Nov. 14, 2006 — Corn November to January: Tight world stocks of corn created a bullish scenario in 2003-04 and 1995-96. A subscriber called to ask where the March corn futures are heading into the holiday season and through the remainder of the year. March corn futures in November of 1995 were trading near a high of 3400 by the beginning of November, corrected 10¢ by the middle of the month, only to revisit the 3400 by the beginning of December and managed to push to a level near 3700 by the end of the month.
From the November high of 3400 and even during the grind of the holidays, futures were breaking into new life of contract highs by 30¢. With world end stocks to use presently estimated at 11.1% only 2003-04's 14.3% is close, dating back to 1980. In November of 2003, March futures began the month by trading near the 2500 level, sold off to the 2350 level by the end of the month. Then they revisited resistance near the 2500 level for the first half of December, sold off quickly to 2300 just before the end of December, and within five days before the beginning of January broke above the key 2550 resistance level. In summary, it is our belief that just because we may be entering the holiday doldrums, tight world stocks may dictate an increased level of volatility and allow for large day-to-day trade ranges. From a cash-grain marketing viewpoint, by leaving firm offers on corn, which can not fit into on-farm storage, at extreme levels above the recent highs, could provide a rewarding opportunity.
Fundamentals: The weekly harvest report is neutral as NASS suggest this year’s corn harvest is in line with the five-year average. An overnight sale of 110 K tonnes of U.S. corn to Mexico is supportive to futures and suggestions Japan may be actively buying U.S. corn for Jan-March needs this week. Also bullish to corn is strong export sales and the investors interest in corn based ethanol. Bearish to corn are early warning signs of economic rationing and the over crowded room full of non-commercial longs.
Season Average Farm Price: Based on USDA's new SAFP of $3 cash corn its estimates Allendale's research may lead to an increase of 8.2 million more acres over 2006 plantings or 86.761 million acres. The 86.761 million acres would be a record dating back to 1970. The closest single season switch would be 1996's 7.8 million acre increase. The largest single season positive adjustment year on year is 1984's 20.3 million acres. At 86.71 million acres, harvested acres could come in at 79.34 million acres and have production of 11.861 billion bushels if you use a 2007/08 baseline projection yield of 149.5 bushels per acre (bpa) or as much as 12.694 billion bushels if you were to use 2004's record yield of 160.4 bpa.
More Interesting: As long as both futures and cash corn remain in its upward trend, if USDA were to raise the SAFP by 20¢, then the Allendale special report suggest an increase in planted acres in 2007 over 2006 could reach 9.6 million.
Weekly Export Sales: Per the most recent official USDA export sales data, 855 million bushels of corn has been sold (likely front-loaded) vs. last years 577 million bushels and most recent three-year average level of 639 million bushels.
End Stocks to Use: domestically corn is 7.9% vs. last yrs 17.5% and the second tightest dating back to 1980, only to 1995's 5%. At 935 million bushels, they compare to 2003's 958 million bushels, but well above 1995's 426 million bushels. World end stocks to use are 11.1% vs. last years 16% and are the tightest since 1980. 2003's level was 14.3%. World corn stocks of 90 MMT compare to last years 125 MMT and 2003's 103 MMT and compare closely to 1983's 89 MMT.
Broiler Hatchery Report: eggs set into incubators, down three percent two weeks ago, down 2% last week and now down 3% in this weeks report. Total number of eggs in incubators now are 200,224,000 vs. 206,422,000 the same week one year ago. This is a early warning signal of economic rationing for corn and soybean meal and would now be viewed as in a growing trend. Broilers placed are now 165,455,000 vs. 167,802,000 last week. Remember it is the poultry sector, which uses 50% of all meal demand and is the number two consumer of corn, 6.5% behind beef's 33.7% usage.
From November to January: Odds are 50-50 for USDA to increase-decrease its November production estimate in the January annual report. The average increase over the past 10 years has been 37 million bushels while the average decrease has been 93 million bushels. The single largest decrease to corn production from the November to January annual report has been 164 million bushels in 2003 and the smallest decrease of 39 million bushels in 2001. The single largest increase has been 80 million bushels last year and smallest increase of 5 million bushels in 2002.
Cash Corn: The Dec-Mar corn spread is at 16¢ carry. At $3.40 spot cash prices, the cost of carry is 4.2¢ per bushels per month or 12.6¢. Anything less than 12.6 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 to sell surplus bushels into the cash market when the spread strengthens to 12.6 or more. We fully anticipate futures and cash to work higher into the March-April period.
Corn Technicals: December futures close is 3424 vs. last Friday's 3432. Our key custom Moving Averages are 3470, 3430 and uses a 2690 bull to bear pivot point. March futures close is 3584 vs. last Friday's 3594. Our key custom Moving Averages are 3620, 3580 and a 2900 bull to bear pivot point. Technically corn could be entering a weakening correction.
Trade Position: We are willing buyers of corn futures but on a pull back. Tight world stocks, no next new supply of corn until Argentina harvest in March 2007. We remain aware of the fact of early warning signs of economic rationing as outlined in the poultry section above.
Soybean Fundamentals: Non commercials continue to steer soybean futures, trailing the corn futures. Bullish to soybeans is the corn rally and ideas of large amounts of soybeans used to manufacture soy diesel. Bearish to soybeans is a large U.S. crop, large world end stocks and a non commercial led rally which suggest increased soybean plantings in Brazil and the other South American heavy weight, Argentina. Like corn, traders are turning much more towards the demand phase for the 2006/07 marketing year and less attention to the production phase, as they should!
