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Need to See a Close Over 130.50 in Dec LC

LEAN HOGS:

Cash and cutout were lower yesterday, but this type of fundamental news is not a surprise to the sharply discounted board. As discussed in the evening wire. Dec futures are discount by nearly 900 points. Convergence will occur, one way or another, on 12/14, or 50 days away. It’ s my opinion that hog futures are in the process of etching out a major bottom. The new and bullish strategies we’ve successfully executed to date are listed below. Recommend cancelling buying the July LH 122 calls outright. We’ll try something else similar to this later. Guess what…open interest was higher yesterday, rising by 385 cars. This is the first “uptick” in open interest we’ve seen in quite some time. Note the impressive turn upward in the bull spreads yesterday. I’m bullish. Production in the first quarter should be down more than 4%.

  • Buy Dec LH 76 calls at 210 points.  
  • Establish the July LH 106/120 call spreads paying 140 points. (filled today) 
  • Establish the Feb LH 85/92 call spreads. (offered at 130 points yesterday) 

LIVE CATTLE:

Open interest was up 372 in the LC yesterday with FC open interest up 526. While not real meaningful this is the first rise in open interest we’ve seen in several weeks and it occurred on a higher to sharply higher board. Technically, I need to see a close in the Dec LC above 13050 to signal a major bottom. IMO it will happen, the only question in my mind is when. We’ve been building a long futures position in the Oct 22 LC contract. Evidence continues to surface that feedlots are getting more current. It’s been a painfully slow and long process. IMO, based upon two major fundamental factors, the cash steer market and front month futures are $20 undervalued. The first fundamental is the size of packer processing margins. If/when feedlots become more current, there’s plenty of room for cash steer prices to “stretch their legs”. Second, exports, I’m projecting beef exports to continue surging higher next year. The board is not factoring in what’s happened in Brazil. The Chinese have banned all beef from Brazil. In addition, the Chinese are in a riff with Australia. This makes beef from the U.S. as the primary source for China. U.S. beef is being introduced to the Chinese middle class, some 390 million citizens, successfully. The importance of this, the magnitude of this development is grossly under-billed by the trade IMO. I’m bullish.

GRAINS:

The grain board is lower today with the exception of soybean oil futures which are slightly higher. Palm oil futures closed higher overnight and settled at a new record high. Bean oil is cheap relative to palm oil. Look for a challenge of last week’s highs (6500) before the end of the week. Support has been seen near 6200. Overnight news for the grain board is quiet with not much happening. Harvest has slowed due to good soaking rains in the Corn Belt. Planting in South America is proceeding rapidly with excellent weather conditions in Brazil. Argentina is dry but they have been getting some rain. For forecasters are projecting record large crops in South America. IMO, this will cap off rallies in both corn and soybeans. We’ve been hedging Dec 22 corn and we’ve exited most bullish positions in corn. China is experiencing massive losses in pork production, and we believe they are culling sows aggressively. The massive over-production started with about 41 million sows. My sources are suggesting the cull could comprise as many as 10 million sows. If that’s the case, China will need far less corn for feed over the next year. I’m bullish wheat and soybean oil but I’m bearish corn and soybeans.

The risk of loss in trading futures and options on futures can be substantial. The author does not guarantee the accuracy of the above information, although it is believed that the sources are reliable and the information accurate. The author assumes no liability or responsibility for direct or indirect, special, consequential or incidental damages or for any other damages relating or arising out of any action taken as a result of any information or advice contained in this commentary. The author disclaims any express or implied liability or responsibility for any action taken, which is solely at the liability and responsibility of the user. This report is a solicitation.  

Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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