Pork Cutout Has Edged Higher For Seven Weeks
By Dennis Smith
Tuesday, March 7, 2023
Open interest was lower in corn yesterday but higher in all other contracts traded including wheat, soy, soymeal and soyoil. Some analysts have turned bullish based upon the continued drought in Argentina. Really? How many times can we kill this crop. IMO, corn will stage another leg downward before the end of the U.S. planting season. Elevated corn prices are headed lower. The only cure for very poor demand for U.S. corn is lower prices. In May the USDA will pencil out ending stocks for the 23/24 crop and projected corn ending stocks could easily be north of 2.0 billion bushels. We took profits on a host of short corn positions last week. Now, it’s time to re-load. Consider the following.
- Buy Apr corn 640 puts/sell May 670 calls/sell May 590 puts for 3 cents or lower. Initial margin is $1,500.
Cash hogs are called higher early today. Winter weather will be a factor in SD, MN and WI. Packer margins have improved recently. Keep in mind that the pork carcass has edged higher for seven consecutive weeks. Yesterday’s cutout was up $1.76. Open interest from yesterday’s action was up 1,944 cars. OI declined 1,495 in Apr on the pre-Goldman roll while increasing 1,941 in June. There was keen interest in Jun 105 calls with total open interest in Jun calls rising 631 yesterday. In my Monday podcast I’ve picked up some fresh news out of China. First, there is growing evidence that ASF is on the rampage again in China. And second, I’ve learned that China is facing an acute chick shortage. It seems that China sources baby chicks and a major supplier is the U.S. However, with HPAI everywhere in the U.S., the only state that China will import chicks is Alabama. This is causing a severe shortage of chicks to place which will quickly result in tight chicken supplies. Just another log on the fire of the long-term bullish meat fundamentals which has not supported hog futures to date. I’m bullish and recommending holding on to bull call spreads. Managed money is holding a very large net short position. Today is the first day of the Goldman roll.
Total open interest was down 233 cars in LC yesterday. April OI declined 1,797 with Jun down 59 while OI was higher in all other contracts traded. FC open interest surged by 1,311 on the strong performance. Asking prices for cattle in the south are clustered at 166 compared to the trade last week at 165. Offers for dressed meat stand at $267-$268. Choice beef is record high for this time of year and quoted yesterday at $290.20. U.S. beef demand has never been stronger. We exited a host of Mar FC calls yesterday, taking profits. Recently we’ve moved out of nearly all bullish Apr LC positions and moved them into Oct futures and options. I consider the Oct LC contract undervalued as long as it’s trading below cash. Last week’s negotiated volume, at 90.5k, was the second highest weekly volume of the year and packers paid up to get the cattle. Yet, margins remain profitable. The weekly kill is projected to come in at 631k compared to 637k last year. The first line of resistance in Apr LC will develop where the Feb went off or 16750. I’m bullish but not adding to positions at contract highs.
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