Last Week’s Cattle Kill Was Larger Than Expected; Bullish!
By Dennis Smith
Monday, November 29, 2021
Corn open interest was down nearly 70k from Friday’s trade. Shorts wanted out and got out. The fundamentals are not bullish. Prices are slightly lower early today. Stick with the risk on bearish positions that were not covered on Friday’s strong close. We could not get some orders filled as the market makers disappeared. The risk is a close in the March contract over 590. We have a put spread in place on the soybeans and we took the maximum profit, $1.00 out of the spring wheat 900/1000 call spreads. These were established in early June and we paid 18 cents for most of these, netting an 82-cent profit with no margin risk. My plan is to load-up on puts in corn prior to the January final crop report. Producers, serious producers should be hedging Dec 22 and Dec 23 corn production, at least some portion of expected production. South America is on tap to raise a record large corn and soybean crop.
Three items stand out today. First, I forgot to discuss the weekly kill in Friday’s evening livestock wire. Friday’s kill was pegged at 470k with the Sat effort estimated at 363, bringing the weekly kill to 2.261 million pigs, or about 11k smaller than the early week projection. This kill was down 3.4% from last year. Soon the kills should start running about 5% to 6% under year ago levels. Second, open interest dropped hard on the selloff that occurred Friday. Total LH OI was down nearly 3,400 cars with OI lower in the first three contracts. Third, my sources are reporting that there’s a very high chance that CA Prop 12 will NOT be implemented on Jan 1, perhaps not until mid-2022 at the earliest. I’m looking for a seasonal low by the middle part of Dec and we want to position from the long side. For this week, I’m recommending the following to get started.
- Buy Jun LH 116 calls at 80 points. These settled Friday at 92.
Friday’s cattle kill was pegged at 119k with the Saturday effort estimated at 81k. The weekly kill came in at 566k which was larger than the early week estimate of 560k. This is bullish news. Look for two to three weeks of very aggressive kills in front of us. Margins, while they’ve narrowed a bit, remain historically profitable. Choice beef is stabilizing around $280 and the choice/select spread resides at $17.73. Look for another round of higher cash steer prices this week and perhaps again next week before packers take a break, take a pause. We still own a ton of Dec 135 calls which expire Friday. Look for an update on the midday pork and beef update on pricing these calls. A mixed to lower early trade is expected and then buying should surface. I’m bullish. My exit price on all feeder futures is 16990. We also own a ton of feeder call spreads. Recommend holding these.