China won't cancel soybean purchases
Hogs: Cash pork prices rallied for almost two weeks straight. They were down Friday but one day down after many days up will not change anyone's mind here.
We are pretty impressed that the four week average slaughter rate is down 5% compared with last year. That is fitting right into our supply expectations. This would imply USDA's numbers for the March through May period will hit right as expected. We are very excited about this development as market hog supplies fall right off a cliff at the beginning of May and continue to fall until June. Not only do we have the seasonal supply drop in front of us but it will be even tighter than normal. The rally we expected is happening and we still contend May and June futures have a $77 objective before their expiration. When futures break out, around $74.15 on the June, we will go long futures.
Trade Idea(s): (04/01) Bought 1 Jun/Sell 1 Aug -1.25, risk to -2.50, objective +1.50. Closed -1.22. Option Strategy(s): (03/10) Sold 1 Jul 68.00 put at 2.25, risk at 2.50, objective 0. Closed 1.12. (04/15) Sold 1 Jul 70.00 put at 2.15, risk to 2.75, objective 0. Closed 1.60.
Lean Hog Technical Commentary:
Hogs posted a small inside bar on the chart today, but remain below the current downtrend. So for now this market is trapped in a wedge formation as shown above. The past two sessions have found support at the moving averages.
Soybeans: The purchase from China came out to the equivalent of 10 million bushels. That is great news. The thing traders did not like is 8 of that was for new crop and only 2 million was reserved for old crop. Is this the start of a pattern now? Though we do not expect any big mass cancellations of US soybeans (see below), China is now confirming they will be working with South America for old crop sales now. While all of this news is a little disappointing, see the story on Grain Fundamentals 1. They will continue buying domestic beans at higher than market prices for an extra two months. We can talk all day long about how bearish new crop plantings and ending stocks will be. However, for now, the old crop situation is tight and may get a little tighter on the next supply/demand report in May. Unlike corn, there is no firm top yet in soybeans yet. We will begin to temper our trading bias. Instead of all out bullish we will begin to temper it a little. We are not bearish old crop soybean prices yet though. Today, the spread we were watching hit our objective and July futures exceeded our economic objective. We will start with buying a put option.
The "China Will Cancel Significant Amounts of Soybeans" Fallacy: One thing that has been talked about since January is the idea China will cancel a ton of booked orders, anytime now, and this market will fall like a rock afterwards. It sounds like a reasonable idea because it has happened before. However, a quick look at the facts reveals otherwise. Through last Thursday China has purchased 637 million bushels of soybeans. That is a full 36% over last year. The thing we must keep in mind is they have been asking for quick delivery of those soybeans right away. Of that total 637 booked, only 50 million bushels have not been shipped out. It is not like 50% of their purchases are outstanding. In fact, over 92% of all sales to China are already shipped out. Please reread that sentence. We will say that yes, if/when China cancels a few boats (3 -10, out of 25 not shipped) the market may take it bad. However, we must clarify that it will not be enough to change these extremely tight old crop balance sheets. Making it clear, we are not saying this market cannot top. When the market decides to switch from an old crop focus to a new crop focus (likely halfway through planting) we will have a clear top. We are simply making it clear the idea of BIG cancellations of unshipped beans coming is wrong.