Hogs
Price action: April lean hog futures climbed 42.5 cents to $91.325 and settled near mid-range. Meanwhile, nearby February futures closed steady at $83.90.
Fundamental analysis: Hog futures traded higher most of the session before heavy selling in cattle futures into the close bled over into the hog market. The surge in live cattle futures has likely played a role in recent strength in the hog market as traders purchase relatively cheap hogs, narrowing the spread between the two. That could partially explain why futures have performed so strongly despite the cash market lagging behind the past week or so. The CME lean hog index is up another 17 cents to $82.11 as of Jan. 27. February futures settled $1.79 above today’s quote for the index with a little over two weeks until expiration. The preliminary calculation puts the index up another 48 cents to $82.59 tomorrow, which would be the largest daily increase since the index posted its seasonal low earlier this month. That is encouraging to bulls, especially considering the wide spread between nearby futures and the index. Pork cutout climbing to the highest level in nearly a month at midsession also has bulls hoping cutout strength will spill over to the cash index, as it did in early December. Cutout climbed $1.50 this morning to $94.36, led by persistent strength in bellies.
Technical analysis: April lean hog futures closed modestly higher after trading at a near-two-month high earlier in the session. Bulls retain a slight technical advantage following yesterday’s technical breakout. Initial resistance stems from $91.375 while strength above that mark targets today’s high of $92.50. Meanwhile, resurgent selling pressure finds support at the psychological $90.00 mark, which is backed by the 40-day moving average at $88.50.
What to do: Get current with feed coverage.
Hedgers: You are carrying all production risk in the cash market.
Feed needs: You should have all soymeal needs covered in the cash market through the end of February. You are hand-to-mouth on corn-for-feed needs.
Cattle
Price action: Cattle futures set back after marching to record highs over the past five sessions. Nearby February live cattle slid $1.525 to $207.025, while most-active April fell $2.325 to $204.95. Expiring January feeder futures skid $1.275 cents to $280.555, while most-active March feeders dropped $2.975 to $275.275.
Fundamental analysis: The cattle and beef complex remains extremely strong, as exemplified by last week’s jump in fed cattle values, as well as nearby February futures posting all-time highs over each of the five previous sessions. However, futures set back today, possibly reflecting wholesale slippage and bullish profit-taking in the wake of the upward surge. As indicated previously, last week’s cash average for fed steers jumped about $5.50 to $209.19, which made nearby fed cattle futures look significantly undervalued. As one would expect in the wake of such a move, this week’s cash trading has been minimal, with about 200 Kansas steers trading at $203.00 Monday and a few heifers from the same area changing hands around $202.00 yesterday. We doubt much trading will take place before Friday, with packers hoping a futures reversal will persuade producers to cut their asking prices.
Bears got a little help from the wholesale market at midweek, with Tuesday afternoon beef slippage being followed by more the same this morning. Choice cutout sagged $1.68 to $330.77 at midsession, while select cutout posted a similar loss to $320.35. The choice-select spread narrowed to $10.42, but seasonal narrowing of the spread is normal. The 10-year average puts it around $6.00 in mid-February, which tends to mark the annual low for the spread. We doubt the market is oversupplied with well-finished cattle despite steer dressed weights reaching a record of 962 pounds in early January.
January feeder futures expire at noon tomorrow (Thursday), with today’s close implying traders expect the index to work its way still higher (from the latest quote, for Monday, rising $1.13 to $279.06). Feeders likely felt some downward pressure from the grain and soy markets as those markets posted big gains today.
Technical analysis: Bulls still own the short-term technical advantage in April live cattle futures despite today’s setback. On the other hand, today’s high confirmed initial resistance at yesterday’s high of $207.725. A breakout above that point would have bulls targeting the psychological $210.00 level. Today’s low placed initial support at $204.50, with likely backing at yesterday’s low of $203.95. Look for added support between the 10-day moving average near $200.46 and the psychological $200.00 level.
Bulls hold the short-term technical advantage in March feeder futures as well, with a band of strong support persisting around the psychologically important $275.00 level. A breakdown below that point would probably reopen the door to a test of $270.00. Today’s fresh contract high of $279.825 marks stiff resistance, although the reversal probably established initial resistance at $278.80. Look for tougher resistance at the psychological $280.00 level.
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: You should have all soymeal needs covered in the cash market through the end of February. You are hand-to-mouth on corn-for-feed needs.