Allendale Wrap-Up for Business Day 10/10/06
Based on the Limit Moves: Looking for an opening call for March wheat and corn futures? Based on at the money option values, March corn futures for tonight’s E-CBOT trade is called 3¢ higher while March wheat futures are called 14¢ higher.
Lack of Government Assistance: The grains were left without any assistance from the government, as it is a federal holiday. The weekly grain inspection and weekly crop progress and conditions report are delayed one day because of Columbus Day. These two reports are scheduled for release Tuesday at its regular time during the day.
Wheat fundamentals: Another dry week forecasted for Australia's wheat crop and the trade has responded with higher values as expectations look for a major correction in this Thursday's WASDE report. In the last USDA WASDE report, Australia wheat production was lowered by two MMT. The worst drought in 100 years, dating 2002 had USDA clip production by 5 MMT in Sept, 2 MMT in Oct, 2, MMT in Nov, 1 MMT in Dec, 500 K tonnes on Jan, unchanged in the Feb 2003 WASDE report and down 500 K tonnes in the March report at a level of 9.5 MMT. We understand as of Sept. 26 the attaché within Australia is estimating a crop size borrowed from The Australian Bureau of Resource Economics at a level of 16.5 MMT while the floor trade is presently using a range of 9-12 MMT vs. the previous weeks 12-15 MMT. Is it out of the question for USDA to drop Australia's wheat production from last month’s estimate of 19.5 MMT to 14.5 MMT? The USDA has met the challenge in 2002 and is capable of such a reduction. Along with production, USDA is also capable of reducing export potential by at least 25 to 50%. Immediately the question boils, where would supplies come from? And the answer could come from North America, specifically the United States and Canada. The Canadian production estimate was increased last week and has the supplies to meet at least half of an eight MMT correction away from Australia. With such a poor first quarter start to its 2006-07 marketing year, the USA could use the surplus of wheat which remains on hand from the poor first quarter start to fill much if not all of the other 4 MMT (147 million bushels).
Wheat outlook: Just as emotional as was the crude oil market was this recent summer, and springtime for sugar futures, wheat futures appear to have attracted a similar crowd. Persistent global demand and shrinking supplies from the world’s number-three exporter in Australia. The futures trend is higher until the value of wheat reaches beyond economic value and stocks begin to stabilize and then build because of economic rationing. Be reminded, a reason why our HRWW sales have lagged is a high price and the perception by the world trade that the quality of the drought ridden HRWW harvest was of poor quality. Why pay a high price for poor quality grain? Such is not the case of MGEX spring wheat and CBOT SRWW. Quality is to be good and although not over overabundant is likely to attract more attention from the world demand sector until that next new crop arrives from Argentina and stocks from Canada. Ukraine is limiting exports to protect domestic needs and Russia is expected to follow. We would not rule out the possibility of both of these countries to step up interest in selling wheat at higher prices and come on quickly with greater than usual spring wheat plantings to take advantage of very attractive futures prices.
Wheat technicals: December CBOT SRWW futures close is 4940 vs. last Friday's 4640. Our key custom moving averages are 4720, 4540 and 4280. December KCBT HRWW futures close is 5316 vs. last Friday's 5016. Our key custom moving averages are 5110, 5000 and 4850. December MGEX spring wheat futures close is 5096 vs. last Friday's 4796. Our key custom moving averages are 4730, 4690 and 4640.
Wheat spreads: Spreads remain very active. The Dec March spread closed at 13¢ carry. At $4.35 cash SRWW for spot delivery, the cost of carry is 4¢ per bushel per month and would require the spread to be 12¢. Thus as far as the Chicago market is viewed there is sufficient supply to meet present demand. If the spread were to strengthen into and beyond 12¢ then it signals a time to move the cash wheat. Dec-Mar KCBT wheat futures spread is at 12¢ carry. With cash bids of $5.10 in the heart of Kansas wheat growing country, the cost of carry is 4.5¢ per bushels per month or 13.5 cents, suggesting it now cost more to store than move inventory. Producers in this situation need to move cash wheat and fill bins with corn and soybeans. We would advise to replace inventory moved with futures on a pull back as we suggest futures may be far from reaching its peak near the February to March time frame.
MGEX Dec-Mar spread is at 11¢ carry. At $5.15 cash bids, the cost of carry is 4.5¢ per bushels per month cost or needs 13.5¢ to store for the three months. The cost to carry is less than your storage cost and suggests it is time again to move cash and store corn and soybeans. We would advise replacing the moved cash sales inventory with long futures but once again on a pull back in futures. Call your Allendale representative with entry points.
