risk in the cash market for now.
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 December.
Price action: Cattle reversed early losses and closed significantly higher today. The expiring December live cattle contract rallied 72.5 cents to $167.70 and most-active February futures gained 70 cents to $168.60. January feeder futures advanced $1.30 to $219.25.
Fundamental analysis: Beef packers clearly held the upper hand in price negotiations for fed cattle last week, as exemplified by the $4.51 dive in the five-area direct cash average to $169.94. December live cattle futures indicate the industry expects further slippage over the next three weeks (to the contract’s December 29 expiration). However, we suspect producers threw in the towel on numerous lots last week, with the aggressive movement possibly cleaning up market-ready supplies. Three straight futures gains suggest renewed optimism among traders.
Those bulls may be basing their optimism on the wholesale market, where choice beef is apparently solidifying support around the $290.00 level. It rose $2.68 to $293.11 at noon today, whereas select cutout slipped 81 cents to $258.73. An excess of less-than-well-finished animals may help explain the widening choice versus select beef price spread. That reached $34.38 at midsession. We suspect the cash market will post a seasonal low in the next few weeks, then start working back toward likely spring highs.
After remaining above the $220.00 level last week, officially ending Thursday at $220.04, the CME feeder index for Friday tumbled to $218.37. However, this suggests fresh optimism about the short-term feeder outlook since the January futures close left it at a premium of about 90 cents over the index.
Technical analysis: Bears still own the short-term technical advantage in February live cattle futures, but today’s close at $168.60 marked the first time the contract closed above its 10-day moving average since Nov. 3. The latter puts initial support at $167.88, with backing from the Dec. 4 and Dec. 5 lows around $166.65, then at today’s low of $166.10. Bears’ inability to sustain the drop to that point will likely be seen as significantly supportive by pragmatic traders. Conversely, a drop back below that point would have bears again targeting the Dec. 7 low of $162.40. Today’s high marked initial resistance at $169.125, which is likely backed by psychological resistance at $170.00. A close above that point would have bulls targeting the 40-day moving average near $177.06.
Bears still hold the short-term technical advantage in January feeder futures as well, but their grip has loosened significantly. They’re likely counting on initial resistance at the contract’s 20-day moving average near $220.46 to hold, especially with bulls proving unable to top the psychological $220.00 level today. But a breakout above that area would open the door to a run at the 40-day moving average near $228.82. Yesterday’s close and today’s opening put initial support between $217.95 and $217.40, respectively, with stout backing from the 10-day moving average near $215.40. A drop below that point would have bears looking to test last Friday’s low of $210.40, as well as the psychological $210.00 level.
What to do: Get current with feed advice. All production risk in the cash market for now but be prepared for some hedge coverage as we have demand concerns.
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 December.
