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Put Another Log on The Fire

LEAN HOGS:

Lean hog futures pulled back hard on Monday after an impressive five-day run higher last week in the wake of the bullish hog & pig report. I’m hoping today for a retracement back upward to provide an opportunity to re-establish a hedge in the Dec options. Open interest on the drop in futures yesterday was down 730 cars, pretty inconclusive. Cash was lower and product was lower. However, my sources continue to suggest that the hog carcass may not move sharply lower, yet. Processing cuts are in good shape and several of the retail cuts are also in decent shape. I need/want to watch the market action this morning. Look for an adjustment in the hedge recommendation on the Midday Pork and Beef UpdatePork prices in China continue to grind lower. Producers in China as losing more than $60/head. A massive cull, a liquidation is occurring as well has panic marketing due to ASF.  Vietnam lowered by 5% their tariffs on U.S. pork. ASF continues to swirl, continues to cause problems in Asia. We are hedged through April and but unhedged beyond this timeframe. With the U.S. still contracting breeding stock, I consider the long-term pork fundamentals bullish.

LIVE CATTLE:

Live cattle and feeder cattle surged higher yesterday on declining open interest. LC lost 1,518 cars and FC lost 809. I consider the very poor action last week, the aggressive selling a bear trap. Today’s action will likely be dominated by aggressive short covering as well. It makes sense that a “real” turn in the market would occur just after an option expiration. Oct LC options expired last Friday. Upon reflection, yesterday’s impressive turn in the market was likely fueled by two developments, one new and one existing. The existing fundamental is the fact that the Chinese ban on Brazilian beef exports remains in place after 24 days. Brazil is requesting a date to sit down and discuss (the BSE situation). The Chinese have not responded. In addition, the trade dispute between China and Australia remains intact. The second development occurred yesterday when the Biden administration indicated they expect China to honor the phase 1 trade accord and they’re also leaving current tariffs in place. This announcement, in tandem with the Chinese ban on Brazilian beef, is a major development in favor of the U.S. beef producer. Keep in mind that when the phase 1 trade accord was hammered out, China was only a tiny buyer of U.S. beef. This has changed. The Chinese are currently our third largest beef export customer and this looks to expand rapidly. U.S. beef is being introduced successfully to the Chinese middle class. The Chinese middle class is larger than the total population of the United States. The implications of this, thus far, have been grossly understated and misunderstood by the market. In addition, don’t forget, in terms of beef prices, live cattle prices (and live cattle futures) are grossly undervalued. This will be rectified over the next year, IMO. IT’S TIME TO PUT ANOTHER LOG ON THE FIRE. Recommend buying another unit of Oct 22 LC futures at 13250 or lower. Use the same stop, 12870 on this position.

  • Buy Oct 22 LC futures at 13250 or lower, using a sell stop at 12870 stop.

CORN AND SOYBEANS:

The big story overnight is the explosion higher in palm oil prices. Cash palm oil was quoted sharply higher and record high. Futures soared into new all-time highs. Dec soybean oil went from lower to sharply higher. Canola is sharply higher and rapeseed prices in the EU are sharply higher. Continued labor problems in Malaysia, strong demand from India and rapidly rising energy prices sum up the bullish fundamentals. Tack on the very poor canola crop and you have a bull market in place. We’re long bean oil with stops in place at break even. IF YOU’RE NOT YET INVOLVED OR LOOKING TO ADD, RECOMMEND TO GO TO THE MARKET ON THE RE-OPEN TODAY. USE A TIGHT STOP ON THIS POSITION, 5840 STOP. Corn and wheat pulled back overnight but both markets should hold. Given a surge toward 780 in the Dec wheat and we hope to unwind our 690/790 bull call spreads (at 64 cents).

  • Buy Dec soybean oil at market on the re-open, use a sell stop at 5840 stop on this position.

Questions please contact Dennis Smith at +1 312 242 7905. Follow on Twitter @denniscattle

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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