Cash Corn: A change in psychology from storing corn to be prepared to move corn. Basis is holding mostly firm with some areas showing signs of weakness as the futures rally is encouraging some supplies to move into the pipeline. Futures are rallying at the hand of the wheat rally and its related spread (presently at $2.04 premium the wheat and within our nearby objective). The third and last signal to look for is how the Dec March corn spread is narrowing or gaining strength. The spread closed at 13 cents. Those producers who sell based on spread and basis mechanics are closely monitoring spread action. Full carry is valued at 9¢ or 3¢ per bushels per month when using 2660 cash price. If the present spread were to trade into 9¢ or less, we will use this signal as a sign to move 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. Unique to this year is the issue of storage availability. Look for basis to be stronger in the west as sufficient storage is available and keen competition between ethanol plants, feed use and exports. When we approach the last 20% of this year's harvest in the east corn belt, look for cash prices to relax, as there is not sufficient long-term storage and just does not have the luxury of multiple ethanol facilities that the west does.
Soybean spread: The Nov-Mar futures spread is 24¢ carry. At an average price of $5.40, the cost of carry is 18.6¢ or 4.6¢ per bushels per month. Off-farm storage is more expensive and needs to be figured accordingly. The market conveys it pays to store beans until the spread narrows into the 18¢ level. At the same time, we would anticipate basis to rally along with the futures. Allendale does not see real strength in the cash soybean market until late July-early August of 2007.
Corn technicals: Dec futures close is 2894 vs. last Friday's 2710. Our key custom Moving Averages are 2720, 2680 and uses a 2600 bull to bear pivot point. March futures close is 3024 vs. last Friday's 2840. Our key custom Moving Averages are 2850, 2810 and a 2700 bull to bear pivot point.
Soybean technicals: Nov futures close is 5744 vs. last Friday's 5776. Our key custom Moving Averages are 5530, 5520, and bear to bull pivot point at 6010. January futures close is 5892 vs. last Friday's 5776. Our key custom moving averages (MAs) are 5710, 5680 and bear to bull pivot point at 6100.
Corn fundamentals: corn continues to follow the lead of the wheat action. Issue of harvest pressure vs. strong demand is a distant secondary fundamental issue for the trade. However just as wheat has experienced its recent explosion at the hand of shrinking world supplies, the corn harvest and greater than average carry in stocks could be tempering the corn thrust for a period of time. As long as sufficient storage remains available, ethanol and export demand remains strong, and feed use does not feel too much pressure from an expanding distillers grain supply from the ethanol sector, its time to take center stage may not be far away. Technically, we understand there is overhead resistance at 3000 and could experience fund driven sell off to the 2570-2620 level we continue to be long term bullish into Feb-March of 2007. Our July 2007 futures objective is held in a range of 3400-3600 vs. tonight’s close of 3140.
- Joe Victor
Allendale lean hogs: The seasonal move higher into October usually lasts two to three weeks. This year's rally lasted only one week. On Friday, we prepared for it by noting if the market breaks the September lows it would be time to sell. The December contract got within $1.20 of our $63 target price. Cash hog prices broke today and are seen lower for the next few days. The pork cutout closed today up $1.59. That could imply a rebound for the CME trade tomorrow morning. It is hard to suggest this bearish minded market will change its view on this news though. See the updated Hedge Advice page of this report.
Allendale Live Cattle: Corn. Corn. Corn. That was the main driver behind today’s CME action. While Joe has covered the corn story in the comments above, it is an issue for livestock. Feeder futures were down from $2 to $3 today. At this time of year, fresh calves dominate the available feedlot placements. 500 lb steer calves placed on feed in October will not finish out until around July. How would you like to have animals in the feedlot eating $3 corn for nine months? Yes, that price was right. Corn in Garden City Kansas is $2.99 now. Our cattle feeding models imply the limited number of 700 lb feeders placed in October will finish out with a $20 to $30 loss. 500 lb calves placed in October would finish out with a $110 to $120 loss at current feed and CME prices. Every 10¢ gain in corn prices on those calf-feds equals an additional $10 cost per head. In other news, Friday's cash cattle action happened from the afternoon through evening at prices from $90 to $91. The average price released by USDA today was $90.22, which would imply a few more $90's than $91. Though packers bought 30,000 to 40,000 head fewer than projected it could actually be feedlots who cave in first this week. With corn prices jumping almost 20¢ in one day how will they feel about feeding each pen for yet another week? Today we are taking a more bearish tone on fats and feeders than we have for the past weeks. We have to recognize this runaway corn market is in control and will affect the beef complex more than our supply friendly views on beef for the next two months. Rebounds in CME prices now should be used to establish speculative sales and hedges. The market has changed and we must as well.
- Rich Nelson
As always, if you have questions or comments, please contact us:
Allendale
(800) 551 4626
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