Corn Fundamentals
The trade is focused on strong demand, forthcoming harvest pressure to futures and cash prices and Tuesday crop production report which is expected to show nearly unchanged to slightly lees production for the 2006 crop vs. the August USDA report.
September to January odds: In looking at the most recent ten years, the September crop production report yields and production have grown larger by the January annual crop production report 90% of the time.
Special Page: We ask you to view tonight’s graphic. You well see how national cash corn prices reach its highs in January as well as March and April. Hold the physical cash corn price much past July (pollination) and cash prices weaken considerably. In particular, the projected world end stocks to use for corn and wheat are tighter than 2003-04. Look at how cash corn prices slid into October of 2003 and only seven months later reached its highs and as important look at how the cash prices responded by the fall of 2004 as the world responded to tight stocks and corrected them by 27%! We plan to run a similar page for wheat and soybeans cash prices this week.
The Second Third: Because of the cash-price graph we spoke about above, Allendale did buy its second tranche of May at the money calls on today's open. We now have 66% of our new-crop hedges covered with May calls. When we see how the national cash prices speak near the March Planting intentions report, we decided to go with the May call options as they expire the third Friday of the month of April, there is no reason to spend more for additional time value of the call. We have plans to buy the balance of the May at the money calls in the month of October. As we did last Friday, we will give the subscribers of this report at least a day's notice before buying the last batch.
2006-07 Corn Export Sales: As of last Thursday, corn sales for export to foreign countries have reached 470-million bushels vs. year ago levels of 310-million bushels. We would have to venture back to 1995-96 to find higher levels of 563-million bushels. It must be noted in 1995 domestic stocks of corn were the lowest dating back to 1980 at only 426-million bushels. The most recent 10-year average has been 324-million bushel.
Corn End Stocks to Use: Projected end stocks to use now at 10.4% vs. 9.4% in 2003 for the domestic situation; globally a level of 11.6% vs. 2003's 14.3%.
Projected world end stocks for 2006-07 now 93 MMT vs. 103 in 2003! Let’s go back to 1983 to find smaller stocks of 89 MMT!
Cash Corn Sales: Call your Allendale representative and ask them to explain the history behind when cash prices peak for corn producers and where prices find its low for end users. The graphs were sent to the Allendale representatives shortly after the close on Friday. Most importantly ask the representative just how the end of 2003 unfolded into the beginning of 2004 and of key importance where those high 2004 cash prices early in the calendar year wound up near the end of the same year. Allendale went into detail behind the specifics at the annual Illinois Bankers Association meeting held in Springfield, IL on Thursday, Sept. 7. We covered specifically both the Illinois and national outlooks.
Corn Marketing: Our new crop hedges were rolled to the July to pay for storage on farm and added an additional 9¢ to our storage revenue for the 2006 corn crop. May 2700 calls to cover a third of the hedges were bought 08/15/06 and are doing well to remove margin pressure. We added the second third of these hedges on Monday, Sept. 11 as outlined in our Hedge Advice page of the Allendale Advisory Report. If you do not have new crop hedges placed you may want to consider our anticipation of March futures rallying 80¢ into the first quarter of 2007 to a level of 3400. We advise to not wait for a top, but rather scale up hedge into the last 40 cent of the move and be certain to cover with at the money May call options. We advise to anticipate cash prices peaking in the Feb-Mar-April 2007 time frame. Call if you have questions about your own particular farm operation.
Five Year Ave Cash Price: The five-year average cash price for corn for the month of September $2.13, month of October $2.05, month of December $2.11.
Corn Technicals: December futures close is 2434 vs. last Friday's 2460. Our key custom Moving Averages are 2450, 2440 and uses a 2580 bear to bull pivot point. March futures close is 2572 vs. last Friday's 2600. Our key custom Moving Averages are 2590, 2580 and a 2670 bear to bull pivot point.
