Fund Liquidation a Factor in LC Trade
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Tuesday December 5, 2017
Yesterday’s higher performance in all hog contracts except the Dec occurred on moderate volume of 44,000 with open interest rising by 1,000 cars. Consider this to be new long specs entering the fray with hedgers taking on the other side. If you’re a hog producer and you’re not actively hedging a portion of production through next fall you’re passing up an prime opportunity in my opinion. The USDA quarterly hog & pig comes out Dec 22nd which is just two weeks from Friday. The report will be released during trading at 11:00 AM Chicago time along with a monthly cold storage report and a monthly cattle-on-feed report. All of these reports (except bellies in the cold storage) are expected to be negative toward price action. In the near term fundamentals, this week’s kill is expected to equal last weeks, currently estimated at 2.533 million pigs. We get another look at weights tomorrow morning. Consider the weakness in the Dec/Feb bull spread a warning sign to “not get bullish”. Mixed is the early call.
Liquidation is underway in the LC and FC after the funds came in and bullied the market higher from early Sep to early Nov. Yesterday’s lower close occurred on moderate volume of 53,000 with open interest declining by nearly 3,400 cars. The weekly kill is projected to come in near 640,000, down slightly from last week’s kill which was the largest harvest of the entire year. The show list is larger with numbers higher in TX, and sharply higher in KS and NE. With the beef enjoying some last minute holiday demand the futures market could display a “turn around Tuesday” in today’s action. Any sharp bounce today, should that occur, would be another hedging opportunity in my opinion. We are actively rolling Dec short positions all the way out to the June contract. We like holding the Feb/Jun bull spread. Basically, we’re anticipating the basis to strengthen meaning we’re expecting the deferred LC contracts to lose a good chunk of their premium. If today is not a higher close it’s a definite sign of weakness. The opening call is higher.
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