Oct. 31, 2006 - Money Flow: The common word to describe the trader mentality towards grain futures is "Money Flow.” The perception on the CBOT trade floor focuses on money flowing out of the energy futures (crude oil) and is finding its way into the grain futures as well as other tangible commodities in short supply, which does have steady to trending higher demand and can be used as an off set to inflation fears. Energy investors are simply becoming impatient with sideways futures trade and less than stellar performance after OPEC cut oil production by 1.2 million barrels per day.
However with few global harvest after the U.S. corn and soybeans occurring until March of 2007, demand is expected to remain mostly steady with the exception of subtle signs of economic rationing, the grains have the appearance of more favorable bullish dynamics. A handful of the more well known European hedge funds have suggested a noted correction in world wheat prices may not develop for at least two years before production can catch up to rebuild world stocks to a more relaxed level and at the same time meet long term upward trending day to day demand.
Corn Fundamentals: Harvest weather is expected to allow corn a wide-open window of opportunity this week. Weekly inspections (a gauge of how sales already made are making its way to ships for export) were a huge disappointment when comparing results to pre release estimates. However, it’s also equally important for the trade to realize the Gulf basis remains firm and the weak inspections may be more of a result of trying to procure supplies from a lagging harvest in the east, closure of the Missouri River and competition with feed and ethanol demand.
Progress: Pre release estimates for corn harvest were 68-72%. Results came in at 68% with a five-year average of 71%.
This could cool some of the bullish enthusiasm. However delays especially in Indiana, down 18%, Ohio down 16%, Michigan, down 19%, and Nebraska down 12%, need this week to try and close its gap and until this harvest lag gap is close to normal, a reason for futures to be supported.
2007 Corn Hedge Advice: Allendale has 30% of next years plantings hedged with the next target level outlined within our Hedge Advice page.
July Corn Futures: An update to advise the low end of Allendale's July corn futures price projection of 3400 has officially been met. The high side of the range remains 3600, with an extreme of 4000. The July 2007 futures corn price projection suggests before the end of the first quarter of 2007 futures could correct to 2800.
Six to Ten Day and Two Week Forecast: After a series of bearish weather outlooks, tonight’s forecast suggest above normal precipitation in the west cornbelt and working its way east in the two week forecast. Look for the harvest pace to reach maximum potential the next six days before rains begin to show early next week five-year average cash Price: the five-year average cash price for corn for October: $2.05; December: $2.11. Fall delivered corn price for this year, this evening is quoted at an average of $3.14.
DDG vs. Soybean Meal: The very latest feed ingredient price list has the cost per pound of protein slightly in favor of feeding 48% soybean meal over 25% distillers dried grain by 2.2¢ per pound of protein. Last week the nod was given to DDG.
Cash Corn: The Dec-Mar corn spread is at 12.5¢ carry. At $3.14 spot cash prices, the cost of carry is 3.9¢ per bushel per month or 11.9¢ from Dec to March. Anything less than 11.8¢ is a warning flag to move cash corn. As you work through your harvest, you might have a much better idea if there is sufficient storage on farm. If not, we would strongly advise you to sell surplus bushels into the cash market when the spread strengthens to 11.7 or more. We would certainly recommend placing corn under the nine-month loan and make use of low interest money to secure working capital. We fully anticipate futures and cash to work higher into the March-April period.
Corn Technicals: Dec futures close is 3294 vs. last Friday's 3324, up 25.7% for the month. Our key custom Moving Averages are 3240, 3220 and uses a 2640 bull to bear pivot point. March futures close is 3434 vs. last Friday's 3444. Our key custom Moving Averages are 3370, 3340 and a 2750 bull to bear pivot point Trade Position: Until the harvest closes the delay gap in the east look for futures and cash values to remains strong or until technical Moving Averages described above are violated. World end stocks to use for corn and wheat (starch group) are the tightest dating back to 1980. Our long-range objective on July 2007 corn futures remain unchanged from our August release of 3400-3600.
Soybean Fundamentals: Tuesday is first notice day and the trade is expecting heavy deliveries. Typically this news would be bearish to futures but hedge funds do not place much emphasis on the short-term picture but more weighted to the long-term value. As long as corn futures trend higher, soybeans can ill afford to leave too much separation in its relationship with corn futures, even with over whelming 2006 crop bearish fundamentals. Bullish to soybean is the weekly soybean inspections which can only be viewed as nearby bullish. See the most recent results within our Export Demand page.
China Soybean Crush: Word is U.S. soybean prices have become too expensive for China soybean crushers and have switched over to buying soybeans from South America as well as buying soybean oil.
South America: Near ideal rains over the weekend support active planting and growing conditions for both Argentina and Brazil soybean growers. Brazil is expected to be much more aggressive in planting certified seed this year vs. years past. Early warning signs out of Brazil suggest the present rally in USA soybean futures may result in a production target of 56-58 MMT vs. previous estimates of 55-56 MMT.
Five-Year Average Cash Price: The five-year average cash price for soybeans in October: $5.53; December: $5.61. Fall delivered soybeans are presently quoted at an average of $6.15 per bushel.
2007 Corn to Soybean Ratio: The floor trade mentality is when corn to soybean futures price ratio (when dealing with new crop futures) is mainly neutral to planting corn or soybeans at 2.3:1. Tonight’s closing ratio is clearly in favor of planting new crop corn in the spring of 2007 at a ratio of 2.06:1 vs. Friday's 2.01:1.
Cash Soybeans: the Nov-Mar futures spread is 23¢. With the spot cash market at $6.14 per bushel, cost of carry per month is 6.3¢/bushel/month or 25.4¢ Nov to March.
