Jeremy Knutson

Friday, September 12, 2008

Hog Comments - 09-12-08 - Corn closes limit up and hogs get slaughtered.

Dec '08 Corn Daily Chart
First off, sorry about the pun in the headline, I had to do it.  This morning's crop production report released by the USDA had the corn yield at 152.3 bushels per acre versus last month number 155 bushels per acre. This number in itself was bullish the market, however, the market also seem to be focused on Hurricane Ike and all the rain it will bring to the eastern corn belt.  It has been said that Hurricane Ike will drop as much as 8 to 10 inches of rain through the states of Missouri, southern Illinois, Indiana and Ohio. This will definitely slow the pace of the early harvest progress.

The corn market has finally done what I've been expecting it to do about the last week and a half which is move higher. The only thing I don't like about today's close is we settled limit higher.  In my opinion, it seems as if the trade has gotten nervous over the threat of torrential rains in the eastern corn belt. I would agree with the thought of massive rains, but odds are our biggest fears will be realized in todays forecast for rain and not the actual event.  This being said, it is my expectation that we could get excited on the open on Sunday night and open higher only to reverse and end trading lower.  I've been saying for a while now I'm not bearish at these levels and would expect the market follow-through to the upside after small correction. The correction coming off of the emotions propelled the market higher today.

The best opening that we could have on Sunday night for follow-through to the upside is a lower opening.  Any open above today's high of $5.63 1/4 would actually be slightly negative opening for immediate trade.  My assumption is if the market does move higher Sunday night and then move lower, support will be found at $5.48 to $5.44.  Today I exited my long futures (at $5.60) on the half position that I have been holding for over a week. It is not my intent to stay out of these positions, I am looking to better them at a lower price. I still have protection to the upside through call options of which I own $5.35 October call options and am short $6.70 December call options.  I will look to reenter my long half position on a decline if we see one Monday.

The weekly close to the is very friendly it would suggest follow-through buying above this weeks high which is $5.63 1/4.  As I stated before they would be healthier for the market to open lower on Sunday night and then move higher versus opening higher right away.  My expectation of price movement next week will be resistance at $5.80 and then up to $5.91 1/2.  My feeling thus far has been accurate that we will not violate the lows we made in August at $5.04 1/2 and I am sticking with this thought.  We have finally gotten a close above a prior day high therefore I expect better trade longer-term.

Bottom line - it feels to me we will open higher on Sunday, make early highs and then soften as the night goes on.  It is safe to say we could retrace toward the number I listed above at $5.48, and see good support without damaging the charts.  Overall I expect next week to be better.

Dec '08 Meal Daily Chart
The December soybean meal contract is quite interesting, being the strongest link yesterday and the weakest link today.  I have to say I'm not impressed with today's market action however the weekly chart looks good for positive price action next week assuming we can make new highs above $342.20.  I'm going to go with the same type of calls for soybean meal as I did with corn, we will probably open a bit better on Sunday evening and rally only to weaken later.  I am not expecting a major collapse in the meal market however I am expecting a correction. That correction would be in the area of $331.20 to $328.50. I did not make any adjustments to my soybean meal position today as it is still well below my entry point at $350 per ton.  I am comfortable with this hedge given the uncertainty in the soybean crop for this year. Hurricane Ike is bearing down on the coast of Texas and as it reaches land it's projected to take a right-hand turn and head towards eastern corn belt.  With the rains of Ike heading toward the eastern corn belt, we should continue to see support the soybean market as producers will struggle to finish early harvest activities.

I believe next week will bring the opportunity to see $347.40 December meal at some point during the week, with the potential of reaching $353.90. These two numbers are the 50% and 62% retracement levels back to the high of $375 that was made on August 25, 2008. If the market get active next week and rallies to the $375 per ton mark, we would need to close above this level for the week to give us a shot at our old contract highs of $431.90 set on July 11, 2008. I do have to say that I do not expect a close next Friday above $375 per ton in the December contract.

Bottom line - I expect Sunday's open to be firm only to set highs early in the evening and weaken as the night goes on.  I expect a possible test of $331.20 per ton for the December futures contract either Sunday night or Monday.  Once this objective has been met I foresee better trade on Tuesday which is just a gut feeling.

