By Dennis Smith
Friday July 15, 2022
Our approach to the grain board has been extremely conservative. We’ve established the Sep soybean 1600/1700 call spreads this week. A couple weeks ago we bought the Aug corn 700 calls. While these may or may not become profitable, the risk is fully defined and manageable. The weather pattern appears bullish, threatening, but the market does not view it as such. Funds are still selling based upon the fear of deep recession. Recession in the U.S. has never happened without a steep rise in unemployment. The U.S. economy is still creating jobs. Repeating, I am not interested in adding risk in the grain complex.
Cash hog prices were mixed to mostly down $3.00 yesterday. The cutout was up .23. Product prices are lofty, at the highest prices in a year. Many primal cuts are trading at 52-week highs. The volume of trade in the product is drying up as well. The Goldman roll is over, finally. Open interest edged higher yesterday on a mostly lower close. For the first time in more than a year I’m trading hog futures from the short side. My risk on the bearish three-way risk reversal is a close above 11200 in the Aug pigs. A close below 10600 would be quite bearish. Heat will reduce demand, exports remain lousy and imports, aided by the powerful move in the dollar, will continue to surge.
Fats and feeders closed lower yesterday, and open interest dropped in both markets. LC OI was down 1,582 with FC OI dropping 1,248. Light cash trade occurred in TX at 136, in KS at 136-139, in NE at $230 dressed and in IA from 140-150. The beef was slightly lower. The selling on the board yesterday was tied to the outside market influence and the fear of recession. If we’re in recession it will be the first full-employment recession ever recorded. We just completed six consecutive quarters of record large beef production. Production in the 3rd and 4th quarters is projected to decline with the decline accelerating in the fourth quarter. Production next year is projected to fall by more than 7%, or the largest annual decline in beef production ever. Production in 2024 will decline as well. The six-month beef cow kill, at 1.981 million head, is the largest on record. We’re in the third year of beef cow cull and it’s accelerated this year. My sources are indicating that corporate yards are now buying light weight calves in a very aggressive fashion because packers realize the supply of feeders is going to dry up dramatically. The aggressive trader should be long feeders in some fashion. Today would be the second day of a pullback off the highs making Monday/Tuesday ideal buying days to add to bullish positions in feeders. By early next week, if corn prices are not shooting sharply higher, that likely means the weather pattern is turning less threatening giving me more confidence in adding to bullish feeder positions.
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