Soybeans Rally, Hog Futures Stumble
With a short trading week, soybeans bounced today on strong export numbers.
The trade was on the lookout for cancellations that didn’t occur.
With estimates ranging from 200,000 to 550,000 tonnes, we actually came in at 626,200 tonnes. November beans closed 7¼¢ lower to settle at $9.25 per bushel. With July trading at lows not seen since March of 2016, a corrective bounce is not a surprise.
Weather models continue to reduce rain across much of the Midwest, with conditions now changing from too wet to too dry as we start off the month of June. With the market in a tug of war between possible bullish weather vs. possible bearish demand news, June promises to be a month full of volatility. We don’t think we've seen the low yet, but we do think we’re close and will be looking for a summer rally, the degree of which will be determined by the weather.
It might be surprising to many but July lean hog futures, the dominant contract, only closed up 15¢ this week. After seeing gains for over a month, this could be the sign to traders that the biggest gains of this rally are behind us. That does not mean the top is in place, just that traders are suggesting this rally may be maturing. That fits generally close to seasonals in this market.
Hog slaughter this week will run 1.972 million head according to USDA’s weekly estimate. That is right next to the 1.968 we discussed this morning. Their number would be 4.0% over last year, near the 3.8% year-over-year gain seen in recent weeks. On a seasonal basis kills should decline into July. What usually stops the rally is the stepped-down seasonal demand (hot weather).
It is time to discuss hog hedges with seriousness. We are at the seasonal price high of the year. There is usually another two to eight weeks ahead before deferred futures really get hit. There is also another two to three weeks where we can get short-term price spikes based on various issues before we can safely say the rally is over.
Having made those points, we are looking at a simple bear put spread or three-way option position. Any variation of the bear put spread would be fine. We are looking at buying December $62 puts for a price floor at 3.40 and selling December $2 puts for 1.00 to cheapen it up. The same goes for a 2.40 up-front cost but has no margin calls.
If the market stays the same or rallies, you get the full benefit of the rally on your physical hogs and are only out 2.40.
Producers who suggest that costs too much and are OK with a small margin deposit may do that same spread but also add a third position, selling December 68 puts for 2.50. This position could be done for around no up-front direct cost with the options. It would entail a small margin deposit.
That position would allow your physical hogs to fully benefit from a rally up to 68. If futures exceed that price, then the short call offsets the gains on the physical hogs. There’s a little more to the story here, but this is a good starting point in your discussion with your Allendale broker.
Consider this paragraph your official Allendale recommendation to place these orders on all hogs to be hedged through February. Separately, we will be discussing feed cost hedges before July.
Rich Nelson Allendale Inc. 815-578-6161
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