Dec '08 Hogs Daily Chart
Both the October and December lean hog contract fell out of bed today.  I spoke yesterday of potentially good buying above yesterday's high of $67.10. The market got as high as $67.30 today in the electronic session only to fail and make new lows of $64.45. December futures contract had an outside day meaning we made higher highs than yesterday and closed below yesterday's low, this does not bode well for the December futures contract.  Today was the last day of the Goldman roll, which is moving long futures positions out of the October contract to the December contract. The closing action where October weakened and December strengthened makes sense in conjunction with the Goldman roll.  The pit traded the session which closed at 1:15 PM central time settled at $1.67 lower, however the electronic session which closed at 1:30 PM settled $2.02 lower.  All trades are marked to the closing price of the pit traded futures contract.

With the bounce we had at the end of the day in the Dec '08 contract allows the chart to set up an opening on Monday that would be beneficial to a follow-through move lower.  Midday cash reports were slightly lower across the board mainly by about $1.00 cwt.  Afternoon cash prices came in weaker than the midday reports, the national cash price $1.56 lower than yesterday. The national weighted average was $67.73 versus $68.68 for Iowa/Minnesota, $68.80 for the Western corn belt and $66.36 for the for corn belt.  It seems as if Packers have their needs covered through the end of next week in most cases therefore no major push higher for cash prices next week.  The cutout closed higher by $.68 today leaving the carcass value at $75.74 per CWT. By having lower cash prices and higher cutout prices today the Packers regained some of their per head margin.

Bottom line - I expect prices to open slightly higher on Monday morning only to meet resistance at higher levels and continue its move lower. The December futures contract has moved $12.65 from its recent high on August 1, 2008 to today's low of $64.45.  It is an interesting thing to point out that when the market makes a significant move it will usually move between $10 and $13 per CWT from high to low, or low to high before it takes a break to make a significant retracement.  I expect prices to start off lower next week and stabilize towards the middle of the week to try and find further direction.

 US Dollar Index - the dollar index fell apart today and it looks like this week could have been a top for the short-term assuming a close around 78.92.  Yesterdays trade action left a warning signal saying we be careful if your long, today confirmed the warning signal.  Next week I would expect good selling and acceleration below this weeks low of 78.22.  The selling would only come in if we don't hold 78.22 and the ultimate test would be closing next Friday below that level. 

I hope everyone has an excellent weekend and is not directly or indirectly affected by hurricane Ike or its remnants.  I will talk to you next week and as always if you have questions or concerns please send me an e-mail and I will do the best to get back to as soon as I can.  For those of you who responded to my request for feedback this week I really do appreciate your comments and I would ask that you keep them coming, any recommendations are welcome.

Based on FOB Omaha carlot pork prices and industry yields.

           Calculations for a 200 lb Pork Carcass
        53-54% lean, 0.65"-0.80" backfat at last rib
         Total                   Today's Primal Cutout Values
Date     Loads      Carcass    Loin    Butt   Pic     Rib   Ham  Belly
09/12        26.5      75.74   93.55   79.54  62.32  88.86 72.93  75.59
Change :                0.68   -0.09   -0.24   0.33   1.01  2.61    unc
National Direct Hog Price Comparison

                :  National   :    Iowa     :   Western   :   Eastern
                :             :  Minnesota  :  Cornbelt   :  Cornbelt
   Base Price is the price from which no discounts are subtracted and
   no premiums are added.
BARROWS & GILTS :  1.56 lwr   :  1.73 lwr   :  1.47 lwr   :   .82 lwr
Negotiated      :             :             :             :
CARCASS BASIS   : 61.00-73.00 : 62.00-73.00 : 61.00-73.00 : 62.00-68.24
185 lb Base Hog :   wtd avg   :   wtd avg   :   wtd avg   :   wtd avg
Plant Delivered :    67.73    :    68.68    :    68.80    :    66.36
Head Count      :   27,543    :   12,684    :   15,447    :   12,096
Hurley & Associates believes positions are unique to each person’s risk bearing ability; marketing strategy; and crop conditions, therefore we give no blanket recommendations. The risk of loss in trading commodities can be substantial, therefore, carefully consider whether such trading is suitable for you in light of your financial condition. NFA Rules require us to advise you that past performance is not indicative of future results, and there is no guarantee that your trading experience will be similar to the past performance.

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