Quarterly Hogs & Pigs Estimates

One of the factors contributing to the weakness in beef has been the perception of formidable competition from declining prices in competing proteins. If we narrow the competition down to chicken, turkey, & pork, what we really find is turkey and chicken prices have rallied this year. Per the USDA's Economic Research Service indicated August y/y average retail price increases of both turkey and composite broiler to be  13.4% and 1.6%, respectively. Beef and pork have both had to endure y/y declines of 6.9% and 2.8%, respectively.

Being that pork and beef are following the same path, this Friday's September 1 Quarterly Hogs and Pigs published by the USDA may be influential to the beef market, and therefore, the live cattle futures traded at the CME Group.

I have attached the Daily Livestock Report dated 23, September, which includes estimates for the report on Friday. We'll talk about the report after it's release Friday afternoon.

Find the estimates for the report here: dlr-09-23-091

Bob

Back From Blog Holiday (& Summer Hiatus)

Hello again, All:

August tends to be a lethargic month when it comes to trading. Once Labor Day is behind us, we typically see a renewed focus on all things trading. This is why I took a hiatus in August from this blog. Now we're back in action.

I'll be coming to you shortly with a review of recent action in the markets. Then we'll talk about what's to come.

There is one trade I do see sizing up. It's a momentum trade in Natural Gas. October Natural Gas got slaughtered in the month of August, and is only now experiencing some sort of a bounce. I like working the direction of the prevailing trend when a market fisrt offers a 'semblance of a correction.

To that end ... here is the specifics of the recommendation:

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New Lows in Wheat

Indicative of lethargic demand and a lack of significant trouble for the Northern Hemisphere wheat crop development/harvest, Chicago and KC wheat futures broke into fresh new swing lows today. For the WU9, this marks an approximate 28% decrease in the price of a bushel of wheat since the end of May. This is significant. This is opportunity & risk. A lot of this move happened in just 20 or so trading days during the month of June.

Concurrently, we've seen both new-crop Corn and Soybeans fall from their highs. This "should" be supportive for the beef and pork industry, as the costs of inputs with respect to fattening up non-grass fed cattle, and hogs, has decreased notably. However, while the cattle market has reflected realtive stability, the lean hog futures have plummeted. 

Relative to a stream of Cattle on Feed reports and the more recent Cattle Inventory report, the expectations for cattle supply in Q4'09 is that of a tightening scenario that should be price supportive. Hogs, on the other hand, are more than ample. The most recent quarterly hogs and pigs report painted a picture of greater-than-expected supplies based on average pigs/litter & farrowing intentions. This, along with the influence of non-"swine-flu" on the psyches of some of our trading partners, has recently really broken the backs of any bulls. Check out the chart of LHZ9 (click to enlarge):

The LHV9 chart has an 86% correlation to two years in the past, 1970 & 2002. IF the price pattern repeats itself, the expectation is for a move down to 45 cents. IF the LHZ reacts similarly to the price patterns of 1970 & 2002 for that particular delivery month, then, in my estimation, it should continue with this weakness until early/mid August. We  shall see.

Bob

What Weather Scare?

Kind of hard to believe, but can we have a summer without a summer rally for grains/oilseeds? As I write this, CZ9 is breaking into new low territory for this entire bear market. All the wheat markets are stubbornly stuck down at the recent lows, and new-crop soybean are again toying with the idea of a down-side breakout.

I mean, typically we kill the crop three times, right? Drown it in spring, burn it in summer, and freeze it in it's final days?

Take a look at the seasonal tendencies for Dec. Corn & Wheat, and Nov.  Soybeans (courtesy MRCI, click on charts to enlarge):

***

Forecasts are benign. Weather looks good. If this sort of weather carries into August, there may still be a recovery - yet not much of one.

Biggest threat to the crop at this point remains the delayed planting & subsequent crop progress.

Bob

Soybean Rally Failure

Early on in the trading session all the ducks were in a row for a Grain/Oilseed rally. The $US is under sharp pressure, energy prices are higher, commodity indices are rallying, & equities are markedly higher. So what happened to soybeans?  The old and new crop contracts put in $0.40 ranges today, rallying early & breaking late to close much nearer the lows of the day than the highs.

Whatever pulled the soybean market lower will hopefully continue and provide an opportunity for those who agree with me that there is a bear flag formation in the chart (see yesterday's post).   

Now I don't trade on hope, I trade with a clear and concise strategy.

