Monday April 1, 2024
GRAINS:
Open interest in corn futures from Thursday’s sharp rally that was inspired by the suprise drop in corn acres was up nearly 41k. This is short term bullish. However, IMO, the corn acreage number will increase from Thursday’s report, perhaps adding as much as 2 million acres back to corn production. In addition, heavy rains are in the forecast for the eastern Corn Belt over the next five days and heavy rains are in the forecast for all of IA and S. MN over the next six to 18 days. In fact, I could not draw a better forecast with a marker. The key question that traders should be asking is not how high will corn prices go….but how low will they go? IMO, corn prices are headed toward $3.50 not toward $5.00. Any rallies over the next 30 to 60 days, likely due to weather uncertainty, should be treated as selling opportunities. I consider the chart pattern in bean oil bullish. We’re holding profitable bull call spreads. Otherwise, I have no new recommendations.
LEAN HOGS:
I want to retract nearly my entire comment from Thursday regarding the hog & pig report. While true that the report was disappointing to me, as I expected evidence of a deeper cull, I now believe that the report is not bearish, not neutral, but bullish. Allow me to explain. The U.S. sow herd is down 130,000 from one year ago. The less efficient sows were the first to go, thus, the huge surge in pigs per litter the last six to eight months. The cull continues and, IMO, the industry will soon hit a wall regarding pigs saved per litter. Back to the report, it does not show rising production. It shows market hog numbers very close (within 1%) of last year. Producers are current. So, one should expect production at best even with last year into summer and possibly as much as down 3% through lower weights per hog.
Turning to the demand side, demand for U.S. pork has shifted, increased since Jan. The evidence is overwhelming. Cash is up 80%, cutout is up 10% year to date and the hog carcass is 16% higher than this time last year. Today’s WSJ showed a graph of quarterly performance for global stock indexes, bond ETF’s, currencies and commodities. The top gainer is cocoa, up 133%, followed by Rbob gas, up 31%. Coming in third is lean hogs, up 27%. I read a report from a marketing firm explaining why bacon demand took a hit last year. It seems with inflation hurting the consumer budget, sky high egg prices last year forced many consumers to forgo buying bacon. At the time retail bacon prices were record high. Well, bacon prices have since declined and egg prices have declined substantially.
Chart patterns are bullish. I highly recommend refraining from selling a lower open in hog futures and instead, look to buy Jun calls or call spreads. This market is going higher. Two ideas are listed below. Hold all April calls.
- Buy Jun LH 110 calls at 100 points, risking 50 points.
- Or, establish the Jun LH 108/114 call spreads at 100 points.
- Hold all April LH calls.
LIVE CATTLE:
Late reports on Thursday indicated that packers were aggressively seeking cattle Thursday afternoon. Tops as high as 190 and 191 were reported in the north. The beef was reported Friday with choice down $1.64 while select was up $2.26. Select is gaining on choice as select end cuts are being ground for trimmings. The choice/select spread stands at only $3.29.
Bird flu has spread to dairy herds in MI and UT. This should not impact live cattle futures like it did early last week. The early outlook is for steady to lower cash. But will it actually be lower? I’m not so sure it will. My strategy is to exit bullish Jun strategies on a move toward 18200. I’ll also be looking at some partial hedging of summer cattle production. The fall/winter is where I want to hold bullish positions. Don’t look for a feeder recommendation from me in the near term. Back to LC, weights are going to be a problem for a while.
- Look to exit the Apr LC 188 calls at 40.
- Prepare to exit the bullish Jun LC three-way risk reversals on a sharp bounce.
- Prepare to establish partial hedges for summer production.
Dennis publishes his widely followed evening livestock wire daily. For a free 30-day trial send an email request to dennis.smith@archerfinancials.com
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