Livestock Analysis | July 7, 2021
Price action: July lean hog futures fell 77.5 cents to $109.15 per hundredweight and August futures fell $1.95 to $100.40. Fall- and winter-month contracts ended mostly lower.
Fundamental analysis: Summer-month hog futures were unable to build on Tuesday’s gains as funds reduced long positions. As of June 29, managed money accounts were net long 64,907 futures contracts, so there is risk of additional liquidation pressure if funds decide to further trim their long exposure. July hogs will track the cash index ahead of the July 15 contract expiration. After today’s losses, the front-month contract is about $1 below where the cash index will be quoted tomorrow (as of July 6). August hogs hold nearly a $10 discount to the cash index, which has fallen around $12.50 since the mid-June peak.
The national direct cash hog price was $1.26 lower this morning, though the pork cutout value firmed. Estimated packer cutting margins are $9.65 below breakeven, according to HedgersEdge.com. That suggests the cash market will continue to soften as packers work to get margins back in the black and hog supplies start to build seasonally.
Technical analysis: August lean hog futures are pausing after the sharp price drop, which is bearish, especially if the recent lows are violated. Near-term support extends from last Friday’s low at $98.10 to the April low at $95.225. Last week’s high at $105.60 is near-term resistance, followed by the 20-day moving average at $106.45.
What to do: Get current with feed advice. Be prepared to add to third quarter hog hedges and establish fourth-quarter coverage on a corrective price rebound.
Hedgers: You should have 25% of third-quarter production hedged in July hog futures at $95.375.
Feed needs: Cash coverage for meal stands at 100% for July, 75% for August, 75% for September and 25% for the fourth quarter. Cash coverage for corn needs stands at 100% for July, 50% for August and 50% for September.
Cattle
Price action: Concerns about potential seasonal weakness seemed to send cattle futures tumbling Wednesday, with the nearby August contract losing $1.80 to $120.60 per hundredweight and October dropping $1.45 to $126.70. August feeders tumbled $1.625 to $159.
Fundamental analysis: News that fed steers had averaged $122.37 at the five-area markets yesterday, down from $123.89 last week, seemed to undercut cattle futures. The drop came despite a $1.24 bounce in Choice beef prices to $286.68 yesterday, as well as a $1.08 follow-through to the upside in Wednesday morning action. Numerous traders are probably anticipating traditional midsummer weakness in cash and wholesale prices due to seasonally large supplies and ‘summer doldrums’ in consumer beef demand. This week’s breakdown in commodity sector leader crude oil, as well as the big losses suffered by the grain and soy markets, may also have persuaded the industry that sustained price weakness will be forthcoming. The big question for the cattle/beef sector is whether the vigorous consumer buying experienced during spring 2021 persists at elevated levels during the coming weeks.
Given Tuesday’s weather-driven breakdown in corn and the sharp bullish reaction posted by feeder futures, another yearling market advance was to be expected as corn prices continued sliding. But today’s breakdown in nearby fed cattle futures dragged feeders lower. Ultimately, the price of fed cattle and the cost of feed greatly affect a feedlot manager’s decisions concerning the purchase of replacement yearlings.
Technical analysis: After having stayed above its 10-day moving average (MA) in late June and early July, August live cattle fell below that level this week. Indeed, today’s drop carried the contract price below its 20- and 40-day MAs. That seems to have given bears the short-term technical advantage. However, bears couldn’t force a close below psychological support at the $120.00 level or seriously challenge support associated with the extended trendline drawn across the contract’s spring highs. Moreover, the contract has spent a great deal of time consolidating between the $115.00 and $120.00 levels, so a bearish follow-through to the downside isn’t at all certain. Still, the contract faces considerable resistance at its $124.45 April high, as well as the contract high of $125.775 reached June 16.
The inability of feeder market bulls to sustain Wednesday’s early push to fresh three-month highs may signal further short-term weakness, especially if live cattle futures keep sliding. But significant support likely persists at its 10-, 20- and 40-day moving averages near $157.375, $155.83 and $153.85. Today’s top at $161.10 represents initial resistance, while the April 8 contract high of $161.90 marks solid resistance.
What to do: Get current with feed advice.
Hedgers: Carry all risk in the cash market for now.
Feed needs: Cash coverage for meal stands at 100% for July, 75% for August, 75% for September and 25% for the fourth quarter. Cash coverage for corn needs stands at 100% for July, 50% for August and 50% for September.