Contact me with any questions/comments, Bob

Mid Month Updates

Today is the last trading day for the July grain and oilseed futures contracts. They have provided us with a lot of action -- almost too much at times, and it will be bittersweet to see them go. July '09 Wheat was born in August of 2006, and gave us a $7.00/bu range during its lifetime.  During that same period, July '09 Corn gave us a $5.00+/bu range, and July '09 Soybeans a $9.25+/bu range. Those ranges were marked with big swings, so clearly they were not for the faint of heart. Yet they did provide ample opportunity for savvy traders with disciplined trading plans. So long July '09 contracts -- we'll miss you.

Bear Flag anyone? Check out the November Soybeans chart below. Tell me if you see a bear flag? (Click on the chart to make it bigger).

I've been fooled by these before, but that sure does look like a pretty bear flag.  As I've been taught, flags tend to break out in the direction of the prevailing trend. In my estimation, a downside breakout under the support trend line should yield a $0.36/bu move minimally, and perhaps $1.20/bu move if things get carried away and we meet the measuring objective equal to the flag pole. Lots of summer left, and lots of potentially adverse weather and other fundamental and potentially bullish factors to absorb -- yet the flag is there for now.

 Let's make the recent hog recos current ... The LHN9/LHZ9 spread is dead. LHN9 LTD is tomorrow. The spread at one time was profitable, and since has fallen back into negative equity territory. Two choices - get out of the spread as a spread, and take the approximate 80 point loss. Or, let the LHN9 cash settle, leaving the long LHZ9 position. Trail a stop in the LHZ9 position looking for more upside.

The options position is long 3 LHZ9 70 Calls at an average of 2 cents. Those options are going for about .75 cents, and I think they're ok to hold onto for now.

Cattle are strong. The LCz9 had every opportunity last week to make a run to sell stops under the range, yet it held and has popped right back up. I do not see much reason, at this point, to believe that it will make a strong run to extend into a new higher trading range.  So I am looking to sell it up here in the 90.50 to 91.00 area for a penny or two to the downside.

As for the financials. We are still in a financial maelstrom in this country and abroad. Economic recovery recently inferred by the big break in eurodollar futures with maturities in 2011 beyond was relatively shortlived. In May, the EDH1 an approximate 3.25% rate, and in June that jumped to nearly 4.5%. Now it's back to about 3.25%. A big "never-mind," I'd say. Yet, I think the upside rally in EDH1 futures is due for a pullback. After which, if it holds there should be another leg up to about 97.00 (3%). And if it does not hold, and the economies of the world appear on better footing this go-round, then rates may not  return to these levels for quite some time to come, in my opinion.

Good trading, Bob   

Old Crop Soybeans Independence

Having fully discounted the USDA acreage report yesterday, corn market tumbled and pressure was mounted in the wheat futures contracts across the country. Interestingly, within the last 25 minutes of trading, wheat had every chance to plummet toward the day's lows, yet it rebounded rather quickly to the tune of about 15 cents/bushel in a mere few minutes. Sure looked poised for a recovery of at least some of the losses. This morning I see that KC, Minn., and Chicago wheat futures are up anywhere from five to eight cents/bu. Wheat prices, for good reason in my opinion, have fallen quite substantially. Yet into oversold territory. And now I think it's poised for some sort of bounce. 

Old crop beans yesterday traded both north and south of unchanged. Old crop ended only modestly lower. Over night the SN9 & SQ9 are each up 19.75 cents. We went long SQ9 @ 1120.4, so the hope is that old-crop tightness considerations continue.

Lean hogs are off a little bit overnight. There are two strategies I've discussed that are still in play. The LHN9/LHZ9 spread offered the opportunity to vacate at a gain prior to the report last Friday. Those who chose not to vacate are incurring a loss, as the spread is now at -3.15, Dec under July. The improved performance with respect to retained pigs/litter and the March-May farrowings combined to pressure the deferred contracts (LHZ9), whereas the front-end supplies offered no bearish surprises -- propping up the LHN9. Thus, the heat.

Those still in the spread should, in my opinion, stick to the 3 cents risk based on the closing price of the spread. All sources I read indicate the producers are still suffering losses - maybe less of a loss, but still a loss. This cannot continue indefinitely without further breeding herd liquidation. And if liquidation occurs, the front end should fall some. The back end, in my opinion, wilL either stabilize or rally -- as thoughts will then turn to a decrease in supplies for the Dec. '09 thru early Q1 '10 time frame. These are my thoughts at this point. So far the market is telling me I'm a victim of poor judgement or poor timing, which is why the risk was defined.

