Wednesday, January 18, 2023
From a fundamental perspective I’m not always correct but at least I can usually figure out where and why I’m wrong. Open interest in corn futures surged higher yesterday by 19,000 contracts. OK, what’s going on? The weather is excellent in Brazil and improving in Argentian and in the U.S. Corn Belt. It’s a one-word answer…CHINA. About the exact moment I determined that corn was poised for a leg down ahead of the U.S. planting season, the Chinese government did something unexpected. They dropped the zero COVID policy completely (in early December). The first wave has already peaked. If China emerges from COVID soon the pent-up demand is going to be huge. This is what the market is anticipating. Now, my recommendation is to not be stubborn with short positions. Be cautious, replace short hedges with puts, step aside in futures. China is a huge elephant and if they stampede, look out! Repeating, place buy stops or get out and replace short futures with puts. Our current positions, Mar put spread and Feb soy options were designed to leave the upside open.
Lean hog futures volume was about half of LC volume yesterday. Open interest was down 451 cars. OI was higher in both the Apr and Jun contracts. While the cutout was lower yesterday there is growing evidence that hams are forging a meaningful bottom. Remember that ham prices and lean hog futures prices are highly correlated. If hams bottom and start moving higher, odds are high that futures will bottom and move higher as well. The possible surge in the Chinese economy is bullish pork even though China is not currently involved in the U.S. muscle market. I like our current bullish position. Adding to the call spreads in the Apr and Jun is appropriate.
Live cattle futures, currently, are a complete mystery to me. Volume was very active yesterday at nearly 99k with open interest down 2,200 cars. Feb OI was down 9k with open interest rising in all other contracts. The market was lower. Who are the sellers and why? There is a major snowstorm occurring today in NE. The China discussion applies to live cattle futures. China is currently the second largest importer of U.S. beef. Packer margins remain positive. The on-feed numbers that circulated yesterday are bullish and the bi-annual inventory that is slated for the last day of Jan is also expected to be bullish. Simply put, if LC futures don’t close strong today, I’ll be extremely worried about the market and ready to pare down our bullish positions. Stay tuned.
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