Look For Feb Hogs to Spin Lower

LEAN HOGS:

Ok, Feb hogs rallied yesterday but failed to penetrate significant resistance only to pull back into the close and finish nearly unchanged. The settlement was 140 points off the session high. Open interest in hogs yesterday jumped by 4,266 cars on volume of 42.4k. The buying yesterday appeared to be mostly fund in nature and judging by the rise in open interest it appears that hedge paper was a willing seller, taking on the fund buying. IMO, yesterday’s high won’t be challenged again for a while. Cash was lower yesterday, and the cutout was down $2.48. So, fundamentally, not a good start to the week. Look for futures to spin lower today and possibly gap lower. We’re holding bearish option three-way risk reversals in Feb and our posted risk is a close in the Feb contract above 9200. I recommend sticking with this plan.

LIVE CATTLE:

There were zero deliveries against the Dec LC contract on FND with the oldest long partly through Feb 22. Margins are taking a nosedive with the choice beef down $6.62 yesterday. The choice, priced at $243.31, has penetrated the $245 level that has held for over 20 months. For the well-informed end user this represents a huge opportunity to book cheap beef. This opportunity won’t last long, IMO. Production has peaked. Yesterday the weekly kill was projected as high as 662k. I’m already hearing that it may be as low as 652k. Last week’s kill was 663k. The impending decline in beef production next year will be something very few in the industry have experienced. In fact, if total production declines 7.8% as projected by the USDA, this will be the largest annual drop in production since 1979. How many people in the industry today were around in 1979? Not very many. So, I caution against getting bearish off the lower beef and off the fact that packer margins are now in the red. We’re long Dec from 153 after exercising the 153 calls on Friday. Our stop is 15210 stop. I’m looking to roll these longs into Feb if/when the spread narrows to about 100 under. This could happen in several different ways. The most likely would-be Dec edging slightly higher in the face of a steady cash steer market and Feb moving lower. Most of our length is clustered in Apr options. Apr futures reside less than 100 points under the contract highs. New contract highs were posted in Jun, Aug and Oct futures yesterday. Jan feeders broke out to the upside, enjoying the break in corn futures. I’m bullish but cautious with the Dec seasonal low due in the middle part of the month.

GRAINS:

If someone were to put my feet to the fire, I’d have to say that bean oil just bottomed out. Cash veg oil prices were sharply higher in Europe yesterday. Last night palm oil cash and futures finished higher in Malaysia. Bean oil has narrowed its premium to palm oil substantially on this break. Front month Jan has retreated to solid support on the weekly chart at 65 cents. Thus, soybeans should also be good for a bounce. The corn, well, I’m not so sure. March corn may bounce but I’m not looking for a significant move upward. This market is done, likely headed downward into a new (lower) trading range, leaving the hope of $7.00 corn in the dust. We’re holding our long-term bullish position in May options but otherwise we’re not involved in corn futures. Stay away from wheat. However, it must be noted that U.S. wheat is now competitive on the world market for the first time since July. This is certainly no place to be a seller.

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