MORNING LIVESTOCK REPORT
By Dennis Smith
Follow me on Twitter @denniscattle
Friday May 1, 2020
Volume was 55,600 with open interest up 540. Noticed that the Aug LH saw a surge in OI, rising by nearly 3K yesterday. Cutout was quoted above $100 yesterday….WOW. For reference, the high in the carcass in 2014, the PED year, was $130. Some in the industry believe that’s where we’re headed. I thought July hogs would be at 7000 when the carcass hit $100. They’re not, posting a settlement yesterday at 6050. Every hog contract remains well below cost of production. This must change or huge and deep contraction of breeding animals will occur. It’s already started. We’ve been backing up more that 100,000 hogs per day over the last two weeks. The good news is that the E/O has triggered serious talks between union and packer. The general public does not understand, however, that the spread of the virus is occurring in the living quarters of the employee, not in the plants. Local health officials don’t seem to realize this either. Labor problem, packers have a real labor problem on their hands and the producers are the ones paying the price. Look for a resumption of the rally today and it should be led, in my opinion, by the May and June. We are now ready to begin buying, on a scale-up basis, Aug hog puts for both hedge and spec account.
LC volume was 56,900 with open interest rising by 3,510. Nice. Take a look at the choice beef chart below. What’s happening here is unreal, never before witnessed advances in beef prices. What is going on here? We’ve backed up over 600,000 animals in the feedlots and look at what’s happened in the beef. Packer margins have soared. In the short term, huge margins will not translate into rising cash steer prices. Not with the huge backlog ahead of us. There’s hope that beef plants will be up and running within a couple of weeks. There’s a major labor problem, however. More labor is needed in order to run these plants two shifts and seven days. The chain speed will be reduced, likely for several months due to PPE gear and distance guidelines. We advise hedging in June and Aug LC options and in Aug feeders. These ideas are listed below. IMO the cash steer market will be at 90 or lower next week.
Given the vast uncertainty, we highly recommend some hedge protection in the June and Aug contracts.
- In Aug LC, buy 90 puts/sell 80 puts/sell 100 calls at 80 points or less.
- Or, consider buying Aug 90 puts/sell 75 puts/sell 100 calls at 160 points.
Having these in place along with some June puts may allow one to stay afloat and wait for better times. The initial margin on the Aug hedge strategies is around $1,300.
- Buy June LC 82 puts/sell 92 calls at 260 points or better.
- Buy June LC 80 puts/sell 90 calls at 120 points or better.
- Buy June LC 82 puts/sell 70 puts/sell 90 calls. (filled 4/28 at 40 points)
I’m expecting trouble in the feeder cattle. We’ve backed up the supply of animals outside of the feed yard with placements in March and April very small. Now we have cattle being turned off wheat. Runs will increase. The demand will be best for light weights and demand for heavier weights will be awful with the prospect of fat cattle being backed up all summer. Consider the following for hedgers with the May idea also for the spec.
- Buy May FC 112 puts at 130 points ($650 premium with expiration on 5/21)
- Buy Aug FC 120 puts/sell 140 calls at 250 points. ($1,250 premium, exp on 27th)
USDA Beef Cutout-Total Value 600-900 Choice
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