Trade Position: We remain short both December and March corn futures on ideas harvest pressure could push corn futures below the August low as they did the last time world end stocks were actually larger than projected 2006-07 stocks.
The monthly free Allendale E-Newsletter was e mailed Sept. 1. If you would like your copy then please enter most recent e mail address at this site: http://www.allendale-inc.com/default.aspx
Soybean Fundamentals
The trade is looking for USDA to vastly increase soybean production in Tuesday's crop production report. The August report estimated soybean production at 2.928 billion bushels. The trade average estimate is 110 million bushels higher at 3.093 billion bushels. The August WASDE report estimated 2006-07 end stocks at 450 mil bushels with the trade average estimate coming in 113 mil bushels higher at 563 mil bushels.
From September To Jan: odds are not near as bold as the corn when looking at the most recent 10 yr history of how soybeans adjust production by the time the January Annual report is released. Odds are 50% higher production to 50% lower production. Dating back to 1995 the largest increase was 305 mil bushels in 2004 with the largest decrease of 225 mil bushels in 2003.
Exports Sales: New crop soybean export sales are at a level of 238 mil bushels vs. 146 mil bushels last year at this time. You only have to venture back to 2002-03 to find bigger sales of 296 mil bushels. The ten yr average this time of the year is 202 mil bushels.
Soybean End Stocks to Use: Projected end stocks to use now at 15% vs. 18.2% last year and 7.6% from 2000-2004 average. Globally a level of 17.3% vs. 18.8% last year and 15.3% from 2000 to 2004 average.
From August to September: On average USDA is 30 (increase)/60 when adjusting yield from the August to September crop report. When they do raise production it’s been by an average of .8 bushels per acre (range of .5 bpa to 1.1 bpa) or 45 mil bushels. When the adjustment is lower the yield on average has dropped 1.2 bushels per acre (range of .5 bpa to 3 bpa) or minus 84 mil bushels. USDA's most recent new crop production estimate is 2.928 billion bushels. Over the past ten years, the largest August to September production increase was 84 million in 1998 with the largest decrease of 219 mil bushels in 2003. Pre release estimates have a trade average estimate of 3.093 billion bushels against an August USDA crop prod estimate of 2.928 billion bushels for expectations of a 165 mil bushels increase, which if proven on Tuesday would be a record dating back to 1980.
Soybean Marketing: Only move enough old crop to make room for new crop supplies as old crop basis is weak and expected to remain weak into the end of the year. Our new crop hedges were rolled to the July to pay for storage on farm. Long range projections suggest when the March 31 Planting intentions report is released, more corn and wheat acres to be planted at the expense of fewer soybean acres and thus friendly to futures and cash. End users and spec longs are advised to be long into the glut of the 2006 soybean harvest and keep an ear open to S American planting progress.
Five Year Ave Cash Price: The five year average cash price for soybean for the month of September $5.52, month of October $5.53, month of December $5.61.
End Stocks: projected 2005-06 end stocks are 81% higher than the previous four year average. Projected 2006-07 end stocks are 48% higher than that same four year average.
Soybean Technicals: Nov futures close is 5444 vs. last Friday's 5480. Our key custom Moving Averages are 5540, 5550, and bear to bull pivot point at 6060. January futures close is 5576 vs. last Friday's 5616. Our key custom moving averages are 5630, 5640 and bear to bull pivot point at 6140 Trade Position: We are short new crop and Jan soybeans on increasing yield and heavy old crop stocks.
Wheat Fundamentals
News over the weekend found India slighting the United States by not purchasing even one bushel to fill its tender of 1.67 MMT of wheat. Four other countries received the business. What makes this so tough is India will begin to harvest its new crop in Feb which is when the last of this 1.67 MMT is expected to arrive. Argentina and Australia production is likely to erode as rains are missing a large portion of the regions which are presently in the reproductive phase.
Export Sales: wheat export sales are running 21% behind year ago levels and 27% below the most recent three-year average. Shipments are running 9% behind last year and 18% below the most recent three year average.
