Rising OI in deferred hog contracts indicates large hedge paper

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LEAN HOGS

Cash hog prices were powerful strong yesterday and the cash market is called fully steady to higher again for today. Two packers will be dark on Friday for summer maintenance and packer margins are in the red. Lean hog futures soared yesterday, led upward by the most active July lean hogs. Massive short covering has been the feature in the June and July hogs whereas aggressive new hedging is the feature in the Aug through next June contracts. The prospect of locking in favorable hog prices with the possibility of corn prices declining substantially presents the first attractive hedge opportunity in a very long time for pork producers. The July hogs have been stroked by rumors of Chinese export business. While certainly possible and these rumors are from reliable sources, the prospect of large Chinese buying is contrary to what's been happening all year. In my opinion what's really happening is large scale switching away from high priced beef to more attractively price pork.

This domestic business has provided a real shot in the arm for pork. As soon as Fourth of July business is complete, I suspect the pork market will begin to simmer down. By the end of next week I plan to have some Aug puts on the books.

LIVE CATTLE

Live cattle futures staged a decent rally yesterday with zero fundamental news to back up the action. A large buy stop was elected near 10:00 AM sending Aug fats sharply higher. Look for resistance in the 12050 to 12100 range. I'm using the pop in the market to secure large numbers of feeder cattle puts. Despite expected tight supplies of feeders, with no prospect of a profitable hedge, I'm expecting demand for replacements to fade during the course of the summer. If I'm wrong, owning puts will leave the upside to feeder prices wide open. Look for defensive action in the weeks ahead in the cash steer market.

If you would like a free 30-day trial to my evening livestock wire please send me an email. Dennis.smith@archerfinancials.com 

Follow me on Twitter @denniscattle

Please view my comments on the corn market via YouTube.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options market. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc

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