by Dennis Smith
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Cash is basically up $1.00 compared to late last week. Cutout is pulling back off the highs so margins are narrowing but not dramatically. Futures are seeing bull spread activity with the Jun hogs the strongest. In fact, the Jun/Jly bull spread appears to be breaking out from a consolidation. Jun is too cheap relative to the index. Of course, the bearish trader is bearish due to the serious backlog of hogs in the country. They’re also bearish due to the price of wholesale pork. I’m bullish because IMO the packers will never be able to chew through the backlog. Weights will continue to increase and force producers to put huge numbers of hogs in the ground and not through the processing plants. In addition, I’m bullish long term as large scale herd liquidation is occurring.
Hams and bellies remain weak. Retail pork items remain in good shape. Regarding the ham market it appears there’s been huge export interest in this pork cut this week. Weekly export sales were a bust but shipments were huge at 49,700 MT, a marketing year high and the second highest weekly shipment ever recorded.
My sources report that beef will be lower again today. However, the decline appears very orderly and not a free fall type of situation which is surprising to most in the industry. Foodservice is coming back with all 50 states staring to re-open to some degree. Exports are minimal right now. However, domestic retailer demand remains good to excellent.
Packer margins are narrowing a bit but they remain highly profitable. All plants are running with the incentive to kill and process as many cattle as possible at current margins. However, under the new rules of social distancing within beef plants, we’re still backing up cattle. Brazil is the next concern from a global beef production perspective. COVID-19 is currently spreading rapidly in Brazil.
Short-term we’re bullish the discounted board and we’ve assumed bull spreads. Longer term we’re bullish to very bullish but that’s after the backlog is consumed which will take months not weeks. So, that leaves us with the prospect of having to be concerned about prices this fall. Given a rally in the Oct and Dec, perhaps toward the highs from earlier this month, we’ll look to unwind our bullish spec positions and begin some serious hedging for the rest of 2020.
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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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