Corn fundamentalsOf the 6,500 contracts corn futures bought yesterday, 65% were bought by two funds. Much of today's support surrounding the higher close is estimated to have come from the local trade. The trade is more concerned about the potential for harvest delays because of wetter than average 30 day forecast for the west corn belt. The heaviest concentration of forecasted rains in the northwest are positioned over the driest of states. The frost freeze forecasted for Tuesday and Wednesday does not carry much in the way of bullish enthusiasm.
Crop progress: 52% of the corn crop is rated mature vs. 49% for the five-year average. Corn harvested is rated at 9% vs. 10% five-year average. At this early stage of harvest progress there are no serious delays for anyone particular state. Corn conditions improved 2% and soybeans 1% vs. week ago levels.
USDA gets it wrong: A client of ours said he had heard that USDA used the wrong weight index to estimate the Sept yield and may have to lower yield by three bushels per acre in the October report. The person responsible for such USDA statistics and measures says the USDA does not use a standard index for all corn field samples; the USDA weighs each sample individually and corrects the yield to 15.5% moisture. If the USDA does adjust yield down by three bushels per acre, it won't be because it used a bad index. And no, Allendale does not see the corn crop becoming smaller into the Jan annual report. As a matter of fact, USDA raises the January annual report 90% of the time over the past 10 years vs. the Sept crop report.
CFTC/price: Our custom report within the "Special Reports" section of our website shows funds long slightly more than 100,000 combined futures and options.
Typically, funds reduce longs as we enter the beginning stages of the corn harvest, then rebuilds. Look for similar type trade this month into early October then poised for a rally into the Feb-March time frame. Your key indictor could well be when the present Dec March corn spread, trading at 13 3/4 ¢ or 4.6 ¢ per bu per month begins to work towards 2.5 ¢ to 3 ¢ per bu per month or 7.5¢ to 9 ¢ for the Dec-Mar spread as a signal, it may no longer pay to store corn.
Ethanol profitability: The last time we saw 50 ¢ profit on one bushel of corn converted to $2.75 gallons of ethanol, it was late 2001. At that time, crude oil was at $19 to $20 per barrel and corn futures at $2.00 to $2.25. If we were to keep the value of distiller’s dried grains at $100 per ton, with the current ethanol rack price at $2.75 per gallon, corn prices would need to climb to $8.41 for the gross margin to go to zero; at $2.50/gallon ethanol, corn price needs to be $7.70 per bushel; at $2.25 ethanol, corn price needs to be $7; and at $2 ethanol, for the gross margin to be zero, the corn price needs to be $6.35 per bushel. Of course, there could be other ways to influence the gross profits downward, such as outside competition from other sources of cheaper feed stocks, such as cellulosic.
Corn end stocks to use: Projected end stocks to use are now at 10.2% vs. 9.4% in 2003 for the domestic situation. The global level is 11.5% vs. 2003's 14.3%.
Projected world end stocks for 2006-07 are now 92 MMT; in 2003, they were 103! Let’s go back to 1983 to find smaller stocks of 89 MMT!
Cash corn: It is the March-April time period when the national corn price average more often than not finds its calendar year peak price dating back to 1998. For the end user it is more often in the Oct.-Nov. time frame when prices reach low levels to lock in long-term needs. Feel free to contact your Allendale representative to discuss your cash-corn marketing plan as an end user or producer.
Loan deficiency payment (LDP): Both the six-, and seven-year LDP average peak for corn has been Oct. 11, while soybeans finds its peak in a range of Oct. 14 through Oct. 27. You will find the complete table just before the soybean comments.
Five-year average cash price for corn: September, $2.13; October, $2.05; December, $2.11.
Corn technicals: December futures close is 2476 vs. last Friday's 2416. Our key custom Moving Averages (MA) are 2420, 2420 (support) and uses a 2570 bear to bull pivot point. March futures close is 2614 vs. last Friday's 2554. Our key custom MAs are 2560, 2560 (support) and a 2670 bear to bull pivot point.
Trade position: We remain short both December and March corn futures based on new crop harvest seasonal tendencies, heavy old-crop stocks. We have placed special recommendations on the risk reverse in Monday's Grain Trading Strategies page. However we remain long-term very bullish from a yet to arrive projected October July futures low into a late winter, early-spring high based on our research in years when projected global and stocks to use are abnormally tight.
Historical LDP: Specific dates for previous corn and soybean LDPs help to identify when to utilize a 60 lock. Please view the table directly below to see just when each year has offered the peak LDP from Sep. 1 to Dec. 31.
