Cash was sharply higher with the cutout slightly lower. Packer margins took a hit and they’re estimated to be only about $8 per head for open hogs. The vertically integrated hog guy is still making huge profits. The loss of processing margins, in tandem with the near disappearance of the Sat kills, is confirmation that butcher hog supplies are dropping fast. The CME lean hog index is quickly approaching 8600 whereas Apr futures settled yesterday just above 8700. We bought April futures yesterday, mostly at 8650 and we’re protecting this position with the Apr 8700 puts which we purchased mostly at 320 points. This risk is totally defined at 270 points. The FAS report out of Beijing confirmed that China will continue importing large amounts of pork in 2021. It will be interesting to see if this information is reflected in the meat supply/demand table that will be issued today. It’s time to place another liquidation target on part of our Jun LH 100 calls. Recommend placing orders to liquidate part of your position at 440 points. Remember, these calls are still out of the money meaning the value of the call is all intrinsic value. In other words, if June hog futures stall-out and don’t trade well beyond 100, these calls will eventually decay toward zero. Remember, it’s not about picking the top, it’s about making money. We bought all of these June calls between 40 and 80 points.
What to do? I’m not sure. Futures are now building new premium to the cash steer market which can’t get off the $1.14 level. Packers just won’t play ball. They don’ have to with the numbers available to them. I’ve lost track, lost a feel for when this will change. Weights are dropping. When numbers begin to tighten, cash will bottom and when it bottoms, it will rise $3 to $5 per week. Demand for U.S. beef has never been better and it’s projected to become even stronger in the weeks ahead. So, it’s all about leverage. The packer has all the leverage at this time. I have no new recommendations. We’re long Apr LC futures, we have some bullish Apr option positions on the book and we have a host of long-term bullish Oct LC option positions on the books. Very few hedges. So, I am definitely bullish. We have advised to hedge feeders.
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