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Relief Rally in Hogs a Hedging Opportunity

by Archer Financial Services | Oct 05, 2017
By Dennis Smith 
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LEAN HOGS

It appears to be a quiet morning regarding news that may impact livestock trading. Compared to Tuesday’s super high volume rally affair, yesterday’s rally in hogs occurred on light volume reported at only 37,900 cars. Open interest increased by 634 with open interest declining by just over 2,000 in the soon to expire Oct. Open interest dropped by over 9,000 cars on Tuesday’s massive rally and painful liquidation of the Dec/Oct bear spreads. Weekly pork export sales were sluggish, reported down 13% from their 4-week average. Shipments faired a little better, up 1%. Keeping exports at a rapid clip is critical in the face of record large production coming down the pipe. Since the release of the hog & pig report, one week ago, futures have triggered an impressive “relief rally” with the spring and summer months blasting into new highs. We consider this a hedging opportunity and strongly recommend a combination of selling futures, buying puts and put/call risk reversals. From a spec standpoint, we’re looking at selling Dec futures outright and purchasing puts. Look for a choppy two-side trade in the early going. 

 

LIVE CATTLE

The volume of trade in LC futures has been extremely light so far this week. Prices have rallied, tested resistance and pulled back again. Some weakness in the bull spreads in tandem with the failure to take out resistance is a bearish indication, in our opinion. Light cash trade occurred yesterday from 107 to 108.50. This is steady to weak compared to last week’s bulk of trade. The show list is larger this week and the weekly kill is projected to be a monster, somewhere close to 645,000. Weight data comes out later this morning which will likely reveal continued rising cattle weights. Boxed movement has been very slow this week, a warning sign of trouble ahead in our opinion. However, weekly beef export sales were excellent, reported up 70% from the 4-week average. Shipments were up 2%. Beef packer processing margins are currently profitable and we’re anticipating that they will further pad their margins during the fourth quarter. Production, beef, production, is forecast to be record large. Tyson stock, by the way, has soared recently. It appears we’re not the only ones looking for improving margins in times of record large production. Traders expecting a continued cash steer rally, in this environment, are obviously anticipating a demand miracle. Perhaps but not likely. 


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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. In addition, the author of this piece currently trades for his own account and may have financial interest in the following derivative products: (corn, soybeans, soybean meal, soybean oil, lean hogs, live cattle, feeder cattle).

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