Lean Hogs Expected to Gap Higher

LEAN HOGS:

Ok, the limit up performance in hogs occurred on lower open interest, as one would expect. Total OI was down 3,907 with Jun losing 2,548, July down 1861 and Aug OI was down 252. Open interest in Aug calls surged by 1,773 but open interest was higher in all put options. It appears the managed money is covering short futures and replacing them with long puts. I would expect producer/hedgers are also buying puts on this rally.  Given that all summer hog contracts remain discount to the index, I’m anticipating a higher open today. We’re on an expanded range of trade so extreme volatility is certainly possible. If July hogs gap higher and hold the gap, we’re looking at a rare three-day island bottom. In other news I’m seeing reports that S. Korea is dropping tariffs on food imports to fight inflation. This is friendly and a very positive trend, should other countries follow suit.

LIVE CATTLE:

Open interest was up 1,568 cars on the surge higher into fresh contract highs. Technically, the market is strong, in excellent shape. Open interest in calls was higher in Oct and Feb but I’ve also noticed that OI is rising in Dec and Feb puts. This must be hedging. At some point we’ll do some hedging but not here, not yet. Open interest in feeders was down nearly 1,000 cars as this market soared into new contract highs. Rain in the S. Plains is the driving force taking feeders higher along with the fresh contract highs in deferred LC contracts. I’m not seeing much to do in today’s market other than watch the action. At some point we’ll want to exit some length in Aug but again, not here and not yet. Cash is expected to trade higher this week and the discounted board still has work to do to the upside, IMO. We’re pretty much out of the feeders and now forced to wait for a break. Waiting is hard and we may never get a break. ?? Nonsense. These markets always give you a chance. Use the old and original target in Jun LC (17050) to ring the bell on profits in Aug LC futures and options. Otherwise, sit tight and hold cash until a break develops.

GRAINS:

The normal weather pattern is driving grain prices sharply lower. It’s not a drought pattern, at least not right now. The Eastern Belt still looks dry, but the market does not perceive a problem. Dec corn is headed toward critical support at 500. Nov soybeans have collapsed and destroyed the chart pattern. My downside target here is 1070. Last trade in Nov soy is 1131, down 22 cents. July wheat is down 17 cents and is now discount to July corn. I cannot explain that. At the moment the fear of El Nino kicking into gear seems unwarranted, at least that’s what the market is saying. Hold all puts. The July short-dated 1150 soy puts that we bought last week for a dime are trading north of 35 cents.

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