Active Trade in Aug LH Puts

LEAN HOGS:

Open interest dropped hard in both Jun and July hogs yesterday. Total open interest, however, was up 1,941 with a build noted in Aug on back. Recall that Oct, Dec and Feb closed higher yesterday. On a note of caution, open interest in Aug puts was up 1,717 with noted increases in the 70 and 72 strike prices. Given a trade in July hogs to 8700 and higher and I’ll be ready to load the boat with July and Aug puts. Prop 12 is going to present a problem clearing product in the second half of summer. Prop 12 is going to happen. I anticipate the long-term bullish fundamentals of herd contraction and renewed Chinese pork imports to override the negative impact of prop 12, but not in the short-term. For today cash is called steady to firm. Given higher cash and cutout last night I’m expecting a higher early trade in futures.

LIVE CATTLE:

We added length in Aug LC yesterday basically right where the market settled. Our stops are working 200 points under our entry prices. It’s mostly a basis play as the cash, after soaring higher last week, is expected to trade higher again this week. My guess is that sharply discounted futures will be forced upward toward the rising cash. As expected, there were no deliveries against the Jun LC on FND with the oldest long partly through 10/25/22. Tops last week in the south were pegged at 180 and asking prices are clustered at 182 in the south and my sources are expecting to sell their cattle north of 182.  The beef soared higher yesterday with choice reaching a new high for the year, taking out the springtime high. This is significant. Many said this would never happen. There was no significant activity in LC options yesterday. I’m wishing we had bullish positions in feeders, but we don’t.  Feeders traded sharply higher yesterday at the OK City auction. For now, I have no rec in feeders. Roll up the short Oct 176 calls is the recommendation for today.

• Roll up the short Oct LC 176 calls to the 182 calls for 250 points.

D-DAY GRAINS:

The corn crop is planted and 85% emerged. Condition ratings dropped hard as reported yesterday. However, it’s critically important to remember that condition ratings in early Jun have very little correlation to yield. In addition, rain is in the forecast especially for the dry eastern corn Belt for next week. While currently dry, I contend this is not a drought pattern. Look at what’s happening in the S. Plains and the forecast for the western Corn Belt. Lots of moisture. THE RECOMMENDATION IS TO HEDGE CORN. This is likely the prime selling opportunity of the entire summer. If you’re not in my camp, fine, then simply buy the puts and leave the upside open. But hedge a portion of your crop.

• Buy Aug corn short-dated 470 puts at 6 cents.
• Sell Dec corn at market, buy stop at 552 stop.

For a free 30-day trial to the evening livestock wire send an email to: dennis.smith@archerfinancials.com and be sure to follow @denniscattle on Twitter.

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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.