Soybean FundamentalsCrop progress reports released Monday after the side-by-side trade has the percent of soybeans dropping leaves at 48% vs. a five-year average of 49%. The rate of harvest is reported at 6% vs. the five-year average of 5%. Heavy carry in soybean stocks, pending new crop harvest and prospects for a rather large South American soybean planting season ahead weigh on futures. New crop export demand has started out of the gates impressively.
50/50 odds: From the September USDA crop report to the January annual report, odds are not nearly as impressive as corn over the past ten years. Odds that soybean production could increase are only 50%.
Soybean end stocks to use: Projected domestic end stocks to use are now 17.4% vs. 16.9% last year and 7.6% from 2000-2004 average; globally, a level of 18.1% vs. 19.3% last year and 15.3% from 2000 to 2004 average.
Five-year average cash price: for September: $5.52; October: $5.53; December: $5.61.
Soybean Technicals: November futures close is 5530 vs. last Friday's 5496. Our key custom MAs are 5490, 5500, and bear-to-bull pivot point at 6050. January futures close is 5656 vs. last Friday's 5624. Our key custom MA's are 5590, 5600 and bear to bull pivot point at 6130.
Wheat fundamentalsArgentina is at the top of the headlines, as dry weather continues and the forecast looks bleak for wheat farmers. Wheat production in 2006 was short, but a great deal of demand is placed on exports. Thus far this marketing year, sales are 22% behind last year.
Winter wheat plantings: NASS reports winter wheat planting pace at 19% vs. the five-year average of 23%. According to the five-foot soil profile maps as of Sept. 16, only southeast Kansas remains abnormally dry for the number one producer of wheat in the USA.
U.S. projected wheat stocks are tight at 429-million bu positioned in between some of the tightest levels of 377-million bu in 1995, and 444-million bu in 1996. However these projections are based on a healthy export program of 900-million bu. Projected global stocks are 126 MMT. You would have to venture back to 1981's 113 MMT to find tighter stocks.
Odds from September to January: Odds have been 70% over the most last 10 years that USDA lowers wheat production in the January annual crop production report vs. its September report.
Wheat technicals: DECEMBER CBOT SRWW futures close is 3954 vs. last Friday's 3924. Our key custom MAs are 3940, 4050 and 4040. DECEMBER KCBT HRWW futures close is 4660 vs. last Friday's 4624. Our key custom MAs are 4630, 4710 and 4740. DECEMBER MGEX spring wheat futures close is 4434 vs. last Friday's 4422. Our key custom MAs are 4570, 4590 and 4580.
Trade positions: The Iraq wheat buying team is in town this week and allows futures to retrace but Australia, France, Canada and Black Sea region is very much in the hunt to sell the big-ticket wheat tender. We have limit orders to sell corrective short covering rallies in the KCBT, CBOT and MGEX wheat for a short-term position, but like corn anticipate a bull rally early in 2007.
Five Year average Cash Price: the five-year average cash price for SRWW for September: $3.43; October: $3.51; December: $3.51.
-Joe Victor
Allendale lean hogs: Losses of over $1 were seen for most CME lean hog contracts. Last week's kill was a big one and the trade is concerned this week's kill could be another big one. One deciding factor will be how the wholesale pork market trades. Cash pork bellies declined $4.86 today while the overall pork cutout dropped 77 ¢. Cash hogs traded the day steady to 50 ¢ lower. Overall we still have to note cash hog and cash pork markets usually remain under pressure for the next few days before finding support and rallying into early October. It is a little confusing to see October futures holding over a $5 discount to cash hog prices now. On the charts, we have to note October futures are at a critical support point right now. That contract could be forming a bearish head-and-shoulders formation. A close below the neckline at $64.70 could be the trigger point.
If confirmed it would imply a move down to $61. On the fundamental side, it is hard to believe cash hog prices, currently around $70, will be making $9 by Oct. 14. We mention Oct. 14 as that is when the October futures contract expires. Fundamentally, the general trade is bearish, though we feel futures have most of it priced in. Technically, only if futures can break a support point we may have to jump on the bearish bandwagon.
Allendale live cattle: This morning we noted a few feed lots held some numbers back on Friday, as packers moved bids up to $89. The mind set here is packers are very close to the knife and will have pay at least steady for those numbers this week. Wholesale beef closed only slightly lower. Some would argue beef prices are ready to rebound and post an increase as early as tomorrow. Overall, much of the trade has jumped to the bear side recently. We still feel the current break is a short-term break in an overall long-term up trend. Our long-term upside price target is still for the February futures to reach $94. The models do not suggest that objective being filled until the end of the year though.
- Rich Nelson
If you have questions or comments, please call (800) 551 4626, or send an e-mail to research@allendale-inc.com.
Allendale is registered with the CFTC and NFA and is a member of the NIBA. The bottom line is we are a regulated firm, which can be extremely important in this day and age.
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
