Hogs…Where there’s smoke….there’s fire!
By Dennis Smith
Friday, January 7, 2022
Where there is smoke there is fire. The hog market smells of smoke. We believe there’s a serious drop in production coming from both a domestic and global perspective. We are highly confident that production in the EU will drop off hard into spring. We’re less certain about China but my sources are confident that the Chinese producer is losing huge amounts of money and liquidation has been occurring for months. This is adding to the gross oversupply of pork. When the dog hits the end of the chain, production in China should drop quickly. Here at home, the hog & pig outlined that butcher hog supplies in the first quarter would be down 5% to 6% from last year. However, I’m picking up from many sources that numbers will be lower than 6% below last year moving forward. Why? Three reasons, PRRS, PED and Delta coronavirus. Sourcing feeder pigs (for butcher this summer) has become a near impossibility. The price of 40 lb feeders jumped $10 per head last week to $74 a pig. We may be entering a perfect storm in which demand stays strong and in fact rising (exports to China) while production both domestically and globally takes a dive. We are positioned for the move. The Goldman roll starts today and index fund rebalancing starts on Monday.
The negotiated volume stands at 41k. Prices paid are lower than last week, call it down $1 to $2. The question, the million-dollar question is will COVID cause a major disruption in the cattle kills? Life would be easy if I knew the answer. Most of our length is located in the deferred contracts. They closed higher yesterday and the downward correction in the back end has been very shallow compared to Feb and Apr. We own Jan LC 138 calls which expire today. If they run in the money, I want to liquidate the calls. I do not want to exercise these with the COVID uncertainty overhanging the market. We also must move to cover the short Feb LC 144 calls. They closed at 30, recommend covering these at 25 points. We’ve bought feeder calls this week. Im long-term bullish live cattle and feeder cattle. We have to get past this COVID threat, however. By the way, the unemployment rate is below 4%. Folks, this is bullish toward meat consumption.
- Cover the short Feb LC 144 calls at 25 points.
- Liquidate the Jan LC 138 calls if futures rally above 138 today.
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