Written Commentary
LEAN HOGS:
Lean hog futures volume was active at 67.5k with open interest down just 389 on the reversal upward yesterday. Hog futures formed a low yesterday, IMO. The option traders seemed to believe this as well. Open interest in Feb LH calls was up 2,232 yesterday. Cash will be called lower, no doubt, but the cash market may begin to stabilize. Packer margins are highly profitable. Numbers are likely going to peak perhaps this week. The product, my sources indicate, is in good shape. Demand for U.S. pork is solid. Frozen stocks of bone-in hams are record low. Frozen stocks of bellies, ribs and butts are well below year ago levels. Prices of the one-quarter inch butt is the second highest for November ever. The only other year butt prices were higher was 2014, the PED year. Bone-in loins, with stocks up 11%, represent the problem child. Note that packers have recently reduced boning lines (labor) which has increased the production of bone-in loin product. Boneless loins are down 10%, so, you can see there’s no real problem with loin demand. On a two-to-three-day pullback I’ll be looking at some calls or bull call spreads in Feb LH options. Tomorrow’s weekly export numbers should be solid.
LIVE CATTLE:
Cash traded at 174 and then 175 in the south and 174 to 175 in the north. Dressed trade was reported at $270. Choice beef was quoted yesterday at $298.17. Packers are making money, no matter what they say. This will encourage them to step up the marketing pace and in the face of declining placements, the math will begin to change, again. Feeders have a 1225-point range of trade today, either up or down. Who is the person at the CME making these rules/decisions? They obviously have never traded a margin account. Jan through Apr FC and all LC futures took out the session high from Monday. This strongly suggests that a low, a meaningful bottom is finally in place. The option traders believe a low has been established. Open interest in Feb calls jumped 4,291. Open interest in the 181 call increased by 3,625. June calls were up 1,549 in open interest. Every LC contract except Oct is discounted to the cash steer market. So, IMO, all contracts remain undervalued. Jan feeders, after jumping 825 points yesterday, are still $10 under the feeder index. Simply put, look for upside follow through laced with all kinds of volatility today in both fats and feeders. We’re holding 1×2 call spreads in Oct LC and a bullish three-way risk reversal in Oct LC. Stay bullish.
GRAINS:
Open interest in corn futures dropped a massive 51.5 k yesterday ahead of first notice day tomorrow. These buyers will eventually come back into the market. The situation in Brazil has stabilized but soy futures have tested support and held. Most agree that nothing much will happen now until after FND and after deliveries are posted. Bean oil is pulling back today. This market is forming a long-term bottom. I’ll look to add another unit of length soon, perhaps early next week. We’re holding bullish option plays in May corn and Mar soybeans and we’re long one unit of Mar soybean oil. I’m mostly bullish corn due to the theory that the second corn crop in Brazil will see reduced acreage due to late planted soybeans in the north.
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