Hogs
Advice: we advise hog producers to exit the 50% fourth-quarter hedges in December $84.00 put options. Our exit was $1.425 for a loss of 65 cents. Maintain the 50% first-quarter hedges in February $84.00 puts for now.
We also advise livestock producers to extend corn-for-feed coverage another two weeks in the cash market through the end of December.
Price action: February lean hog futures sank $1.50 to $86.35 and settled nearer session lows, while nearby December futures fell 75 cents to $82.50.
Fundamental analysis: Lean hog futures continue to encounter stiff technical resistance just below last week’s highs despite modest strength in the cash market. The CME lean hog index is down another 30 cents to $84.06 as of Dec. 2. As we hinted yesterday, strength is expected to come back into the index, as the preliminary calculation puts the index up a penny to $84.07 tomorrow. While it is not much, December futures continue to trade at a discount to the index and with the contract’s Dec. 13 expiration just over a week away, continued strength in the cash market is almost sure to shore up discounts to the index in the near future. The weakness in pork cutout has apparently emboldened the bears though, as pork cutout fell another 8 cents at midsession to $89.53. Each cut except bellies posted losses this morning; belly primals rose $5.99 and helped mitigate the downside. Pork cutout remains near recent seasonal lows. It will be difficult for the cash hog market to garner much bullish momentum without help from wholesale pork.
Technical analysis: February lean hog futures continue to consolidate in an apparent bull flag on the daily bar chart. Bulls are looking to overcome downtrend resistance at the $88.00 mark, which is reinforced by last week’s high of $89.60, then the psychological $90.00 mark. The 20-day moving average continues to serve up solid support at $85.70, while weakness below that mark finds little support until $84.00.
What to do: Get current with feed coverage. Carry all production risk in the cash market for now.
Hedgers: NEW ADVICE -- Exit the 50% fourth-quarter hedges in December $84.00 put options. Our exit was $1.425 for a loss of 65 cents. You have 50% of first-quarter production hedged in February $84.00 puts at $3.35.
Feed needs: NEW ADVICE -- Extend corn-for-feed coverage another two weeks in the cash market through the end of December. You have all soymeal needs in the cash market through the third week of January.
Cattle
Advice: We advise livestock producers to extend corn-for-feed coverage another two weeks in the cash market through the end of December.
Price action: Wholesale weakness undercut cattle futures Wednesday. Expiring December live cattle slid 10 cents to $188.375, while most-active February fell 75 cents to $188.325. January feeder futures dove $2.35 to $256.95.
Fundamental analysis: Cattle traders proved unable to force a move above solid overhead resistance again Wednesday, which probably represented a response to diminished cash market expectations and wholesale weakness. That is, light Monday-Tuesday cash trading at $190.00, along with Tuesday’s impressive futures advance, had seemed to set the stage for fresh cash market strength this week. But having Choice cutout fall $2.07 (to $308.76) at noon today probably raised questions about the short-term outlook, with the sizable losses posted by the deferred contracts amplifying those concerns.
Still, the winter-spring outlook seems favorable, especially with the embargo on imported Mexican calves and feeders threatening to further tighten the supply of cattle in feedlots next spring. Having steer weights flatten during November and seeming set to turn seasonally lower also seems supportive. One could argue the market is due for a bit of traditional December weakness as grocers focus heavily upon hams and turkeys for holiday dinner entrees, but the upward cash market bump posted in the second half of November likely decreased that possibility.
Meanwhile, feeder futures tumbled as traders seemed to focus on the likely temporary nature of the U.S. embargo on Mexican yearlings and calves as the two countries deal with the screwworm issue. Nevertheless, we tend to expect further short-term feeder strength due to the loss of about 200,000 head of Mexican animals entering the country each week. Today’s drop put the various feeder contracts at significant discounts to the feeder index (now at $259.38).
Technical analysis: Bulls still hold the short-term technical advantage in February live cattle futures despite today’s setback. Initial support near the 10-day moving average at $188.13 was confirmed by the daily low of $188.025. That’s backed by the 40- and 20-day moving averages near $187.56 and $187.13, respectively. A drop below the latter point would have bears targeting the psychological $185.00 level. Today’s high marked initial resistance at $189.375. Expect layers of resistance between that point and the psychological $190.00 level, and the Nov. 25 high of $190.05.
Bulls clearly own the short-term technical advantage in January feeder futures as well, especially with the chart seeming to depict a cross between a “bull flag” formation and a “diamond” continuation pattern. Those suggest the potential for a huge upward advance if/when the market breaks out to the upside. As with February cattle, today’s low at $256.625 confirmed initial support at the 10-day moving average (near $256.50). That’s backed by Monday’s low at $255.575 and the psychologically important $255.00 level. A drop below the latter point would seemingly open the door to a retest of the hugely important $250.00 level. Today’s high placed initial resistance at $259.95, which likely represents the onset of psychological resistance at $260.00. Look for additional resistance at $261.20, but the “bull flag” suggests a breakout above that point would have technicians targeting $270.00.
What to do: Get current with feed coverage. Carry all production risk in the cash market for now.
Hedgers: Carry all production risk in the cash market for now.
Feed needs: NEW ADVICE -- Extend corn-for-feed coverage another two weeks in the cash market through the end of December. You have all soymeal needs in the cash market through the third week of January.