Grain Spreads: Value Play Hogs

Sean Lusk General Commentary Leave a Comment

Commentary:

It’s been said when markets can’t break on bearish news they inherently become bullish. I’m switching gears here as I scan the Board looking for perhaps a value or inflation play for the 3rd and 4th quarter. Hogs look cheap to me further out on the calendar. I included a chart of December hogs below. In my view Hogs have struggled to regain their footing throughout the past week after a highly negative Quarterly Hogs & Pigs Report signaled the market will be working through backlogged animals for quite some time. The market was able to stabilize a bit last week, in part thanks to strong domestic demand for pork. The USDA also reported solid pork exports the week ending June 25, with China as a lead buyer. But it’s unclear whether a low is in place. Cash prices continue to slide as processors work through backlogged animals. That had spot contracts under duress in my opinion. However the pork cutout value was able to move higher last week, thanks to a $2.84 in the pork cutout value on Thursday. Movement was again impressive at 444.53 loads. One bright spot has been a return of export business as plants have restarted, the pipeline re-filled, with pork prices moderating. Weekly export sales data out Thursday morning had total weekly sales at 39K tonnes, an eight week high, including 22K tonnes to China, also an eight week high. An unknown is just how sensitive China will be to any Covid resurgence in US packing plant communities. They halted imports from another two Brazilian pork plants this weekend (six total now), on top of halting imports from large plants in the EU over the past two weeks. If China continues to buy from the US we could see deferred futures start to rally. However, should those plants in the EU and Brazil re-open to China, we could see prices begin another leg lower. I’m optimistic here that both domestic demand and global will win out. Plus Dec hogs at 52.02 todays settle cents are cheap in my view. I have an option idea below that is a static long in the market with defined risk. Call or email me with questions.

Trade Suggestion

Futures-N/A

Options-3 way option strategy. Buy the Dec 20 70 call. Sell the Dec 20 80/70 put spread. Bid negative 920 points on the strategy which is a $3680.00 collection minus commissions and fees.

Risk/Reward.

Futures-N/A

Options-The risk here is 80 points or $320.00 plus commissions and fees. The max loss on the 80/70 put spread is 1000 points. However one is collecting 920 points upon entry here as the cost of the call plus selling the put spread collects 920 points upon entry. Today this three way settled at -910. I would bid at -920, slightly below the market. I’m looking at an eventual rally towards the gap. If that happens over the next 4 to 6 weeks, I could envision buying back the three way for approximately half of what I sold it for at -460. One can place a sell stop at negative 970 here risking 50 ticks on the 3 way or $200.00 plus trade costs and fees.

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