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Soybeans Volatile, Hog Market Sinks

The bean market ended a volatile week of trading on a quiet note, with liquidation of the bull spreads the dominating feature of the trade. 

The May/July spread narrowed 2 ¼ cents, and the July/Nov narrowed 4 ¾ cents. For the week, the front month May contract was up 3 ¾ cents.  Next week, the trade’s attention will turn to Wednesday’s WASDE report. Early thoughts are that the endings will continue to shrink due to phenomenal exports the U.S. continues to see.  

Soybean sales are now 105 million bushels for the USDA latest export estimate of 1.530 billion bushels. We still have five months of the marketing year remaining. We do look for the USDA to offset some of the export demand by increasing imports. With China desperate to get out of the buys, we look for U.S. end-users to buy these beans. Talk is somewhere near 14 cargoes are definitely coming to the U.S., and between 8 and 10 cargoes being offered. If they are bought at a deep enough discount, talk is they could be barged up river to be crushed.

Long-term, it looks like it will be hard to be bullish without a weather problem. China, the world's biggest buyer of beans, looks like it will be pretty much of out the market for a while. The world is currently swamped with beans. Argentina is just starting harvest and is trying to move beans at the same time their biggest buyer, China, is selling beans. The U.S. users continue to buy both beans and meal from SA origin, which should resolve our tight supply situation here. 

The recent strength in futures is due to banks blowing out short positions held by Chinese traders against their long cash positions. Their crush and poultry operations are already in serious red ink, and then add to the thought that futures were rallying every day and their cash values are declining every day – a very hard scenario financially. The fund position has actually gotten smaller as they have taken profit and are stepping aside while being replaced with small traders and hedgers blowing out of short positions. 

This is not going to end well when it is all said and done. Near-term buyers will be positioning for the next WASDE report, which is expected to be bullish, and that will probably keep a bid under the market…Jim McCormick 

Trade Recommendation:

  •  (11/5) Bought a November $11.40 put, sell a November $10.00 put, sell a November $12.20 call for  4 cents.  settled at  -26.5 cents

 

 

Lean Hog Commentary

Posted 04/04/14

China Bans U.S. Live Hog Imports: The big news in the pork industry was word that China temporarily placed a ban on imports of live hogs from the U.S. The reasoning behind this news was their concern about the hog herd and PED. Keep in mind, PED was actually a China problem originally. Limit down trade was posted from the May through October contracts today on this news (partially to yesterday’s wholesale pork drop as well). 

For those new to the pork market, this sounds like very bearish news. It is well known that China is the #3 buyer of our pork exports. Last year they accounted for 13% of all exports. While they are a big buyer of our processed pork exports, we couldn’t care less over their live hog purchases. Here are some stats to write down:

 1) Hog production from U.S.-born animals was 107 million head last year.

 2) Total imports of live hogs into the U.S. last year was 5 million head.

 3) Total exports of U.S. hogs to other countries was only 34,004 head. 

Of that minuscule amount of live hog exports, 13,653 head went to mainland China and Hong Kong. From a numbers standpoint, this ban does not amount to anything. From a psychology basis, and the fact that we have so much blind money in this market right now, it is an issue.

Bigger Hog Slaughter Coming?

Through most of this week, we have highlighted the fact that daily kills were a little higher than most expected. This afternoon’s USDA summary suggested 2.030 million head this week, 3.2% less than last year. You may remember during all of March the kill ran 6% to 8% lower than last year. Allendale, and much of the pork industry, has been arguing that last Friday’s Hogs and Pigs report was unreasonable. You may remember that it called for slaughter to run 4.7% lower than last year from March 1 to mid-April. It also suggested only a 3% to 4% reduction in slaughter during the summer. The private analyst community has been touting a 10% to 15% reduction in summer slaughter. With this week’s kill bucking the March supplies, many will now wonder if USDA was right. For now we keep the H & P report right where it belongs, in the trash can. One week does not change four weeks of problems.

PED Reductions 

One thing the trade had to accept this week was that new findings of PED will be falling hard from here on out; 247 findings was posted in the latest week, far off the 315 posted five weeks previous. Warm weather puts an end to flu season. No one can argue this issue. That does take some of the bullish enthusiasm out of this market. It does not change the fact that the worst of the PED slaughters is still in front of us however.

Hog Pricing 

With a few more hogs showing up this week, new PED numbers falling, and the overblown China story, this week was a tough one for hog prices. The lean hog index, through Thursday, is at $130. The IA/MN run is now $128. Futures are now implying the LHI will fall $7 over the next 10 days. An additional $5 is scheduled after that down into summer. Given that we have yet to actually get into the heart of summer or the heart of PED slaughter problems, we cannot suggest this is realistic pricing. We will not “catch a falling knife” here with attempts at buying until the market is ready for it. Expect lower trade next week…Rich Nelson

Working Trades:

  • (1/3) Sold 2 Jun 96.00 puts 1.95, risk to 1.97, objective 0. Closed 0.02.
  • (1/24) Sold 1 Jun 98.00 put 2.02, risk to 2.10, objective 0. Closed 0.05.

 

 

Rich Nelson 

Allendale Inc. 

815-578-6161

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