Open Interest in LC Futures Continues to Decline By Dennis Smith from Archer Financial Services


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Thursday January 30, 2020


After working about $1.50 higher this week, in the face of huge production, cash is called steady for today. Futures prices have dropped hard as the premium comes out of the market. The attractive basis is encouraging the commercial to cover while the spec and fund initiates a new short, resulting in very little change in open interest. Weekly export sales and shipments were excellent. Sales were large at 34,100 MT with Japan a huge buyer, booking 11,000 MT followed by Mexico booking 7,500 MT with Korea taking 5,100, Canada 3,500, China, 1,500 and Colombia booking 1,400 MT of U.S. pork. Shipments were huge at 43,600 MT with China taking a new large weekly total, shipping 18,600 MT followed by Mexico shipping 10,800 MT of U.S. pork. These numbers are impressive but they’ve not translated into strong futures due to higher than expected production. The CEO of JBS/Brazil stated that China will likely import meat more aggressively in the face of the coronavirus scare for food security reasons and assurance. He went on to state in 2003/2004 China increased meat imports during the SARS outbreak. Until we see the hog carcass move higher and through $83.00 there’s no reason to expect a rally to hold in futures. Eventually this should happen as supplies drop off…assuming they will in about 30 days.


Funds continue to exit their sizable long position in LC futures. Open interest from yesterday’s lower close was down 7,600 cars. During five sessions of liquidation total open interest has been peeled back by over 41,000 cars. Perhaps more than a third of the fund long has been dumped presumably due to the expected slowdown in global economic activity due to the coronavirus in China. Please note the statement made by JBS overnight that they’re expecting China to ramp up meat imports due to food security concerns. U.S. stocks are lower this morning but they’re well off their overnight lows. Cash trade occurred late yesterday at $1.22, down $2 from last week. We started covering hedges in the June yesterday as we’re expecting a recovery into the spring demand season. We’ve also been establishing conservative bullish option positions; nothing heroic like buying futures. Weekly beef export sales were solid at 21,700 MT with shipments also good at 16,600 MT.

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