MORNING LIVESTOCK REPORT
By Dennis Smith
Friday, October 8, 2021
CORN AND SOYBEANS:
Palm oil cash and futures ripped into fresh contract highs and all-time record highs overnight. Soybean oil is following suit. However, soybean oil prices remain $12 under their all-time highs set earlier this year. Compared to palm oil prices, soybean oil is cheap. On Sep 27, palm oil was trading $165/MT discount to bean oil. Today, the difference is around $92. Consider a pullback toward 6100 in the Dec bean oil as a buying opportunity. Soybeans are higher solely due to bean oil. I don’t trust the soybeans to move higher. I may even consider buying puts later today with the concern that soybean yield will be increased on Tuesday. In contrast, I’m not expecting yield to be increased in corn and possibly it will be lowered. Corn exports are strong and the energy shortage will continue to drive ethanol margins, increasing the crush. Wheat will move out of the feed ration as wheat prices continue to rise. Finally, I’m expecting a large Chinese corn purchase in the near term. Consider the Nov corn 560 calls, currently trading at 3 cents (two weeks to expiration) or the Dec 560 calls, currently trading at 9 ½ cents.
The weather is cooling, especially the nights and hogs are being introduced to new corn, fresh corn. This will cause a growth spurt. Chain speed remains hobbled by law. China was absent, notably absent from the U.S. pork market last week. CA prop 12 looms ahead. Cash will be lower today but Friday’s are not an important day to gauge the cash hog market. My new concern is that hams appear to be running out of gas. My sources are suggesting that Mexico is starting to back off a bit. Hedging is advised. Consider the following in the Dec options. Recall that we covered profitable Dec hedges prior to the bullish hog & pig report. If Dec hogs trade even a touch higher this strategy should be filled.
- Buy Dec 83 puts/sell 73 puts/sell 88 calls at 120 points. If will take a bump higher in futures, from 8150, to get this hedge executed.
Open interest dropped by 2,324 yesterday in the LC futuers. OI in feedes was down 871. So, this takes a little bit of the bullishness out of the rally yesterday. Perhaps it indicates that futures will pull back, back and fill for a few days. However, they don’t have to. If we are turning a corner here, if feedlots are getting cleaned up on backlogged cattle, don’t forget that cash steer prices and futures, relative to where wholesale beef is trading, are $20 undervalued. Recall that funds completely blew out of length in the Sep swoon. They did this on the horizon of a huge inflationary surge that is driving all commodities higher. In other words, there are now huge buyers, huge players on the sidelines itching to get back into the cattle market. This surge of new money has not started, yet. The cash steer tone was better this week. For the second consecutive week the negotiated volume was large. Pehaps we’ll see a bullish surprise in the size of the Sat kill, driving the weekly harvest toward 660k. IMO, the Feb/Jun spread, at under $2.00, is undervalued. Other than the bull spread, I plan to watch the action today.
- Buy Feb/sell Jun LC at 190 to the Feb. Risk a close at 120 or lower, approx a 70 point risk. The margin to hold this spread is $600.
The risk of loss in trading futures and options on futures can be substantial. The author does not guarantee the accuracy of the above information, although it is believed that the sources are reliable and the information accurate. The author assumes no liability or responsibility for direct or indirect, special, consequential or incidental damages or for any other damages relating or arising out of any action taken as a result of any information or advice contained in this commentary. The author disclaims any express or implied liability or responsibility for any action taken, which is solely at the liability and responsibility of the user. This report is a solicitation.