Projected world end stocks: are 128 million metric tones (MMT) vs. 132 MMT in the bull run of 2003 leading into 2004 where stocks corrected to 151 MMT. Anything less than 128 MMT, you have to venture back to 1981's 113 MMT.
Wheat Technicals: DEC CBOT SRWW futures close is 4130 vs. last Friday's 4154. Our key custom moving averages (MA) are 4160, 4160 and 4020. DEC KCBT HRWW futures close is 4780 vs. last Friday's 4802. Our key custom MAs are 4800, 4820 and 4740. DEC MGEX spring wheat futures close is 4592 vs. last Friday's 4616. Our key custom MAs are 4630, 4620 and 4610, now viewed as key resistance.
Trade Positions: long CBOT and MGEX futures positions had risk hit today for a loss but remain long the KCBT. We will stay sidelined from the CBOT and MGEX wheat until after USDA releases Tuesday's WASDA report.
Wheat Marketing: Projected domestic end stocks to use are 21.3% vs. 2005-06 26.3% and five year average levels of 26.94%. Projected global stocks to use are 17.7% vs. 19.7% the previous year and five year average of 22.44% and most importantly smaller than 2003's 18.9% which caused futures to rally. Based on this data timing is expected to be extremely important to move 2006 wheat production in the March-April 2007 time frame. December 2006 wheat futures hedges were rolled to the July 2007 futures to cover storage cost. From October 2003 into March of 2004, futures rallied nearly 90¢ then nosed dived.
Five Year Ave Cash Price: the five year average cash price for SRWW for the month of month of September $3.43, month of October $3.51, month of December $3.51.y
From September to December: There could be a spread idea for wheat and corn. Wheat production decreases from the September to January annual report 70% of the time. The largest decrease since 1995 has been 79-million bushels in 2000 while the largest increase has been 45 million in 2003. Remember the corn odds from above.
However, timing on the present spread chart suggest the trade could be willing to buy the December corn and sell the December Wheat to a pull back to support of $1.53 after hitting the recent double top. It is at the $1.50-$1.55 level where we could be willing to buy December wheat and sell December corn for a move back up to the double top.
- Joe Victor
Allendale Lean Hogs: Lean hog futures traded slightly higher today in the face of a bearish wholesale price decline on Friday. Another 25¢ off the pork cutout was noted this afternoon. Having said that, though cash hogs traded steady to lower today, they are called steady for tomorrow. There is talk cattle and hogs at the CME could be pressured by the weakness in crude oil and the metals but so far, that is mainly talk. Overall, we have to be bearish on cash hog and cash pork prices for the next week or so out. This week will hold a big kill and put a few extra supplies on the market. Today's kill was 414,000 head which is certainly larger than the 405,000 head average guess among the five analysts who put out numbers each day. Having said that bearish viewpoint we cannot be bearish on nearby futures. It still appears October futures are discounted enough and could see any declines limited to the gap around $65.50. The seasonal trend in futures is for a rally through September and a market peak in early October.
Allendale Live Cattle: Last week's average cash cattle trade was $91 which is 50¢ lower than the previous week's action. It is interesting to note both October and December futures are pricing in a sideways cash cattle market from here through the end of the year from $90 to $91. Normally cash cattle are rallying into late November/early December.
Instead of a market top, we look for a temporary break in a long term up trend. One thing we have to note is wholesale beef prices are not leading the decline down. Unless wholesale beef prices start breaking hard, we will not be too concerned. Our upside goal for February futures is $94.
- Rich Nelson
If you have questions or comments, please call: (800) 551 4626; or send an e mail to: research@allendale-inc.com
The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Commodity trading may not be suitable for recipients of this publication. This is not a solicitation of the purchase or sale of any commodities. Those acting on this information are responsible for their own actions. Any republication, or other use of this information and thoughts expressed herein without the written permission of Allendale, Inc., is strictly prohibited. Allendale Inc. c2006
