By Dennis Smith
Monday, November 8, 2021
Lower prices across the board. Be careful selling these markets in the hole ahead of the crop report due out Tuesday at 11:00. Not that I’m bullish but a whip higher before or after the report is a real possibility. If that happens, and there’s no real bullish surprise, we will sell both corn and soybeans again. If there is a surprise in the report tomorrow it most likely will occur in the soybean yield data, IMO. Also, IMO, the surprise will most likely be a bearish surprise not a bullish surprise. We stepped out of long soybean oil positions (taking profits) last week just before the large break in prices. Wheat should find support near current levels. We’re holding a large number of Dec spring wheat 900/1000 call spreads and we hope to gleam the full $1.00 profit out of these at expiration. The Minn grain exchange closed the open outcry floor operation (out of the blue) on Oct first, robbing us of a market to exit these positions. We will advise moving toward expiration. Back to corn, as I stated four weeks ago, the bullish story in corn is over. Demand led rallies, off recent lows, are possible with ethanol margins record high. But the outlook for soaring prices (590 or higher) is extremely unlikely, IMO. I’ve considered the soybean fundamentals bearish for a long time. We’ve not approached soybeans from a bullish perspective since last June.
The first day of the Goldman roll whittled the Dec open interest down by nearly 9,400 cars. Total open interest was down nearly 5k, suggesting that index funds are not only rolling but also lightening their net long position in lean hog futures. The COT report (issued late Friday) continues to show commercial entities covering short positions while funds continue to sell. Cash hog prices finished last week steady to up $1.00 which is most unusual. The index is stabilizing, last quoted at 7869, up .37 with the one-day index estimated at 7910. In other news, researchers at the University of Illinois have identified a new strain of ASF in China. They trace this strain possibly back to Europe, not Africa. China, we believe, has major problems in their pork herd. Hog prices were higher overnight in China, with prices rising rapidly since the end of Sep. It’s possible the massive cull, that started in January, is complete and now production will drop way off and prices will rise sharply. Look for China to remain a major buyer of U.S. pork into 2022.
Regarding lean hog futures, I’m bullish. Dec hogs gapped higher on Thursday and prices pulled back on Friday but did not fill the gap. IMO, the gap will likely not be filled. Buy calls if you don’t already have a bullish position on the books.
On the first day of the Goldman roll the open interest in the Dec LC dropped by more than 10k. However, total LC open interest was down only 400 cars. Futures tested unchanged early Friday and then rallied. We tried buying the market (Dec LC) but our orders were not filled, missing by 17 points. Cash steer prices are starting to jump in chunks. Last week they went to $1.28 (up $2 from the previous week) to $1.30 on Friday. So, the $4 jump in cash prices could easily be matched with another $4 jump this week, IMO. Feeders are underpriced relative to deferred LC futures. They almost pencil out, meaning they almost make sense which is typically never the case. Look for a rally in feeders this week especially if the crop report on Tuesday is not bullish toward corn prices.
Because we have a host of bullish LC positions already on the book, I’m looking to add to the position via Dec options, looking for added leverage with limited and defined risk. Dec LC options expire Dec 3, 26 DTE or four weeks. IMO, the late Aug high in the Dec, 13815, may be challenged into December. Recommend to select a December call option and buy it. Consider the following.
- Buy Dec LC 134 calls at 80 points. These calls settled Friday at 90. Spending 80 points is a premium outlay of $320 per call. IMO, the odds of this call being in-the-money at expiration are really high.
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