Monday Morning Livestock Market Update - Futures May Face Headwinds

GENERAL COMMENTS:

Live cattle futures do not look as exciting as they had for a period of time. The uptrend in February has been violated, leaving it vulnerable to further weakness. Further weakness could take place this week if cash does not perform any better than last week. In fact, the expectation for cash this week is steady at best with the potential to see further weakness. Packers have cattle purchased for deferred delivery into the holiday period when reduced slaughter levels will slow their need to purchase aggressively. Packers will work on obtaining cattle supply for further out past the holiday period. Feedlots might be more anxious to sell on the fear that lower cash prices may unfold over the next few weeks.

Hog futures were a complete surprise on Friday as the price rally took place despite the weakness of cash and cutouts. The National Direct Afternoon report showed cash down $2.77 with cutouts down $0.77. Futures seemed to be technically driven. The February contract came within 5 points of closing the chart gap left just a week earlier. This gap is expected to be closed Monday. It seems as if the market will regain all of what had been lost over the past week as traders again gained confidence, buying the low even though underlying cash did not support it. There seems to be a growing bullishness developing in the market, but the choppiness of trading during the last half of December will keep volatility alive. The December contract will cease trading Tuesday with February moving to the lead month.

	BULL SIDE		BEAR SIDE
1)	Cattle futures were able to close higher regaining some of the losses of the previous day. This may provide traders with the confidence to hold their long positions.	1)	Steady-to-weaker cash in cattle last week may set the stage for nothing better than steady cash this week. Packers have increased deferred purchases, leaving them less aggressive.
2)	Cash is not expected to fall apart through the end of the year as demand remains strong. Packers will need to fill strong slaughter schedules.	2)	Feedlots may be more willing to contract cattle this week before cash prices may weaken further.
3)	Traders may be setting their sights on the potential for a tightening supply next year and continue to buy price retracements to positions themselves for the long term.	3)	Continued weakness of cash and cutouts in hogs may limit upside price potential with the gains Friday only a result of profit-taking before the weekend.
4)	Futures may regain the losses of the past week with deferred contracts possible, resuming the uptrend.	4)	February hog futures will take over as lead month on Wednesday and is carrying quite a bit of premium to cash.