As long as the present spread is below 25.4¢, it’s an indicator that it costs more to store soybeans than to sell to the cash market. Use this present rally to sell any overages, which will not fit into your on farm storage.
Progress: Pre release estimates for corn harvest were 81-85%. Results came in at 83% with a five-year average of 85%. This could cool some of the bullish enthusiasm. However delays especially in Indiana, down 15%, Ohio, down 16%, and Michigan, down 23%, need this week to try to close its gap and until this harvest lag gap is close to normal, a reason for futures to be supported.
Soybean Technicals: Nov futures close is 6396 vs. last Friday's 6354, up 16% for the month thus far. Our key custom Moving Averages are 6110, 6030, and has bull to bear pivot point of 5990. January futures close is 6532 vs. last Friday's 6490. Our key custom MA's are 6380, 6320 and bull to bear pivot point of 6090.
Trade Position: Fundamentally, we remain bearish to soybeans. Technically, we are more of a bullish stance as long as corn and wheat lead the way up. We have written new speculative trade recommendations within our Grain Trading Strategies page. We have resting orders to sell soybean futures on a break below support, sell soybean oil up against technical resistance.
Wheat Fundamentals: Demand for Australia wheat is quietly switching over to U.S. supplies and is able to keep a floor of support under futures. However the technical picture is increasing becoming more bearish. Please view the moving-average levels below. Talk off the CBOT trade floor and within the daily chart community is a market, which is exhibiting signs of a nearby top. Given the fact the first of two cash-selling opportunities is typically Oct-Nov and then again in the spring, historical technicals may be taking over but the demand for U.S. wheat over a disastrous Australian crop is expected to keep futures from free falling.
Progress: Pre release estimates for winter wheat plantings were non existent as when results have exceeded 85%, the trade perception is the crop is as good as in the ground. NASS reports 91% of winter wheat crop has been planted vs. the same amount for the five-year average. Only Ohio is reporting serious delays of 19% behind its five-year average level of 91%.
Winter Wheat Conditions: the good to excellent condition rating for winter wheat improved to 60% good to excellent vs. last weeks 57% and compares to a five-year average of 61%. # 1 wheat producer Kansas, has its condition rating of 64% good to excellent vs. year ago levels of 72% good to excellent.
Cash Wheat: the Dec-Mar CBOT SRWW spread closed at 19.4¢ today. Cost to carry $4.72 cent per bushel wheat is 15.7¢ for the time period and suggest the arrow is now back to storing wheat rather than move wheat hedges to cash as it did for the first four days of last week. Allendale did convert 35% of its wheat to cash sales on Oct. 18. See our Hedge Advice page for futures instructions. Wheat Technicals: DECEMBER CBOT SRWW futures close is 5010 vs. last Friday's 5084, up 13% thus far for the month of October. Our key custom Moving Averages are 5080, 5110 and 5040. DECEMBER KCBT HRWW futures close is 5244 vs. last Friday's 5306. Our key custom moving averages are 5300, 5330 and 5270.
DECEMBER MGEX spring wheat futures close is 5054 vs. last Friday's 5080. Our key custom moving averages are 5140, 5140 and 5070.
Trade Position: We remain long CBOT, and KCBT futures based on tight world stocks of wheat, declining wheat production in Australia and the bull rally in corn futures. Our risk levels in the KCBT has been risen to protect gains already earned and we have written new orders to buy into MGEX July wheat as outlined in our Grain Trading Strategies page.
-Joe Victor
Allendale Lean Hogs: Is December reaching a peak? Given the recent run up in CME prices last week it may be surprising to ask that question. Packers are running a good kill so far this week. Today's kill was estimated at 429,000 head. That included the Seaboard Sunday kill, which was likely 10,000 to 16,000 head. Taking out those numbers and today's kill actually totaled 413,000 to 419,000 head. That is still a good jump above last week's Monday run of 407,000 and last year's 400,000 head total. The problem here is we are running into a typically weak spot with retail sales in November for non-ham related cuts usually smaller than October. The two previous weeks averaged around 2.2 million head kills and the wholesale pork trade barely moved. Today's cutout was down $1.18 however. Realistically it is hard to suggest wholesale pork prices can last up here forever. Additionally we have to wonder about seasonals. This market posted an earlier than usual bottom in October. Does that mean the mid November seasonal peak will come early too? We will remain vigilant in monitoring wholesale pork price levels. That downside gap from $61.60 to $62.20 could be a target when the trend changes. Given a few more days, it could be time to start short-term sales again.
Allendale Live Cattle: The first shipment of U.S. beef to South Korea failed to support the CME trade today. This morning it was announced nine tons of U.S. beef arrived in South Korea over the weekend. After a 15-day quarantine and inspection period, it will be released to retail outlets. The trade is not too excited yet as most U.S. exports are wary of the (no bone fragment) rule currently in effect. Also of interest, cash cattle prices averaged $90 late Friday. Volume was good with most areas cleaning up their show lists. Current talk is to look for another week at $90. One question mark right now is wholesale beef prices. The trade was duped last week by the early week run up and resulting failure in beef prices later on. Will that happen again? Overall for price direction we look for a sideways trade from $86 to $90 in the December futures. There is a potential Head-and-Shoulders formation on the December, which would be activated by a close below the neckline around $86.75. While we respect the charts, it is hard to suggest this market will plummet to $80 or so by the end of the year. No bids have been posted yet while offers are $92 to $93...Rich Nelson
Allendale Research Inc.
(800) 551-4626
research@allendale-inc.com
www.allendale-inc.com
Allendale is registered with the CFTC and NFA and is a member of the NIBA.
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
