Hog Futures OI Still Declining
Open interest in lean hog futures on the sharp break in prices yesterday was down 922 cars. Declining prices amid declining open interest is not a bearish sign. Given the sharp discount that futures hold relative to the cash index, IMO, the downside to hog futures is limited. Dec futures settled 1100 under the latest estimate of the CME lean hog index. In other words, futures have already dialed in a lot of bad news. We are highly recommending a host of new conservative but bullish speculative positions. We’re adding a new strategy which is buying the Dec LH 76 calls. For traders willing to invest in the premium, the in-the-money Dec calls represent real value, IMO. The seasonal low timing is now and through next week. RECOMMEND UNWINDING ALL REMAINING FEB HEDGES WHILE HOLDING ON TO THE APRIL HEDGES FOR NOW. My favorite spec ideas are listed below.
- Buy Dec LH 72 calls at 430 or lower, risking 150 points.
- Buy Dec LH 76 calls at 230 or lower.
- Buy July LH 106/120 call spreads at 140 points.
- Buy July LH 122 calls at 35 points.
For the first time in ages the open interest edged higher in LC futures, rising by 860 cars. FC, on the mixed close yesterday, saw OI drop 534. Cattle futures pulled back yesterday in a risk-off performance that appeared to have little, if anything, to do with the fundamentals. Sure, weekly beef export sales were at a marketing year low. However, my sources suggest that exports this week are recovering nicely. Data out of China regarding Sep meat imports confirmed that the Chines imported a record amount of beef. Keep in mind that the Chinese ban on beef imports from Brazil remains intact. Also, be aware that cattle prices in Australia have doubled this year. Lastly, don’t forget that packer margins remain historically profitable meaning that cash steer prices and front month futures are about $20 undervalued given the price of beef and offal. On-feed comes out today and it should confirm that on-feed inventory is below last year (99%) and this should then be the case for months. Yes, I’m bullish. My strategies are penciled out in the evening livestock wire. I don’t envision adding any positions to the arsenal today.
The most significant news overnight is that Russia is increasing, again, their export tax on wheat to slow down exports and protect or reduce domestic flour prices. Paris wheat futures are trading at contract highs. KC wheat is within a whisker of contract highs. So, wheat is the strongest grain as trading approaches the morning pause. Corn and soybeans are a touch higher. Bean oil is slightly lower with cash palm oil lower overnight and palm oil futures closing lower. It appears palm oil futures were tracking the sharply lower performance of bean oil on Thursday. Despite the lower close, palm oil futures settled at a new all-time weekly high, which of course is bullish. Listed below is what I’d look to accomplish in the days ahead.
- Buy, add to long Dec bean oil at 6080 given the opportunity.
- Recommend hedging a portion of 2022 projected corn production using options.
- Prepare to exit the Dec wheat 690/790 call spreads around 64 to 65 cents.
- Anticipate taking the full profit on the spring wheat 900/1000 call spreads at expiration.
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