After This Week Pork Production Headed Lower 

GRAINS:

Wheat prices are firm in the wake of yesterday’s upside recovery. Look at the Mar KC wheat, it has recovered nearly all of the losses from Wednesday. Buying wheat calls, establishing bullish positions in wheat has been recommended this week. March corn is back to the 590 resistance and soybeans have been strong this week, penetrating resistance levels. IMO, there’s a real high chance that Russia will invade Ukraine sometime during the first quarter. Ukraine is the #4 corn exporter and #4 wheat exporter in the world. Hold bullish positions in wheat. For corn, my expectation is for basis to weaken a bit after the first as grain moves freely off forward contracts. If this causes a pullback in futures, we will be ready to establish long corn futures positions and/or a host of bullish option positions. Unlike earlier this year, next year I will not take bullish positions into the growing season. Instead, we will be flat and looking to sell a sharp rally into the late May/late June timeframe. This is the plan. I’ll be looking to go long soybean oil in January as well.

LEAN HOGS:

The carcass, so far this week, has gained over $5.00. The proof is in the pudding, or in this case, it’s in the carcass. Pork prices are bottoming out just as supplies are topping out. Production, after this week, is headed lower. Butcher hog supplies are projected to run 6% lower than year ago levels during most of the first quarter. The USDA is projecting first quarter production to be down 4.3%. They’re using heavier weights. So, if weights drop off, production during the quarter could easily be down 5% or more. My sources are indicating serious breeding problems associated with PRRS in the large integrator operations. There’s a real chance that the upcoming hog & pig may contain some bullish surprises. Keep in mind, producers in the EU, all pork producers in the EU, are losing money and culling breeding stock. Keep in mind, my sources indicate that Chinese producers, losing money all year, have been aggressively culling breeding stock. Keep in mind, that all three herds under contraction simultaneously, has never been experienced in modern times. At some point next year, global pork production will fall off a cliff. Packers have vastly improved margins this week as the carcass is moving higher. Eventually, some competition for negotiated pigs should develop. Watch the Feb closely. A close over 8100 will send a bullish ripple through the market.

LIVE CATTLE:

I was reading a report about beef exports late yesterday. What’s happening in the beef export market is really impressive stuff. It’s not just China either. Jan-Oct beef exports to Japan are down 1% but Japan represents 24% of our export market (largest percent). There is no reason to expect the Japanese business to decline next year. Exports to South Korea are up 17% over the Jan-Oct period. They control 23% of our export business. This trade should increase next year. China is now third on the last, at 15% of total exports. Exports to China during the period are up 545%. Mexico is next, exports are up 16% here with exports to Canada down 7%. The Chinese export business is now nearly equal to Mexico and Canada combined. But that’s not where the good news ends. Beef exports to member counties of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) are at a record high pace this year. Beef exports to these countries year to date are up 69% from last year. All-time high beef exports have been achieved to Guatemala, Costa Rica, Honduras and El Salvador. There is no reason to expect this business to slow moving into 2022.

Feb LC filled a gap on the chart from early November and then closed higher and finished 125 points off the session low. The bull spread (Feb/Jun) also gained 50 points. Odds are yesterday marked the seasonal low. Earlier in the week we bought the Jan 138 calls/sold the Feb 144 calls. Risk the bull spread (Feb/Jun) to a close under even money. The spread settled at 50 over yesterday. I recommended stepping aside in Jan feeder futures yesterday, taking a profit although a disappointing profit. My plan is to re-own the May feeders on a pullback next month.

• Exit the Feb/Jun bull spread on a close below even money.
• Consider buying Jan LC 138 calls/selling Feb 144 calls.

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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.