by Dennis Smith
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The USDA will provider their first look at ending stock projections for the 2020/21 crop which is currently being planted. Planting progress is proceeding rapidly with corn nearly 70% planted and soybeans nearly 40% planted. The weather will improve and all planting should be completed in May. Given a normal growing season and we’ll be swimming in corn. The funds are fully aware of this as they hold a record large net short position approaching 200,000 contracts. The USDA will also provide update meat supply/demand tables.
The kill this week is projected to come in near 1.925 million, up nearly 9% from last week but still down 18% compared to last year. Most plants are up and running but all plants appear to be running no faster than 70% and several are lower than 50%. So, while the E/O now has all plants running as our government said they would be, the labor problem remains a problem. In fact, the industry realizes this labor problem will not be solved in the short term. Keep in mind that Smithfield and Tyson are heavily involved in production as well as processing. Recall that the most recent hog & pig report indicated that farrowing intentions for this summer in NC were projected to drop by 10%, and decline by 7% in IA. Now I’m hearing these intentions will be down 15% or more. The point is two-fold, 1) packers evidently saw these problems coming and 2) the period of cheap pork is gone. Indeed, it appears the industry will be scaling back production to meet the reduced slaughter capacity. Hogs will continue to be backed-up for the rest of May and possibly most of June. I don’t see any alternative other than putting several million fat hogs in the ground. They’ll never make it into a processing plant. Cutout should be headed for $130 which was the peak in the carcass in 2014 when PED decimated the herd. It could easily move beyond $130 as well. I consider every hog contract under valued under these fundamental circumstances.
LC will trade on an expanded limit today of 450 points either down or up. FC will trade under their normal limits which is also 450 points. Prices were higher for feeders yesterday at OK City. There was no cash steer trade to report yesterday. Beef continued to rise, moving up into all-time highs again. This week’s kill projection is clearly disappointing at just 471K. Many came into yesterday thinking the kill would reach 500K. So, the backlog continues. A 471 kill would be down 29% from last year. I suspect the futures market will recover today. If the cash bids come in steady then both Jun and Aug look awfully cheap. We’re holding some hedges in the Aug, we covered hedges in the June and we’re holding bullish option positions in the Oct LC. My guess is to expect a two-sided trade early today followed with a higher close.
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