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Lean Hogs Spread:- Buy Aug21- Sell Jun21.
Anyone else considering entering this trade soon? The seasonal period according to MRCI is 4 Feb to 11 Apr.
The closing price yesterday at 0.475 seems like a good entry level.
I do not intend to enter this spread, as I already hold a number of positions in the meat markets.
On the one hand, it did follow the seasonal chart nicely in recent months. In my opinion, this is an important condition for successful seasonal trades.
On the other hand, I assume the Q contract to be more overvalued than the M contract currently. Thus, I think the profit potential of the trade will be limited this year.
According to court documents, Cody Allen Easterday, 49, of Mesa, used his company, Easterday Ranches Inc., to enter into a series of agreements with Tyson and Company 1 under which Easterday Ranches agreed to purchase and feed cattle on behalf of Tyson and Company 1. Per the agreements, Tyson and Company 1 would advance Easterday Ranches the costs of buying and raising the cattle. Once the cattle were slaughtered and sold at market price, Easterday Ranches would repay the costs advanced (plus interest and certain other costs), retaining as profit the amount by which the sale price exceeded the sum repaid to Tyson and Company 1.
Beginning in approximately 2016 and continuing through November 2020, Easterday submitted and caused others to submit false and fraudulent invoices and other information to Tyson and Company 1. These false and fraudulent invoices sought and obtained reimbursement from the victim companies for the purported costs of purchasing and growing hundreds of thousands of cattle that neither Easterday nor Easterday Ranches ever purchased, and that did not actually exist. As a result of the scheme, Tyson and Company 1 paid Easterday Ranches over $244 million for the purported costs of purchasing and feeding these ghost cattle.
Easterday used the fraud proceeds for his personal use and benefit, and for the benefit of Easterday Ranches, including to cover approximately $200 million in commodity futures contracts trading losses that Easterday had incurred on behalf of Easterday Ranches. In connection with his commodity futures trading, Easterday also defrauded the CME Group Inc. (CME), which operates the world’s largest financial derivatives exchange. On two separate occasions, Easterday submitted falsified paperwork to the CME that resulted in the CME exempting Easterday Ranches from otherwise-applicable position limits in live cattle futures contracts.
I like seasonal trades, and one trade that works in many – but definitely not in all – years is the LHG-LHV during the summer months.
This year the spread has reached an extremely high level. Only once since 1983 this spread has traded above 10; this has been in 2014. Even in 2014 the spread went sideways after the end of May. In many years the spread ended below zero at the expiry of the October contract.
The spread will work in case the spot market tops out soon.
I intend to buy this spread with a stop above 10 at close.
Just want to add a note again fundamentally - inventories of lean hog are low at the moment but I do feel like we are seeing the top, more or less. The spread between live cattle (which has high stock levels) and lean hogs is getting a bit too wide, and people will switch to beef if there's a significant discount, especially since supplies of live cattle (ie feeder) look pretty plentiful. Grains also seem to be coming down (although with tight supplies this is very weather dependent), which should point towards hogs prices coming down too since they're correlated. I guess main risks are if coming out of lockdown we see unusual demand stretching into winter months since people are "enjoying the freedom" for longer than usual, or if grains have a big rally on bad harvest. Only point I'd add is most things are being driven by macro, which is why a lot of "bear spreads" look good, because prompt is high (ie flat price is high), but that also means returns on those spreads will likely be correlated, ie if you have a grains position and a hog position then it's likely that they'll move together. If grains go mental then both will go haywire, if grains recover then it's likely hogs will too. Just watch out about placing trades that look different but are trading the same underlying idea
Edit: it does look like a pretty good trade though. Good luck!
What I am trading when entering a seasonal trade is probability. I traded bear spreads in the hogs during the summer months very many times over approx. 20 years, and it often worked well. Most exceptions were in years with major diseases. Of course, you have to apply proper position management. Looking back over 20 years, these trades were among the most profitable ones for my account.
There is one more potential risk: China. In case China buys large amounts of hogs within the next couple of months, the spread might go to the wrong direction.
You mention an important point that I talk about again and again: Portfolio risk. If the two bear spreads were the only trades in my portfolio, I would not feel comfortable. But there are other trades, e.g. I sold LCQ puts, and bought KCN outright futures, which go into the other direction.
I am long coffee for some months. Dry weather keeps the crop relatively small, and we are in an off-year. On the other hand, after the opening (COVID 19) consumption should rise. But I am not sure how far we will go from here. On a severe drawback I will take profit.
