Wednesday, February 1, 2023
Yesterday corn open interest was slightly higher, soybean OI took a large jump and meal OI was unchanged. I wonder if the funds are about done with this buying binge? It’s my opinion that corn prices are vulnerable to a $1.00/bu drop ahead of spring planting. I’m also of the opinion that most Midwestern corn and soybean producers believe this is highly unlikely which tells me that it’s highly likely. Producers remain bullish in the face of bearish fundamentals. Yesterday we bought the Mar corn 660 puts for 3 ½ cents.
The cattle report is bullish and strongly suggests that beef prices will remain elevated and in fact work higher during the year. The beef/pork ratio is historically high meaning that beef is expensive relative to pork. Pork is a bargain. My conclusion is that beef prices will not crater suggesting that pork prices are poised to rally sharply. Indeed, the hog carcass sits at a 2-year low. If there is no recession and exports improve over last year, hog prices will move sharply higher. Supply, or tight supply will be an issue. Numbers are over-stated in the U.S. hog herd. PRRS remains a major issue. Numbers are down substantially in the EU and we believe (without confirmation) that Chinese pork production will be declining this year as well. ASF continues to spread in the EU and in Asia. Global pork production is declining. Apr pigs spent last week swinging on either side of 8550 and now they are spending this week on either side of 8650. At the moment I have no new ideas. We’re holding bull call spreads designed to buy time for a bottom to develop and a significant rally to occur. Open interest from yesterday was up 3,556 cars. Given the way futures closed, well off the session lows, I consider this information bullish.
Let’s review the numbers. All cattle and calves stand at 97% with the calf crop at 98%. However, breaking out the beef sector, beef cows/heifers that have calved are only 96% of last year, implying 1 million fewer calves. Heifers held for beef cow replacement were measured at only 94% of last year. This is a bullish number and indicates the massive cull remains in high gear as of the end of last year. Heifers at 500 lbs and over are 96% of last year. As of Jan 1 heifers accounted for 40% of all cattle on feed, a decades high percentage. All of this data points to lower beef production for this year, next year and likely for 2025. The industry needs incentive to end the massive contraction in beef cows and begin another expansion. This incentive would include the following.
- A substantial rise in feeder cattle prices making cow/calf operators profitable.
- A substantial drop in feed prices (especially corn).
- A substantial improvement in grass (pasture) conditions.
- A substantial hay crop lowering hay prices substantially.
- Strong fed cattle prices.
Should these factors fall into place this spring/summer, and contraction ends and heifer retention begins, what is called the bullish whiplash effect would take hold. The substantial reduction of heifers moving into the feed yards would tighten the fed cattle supply in a major way. Time will tell when this massive contraction ends.
I’m bullish. Look for feeders to gap higher today. Look to buy Oct LC at 16270. Back to feeders, if corn prices have topped as I’m speculating, they have, March feeders can move to $200.
- Buy Oct LC at 16270. (down 22 points on the day)
- Cover the short Apr LC 152 puts at 20 points.
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