The other hog play is the LHZ9 70 Cent Calls, which were recommended to buy in average-down fashion each 1 cent lower from 3 cents down to 1 cent. If done, the position is now long 3 LHZ9 70 Cent calls @ 2 cents, for a total risk of $2400.00. Looks like the last trade in that option is 0.75 cents. The same thought process as above applies to this trade, meaning I'm looking for a recovery in the next 4 months or so.   

On a fresh market -- let's take a look at the Britsh Pound. The BPZ9 has stayed in approximately 300 point weekly ranges banded by approximately the 162.50 to 167.50 level (that's $1.625 to $1.675 per British Pound). I think it is a good time to either get long a straddle or a strangle. The BPZ9 has at least an 84% correlation to two other years in the past, and if the correlation pans out the projected move would be a rally up toward $1.74 by early September. Conversely, the seasonal tendency for BPZ9 is for a rally into the end of July, and then a break into the latter part of August. Either scenario looks for movement, which is what one needs when buying volatility. I'll come back with some suggested straddles/strangles soon.

Bob // 1.312.987.2053; 1.800.388.0998 

Hogs & Pigs Report Tomorrow

At 2pm Chicago time the USDA will publish it's Quarterly Hogs and Pigs Report. Here are the estimates, compliments of the most excellent source of information which is Informa:

Note that the numbers published tomorrow by the USDA were based on a survey done in May, for expectations for June 1. Since, June has been an unkind month to the pork market - so we'll have to adjust expectations relative to the market conditions that ensued since the data for this report was compiled.

The bear spread in the hogs held steady today after yesterday's strong recovery. Care must be taken to protect gains ahead of this report, just in case something unusual happens.

Crops appear to be progressing decently, per the market weakness. Wheat harvest, too, must be moving along steady enough as both Chicago and KC wheat again pushed into new swing lows.

Bob

Futures and options trading entail substantial risk and therefore are not suitable for all investors.

Hog Spread – What a Difference a Day Makes

The backspread in the Lean Hog futures that had been causing some pain snapped back in a hurry today.

Take a look:

Now that this reco has benefitted from this reprieve, we'll turn our attention back to the original suggested profit targets and trade management. The original profit target was 2 cents from the entry zone of -0.75 to -0.95, LHZ9 under LHN9, so roughly +1.05 to +1.25 cents LHZ9 over LHN9. It looks like it went out near +0.10 today.

Contact me with questions & comments. Don't be shy.

Bob // 1.312.987.2053 & 1.800.388.0998

Futures and Options trading involve substantial risk and are not suitable for all investors.

Spread Update and Grain Moves

The LHN9 / LHZ9 spread is clearly taking some heat. The backspreads had worked quite well up until a couple of weeks ago. Now it appears that liquidation of those backspreads is overwhelming. The recommendation was made to initially risk 3 cents, and we're now about half way there. Critical support, in my opinion, comes in around 2.25 on the spread. We basically ended up right on that support at day's end today. So we'll see what the next few days bring. I'd really be surprised to not see a bounce, but this is why risk must be defined entering into a trade.

Wheat harvest is in full swing, thus the inability of wheat to rally today even with soybeans up over 20 cents. Corn was having a hard time rallying on its own with the wheat under pressure. Old crop Soybeans rallied today as if there was still some old-fashioned rationing to be done.

While the hogs struggled today, both live and feeder cattle posted gains. Live cattle are not wasting much time puching up toward the high end of the long-term trading range it has been in. Feeder cattle are encouraged by the recent pull-back in grain prices.

The dollar index broke 100+ points today, and gold followed inversely by rallying $5.50/oz.

We're half way done with a 2-day FOMC meeting, an announcement from which would be expected tomorrow afternoon at around 1:15pm Chicago time. Ahead of which, no portion of the yield curve posted losses today. Eurodollar, 2-yr., 5-yr., 10-yr., & long-bond futures all rallied -- with the farther end of the curve rallying the most.

I've been doing some work to paint a picture of what's been occurring in the shorter-term dated interest rate futures contracts. I'm not sure if the recent rally in rates was a head fake or a shot across the bow. Perhaps you can chime in with an opinion when I post that post.

Good trading, Bob