By Dennis Smith
Wednesday, December 1, 2021
Corn prices are up 4 cents but they quickly dropped 4 cents off the overnight highs. It appears that producers have not turned aggressive sellers, at least not yet. However, I’m hearing that a very large amount of grain has been sold for January delivery. I’m waiting for a close in the March corn below 560 to confirm that a major top is in place. Soybeans have already provided such confirmation. My next downside target in Jan soybeans is 1150. Soybean oil has topped for now. Eventually, perhaps, we will come back into the bean oil but not now. Finally, it appears that wheat futures have topped as well. Please refer to the evening wire to see what grain positions we have on the books.
Yesterday was a “get me out” trade in lean hog futures. Open interest was down just over 2k in the Dec, Feb and Apr contracts. Total OI dropped just over 5,800 cars. The spreads turned with Dec gaining rather dramatically on the rest of the board. This seems to be sending the signal that cash hog prices are ready to bottom. Why not? They’ve been in consistent decline since the end of June. Cash hog prices, yesterday, were quoted up $1.50 to $3.00. Hog numbers, while remaining well below last year, are projected to peak over the next two weeks. Margins remain highly profitable. In addition, pork is cheap, incredibly cheap compared to chicken and compared to beef. The debate over CA Prop 12 continues in the trade. Many are calling for a severe disruption and decline in the product. Some are calling for implementation of the rule but no compliance. Some (myself) are calling for implementation to be delayed by six months or more. What I do know is that the futures market, with thousands of participants, is projecting a huge rally in cash hog prices and cutout values over the next six to eight months. Yesterday we stepped into a nice “double” trade. Not a home run but a trade that has a very high chance of max profit with totally limited and defined risk. This is the Feb LH 86/90 call spread, paying 90 points. For today, recommend working orders to buy the June LH 118 calls at 80 points. Consider this a “one quarter” position. We hope to do more down the road.
- Buy June LH 118 calls at 80 points. This is a premium outlay of $320. IMO, summer hog futures are likely headed north of 120.
LC futures saw another large volume session (70,185) with open interest down 2,711. Dec gained on the rest of the board which is bullish. Dec is discount to the cash which has not traded in volume yet this week. In addition, the Dec pulled back and filled a gap on the chart from last week. Today is the third day down after seeing fresh contract highs on Monday. IMO, futures will trade soft/lower early in the session and then the selling will dry up. Look for a surge upward into the late week trade. Asking prices for the show list animals reside at $1.43 and $225. Cattle at auction barns that will grade prime are fetching $1.50. I remain bullish.
- Final liquidation target on the Dec LC 135 calls is 480 points. Recommend to have GTC orders working.
- Exit half of feeder long futures at 16790 and half at 16990.
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