Bio-Fuels: Bio fuel is becoming the newest catch word at home and abroad. 240 million bushels of soybeans expected to be used for bio diesel in 2006, doubles to 480 million bushels in 2007, and flattens to the same level in 2008.
Odds from November to Jan: Odds of USDA lower soybean production from the November to January annual report are 80%. In years when a downward adjustment is made, it has an average of 19 million bushels. The largest downward production revision over the past 8 years has been 34 million bushels in 2003, the smallest of 6 million bushels in 1998. When USDA has revised the production estimate higher it has been by an average of 42 million bushels. The largest increase has been last years 43 million bushels and smallest of 40 million bushels in 2002.
Export Sales: Per the most recent official USDA export sales data, 515 million bushels of soybean has been sold vs. last years 357 million bushels and most recent three-year average level of 474 million bushels.
Cash Soybeans: The Jan-Mar futures spread is 11.6¢. With the spot cash market at $6.40 per bushel, cost of carry per month is 6.6 ¢/bushel/month or 13.2¢. As long as the cost of carry is below the spread, it signals to move soybeans to the cash market. Use this present rally to sell any small overages, which will not fit into your on farm storage.
Stocks to Use: Domestically soybeans stocks to use are 18.3% vs. last yrs 15.6% and compares to 2003's tightest level of 4.4% dating back to 1980. In November of 2003, January futures were trading at near 7800 vs. today's 6695. Present stock levels for 2006/07 are projected at 565 million bushels vs. 2003's 112. 5.04 times more stocks and a present value, which is 85% that of 2003. Last years stocks were 449 million bushels. World end stocks to use are 18.9% vs. last years 18.7% compare to 2003's 15.3%. World stocks of 55 MMT are a record vs. last years 52 MMT.
Soybean Technicals: January futures close is 6574 vs. last Friday's 6624. Our key custom Moving Averages are 6590, 6540, and has bull to bear pivot point of 6110. March futures close is 6692 vs. last Friday's 6744. Our key custom MA's are 6690, 6640 and bull to bear pivot point of 6200.
Trade Position: We are willing buyers of soybeans on a technical pullback and as long as corn futures continue to stay in its up trend. We did buy soybean meal futures late last week and March soybean futures today. We narrowly missed buying the January futures, but will keep our entry order unchanged. World fundamentals are largely bearish to soybeans.
Wheat: World wheat stocks are the tightest dating back to 1981 and a full 20% below year ago levels. It is no surprise USDA decreased world wheat stocks as Australia's wheat production and export potential continues to drive lower. Japan continues to launch weekly tenders, which represent less than 50% of its normal weekly tenders in a healthy crop production year.
Conditions: the National Ag Statistic Service did report after Monday's futures close, winter wheat conditions are unchanged from last week in the good to excellent category. They shifted 1% from the good up to the excellent category. The good to excellent ratings for the crop remain above the five-year average as detailed in our web sites "Special Reports" section.
Wheat Acres: Allendale has completed research similar to that of corn in estimating the increase in acres over year ago levels based on the Season Average Farm Price. Allendale was able to identify 4 years dating back to 1970, which had an increase in the projected Season Average Farm Price similar to the 27% projected for 2006/07. Based on this criteria, the study suggest wheat plantings could be as much as 3.8 million acres over the 57.344 million planted in the fall of 2005 and spring of 2006. All wheat plantings for the 2007 production is estimated at 61.186 million acres. This amount would fit in between 2002's 60.318 million acres and 2003's 62.141 million acres. At 61.186 million acres and using USDA baseline yield projection for 2007 of 43.1 bushels per acre, projected yield could be 2.138 billion bushels vs. the 2006 harvested amount of 1.812 bb or 18% greater.
Wheat Export Sales: Per the most recent official USDA export sales data, 501 million bushels of wheat has been sold vs. last years 613 million bushels and most recent three-year average level of 626 million bushels. Though this year’s sales are trailing last years by 15% they are much better than month ago levels which were running as much as 26% behind. Australia's smaller crop is viewed as the United States’ advantage to better winter export sales.
Stocks to Use: Domestically wheat end stocks to use are 20.2% vs. last yrs 26.5% and compares to 2003's level of 24.9%. 418 million bushels are the tightest since 1995's 377 million bushels. World end stocks to use are 16.4% vs. last years 19.9% compare to 2003's 18.9%. World stocks of 118.8 MMT are only second to 1981's 113 MMT dating back to 1980.
Cash Wheat: The Dec-Mar CBOT spread is at 21.6¢ carry. At $4.55 spot cash prices, the cost of carry is 5¢ per bushels per month or 15¢. Anything less than 15 is a warning flag to move cash soft wheat. The Dec-Mar KCBT spread is at 15.4¢ carry. At $5.00 spot cash prices, the cost of carry is 5.¢ per bushels per month or 16.4¢. Anything less than 16.4 is a warning flag to move cash hard wheat. The Dec-Mar MGEX spread is at 14.4¢ carry. At $5.48 spot cash prices, the cost of carry is 5.8¢ per bushels per month or 17.5¢. Anything less than 17.5 is a warning flag to move cash spring wheat.
Wheat Technicals: DECEMBER CBOT SRWW futures close is 4770 vs. last Friday's 4804. Our key custom Moving Averages are 4870, 4910 and 5020. DECEMBER KCBT HRWW futures close is 5084 vs. last Friday's 5086. Our key custom Moving Averages are 5160, 5200 and 5260. DECEMBER MGEX spring wheat futures close is 4940 vs. last Friday's 4972. Our key custom Moving Averages are 5040, 5060 and 5070.
Trade Position: We are long CBOT and MGEX July futures, and have resting orders to buy the KCBT July wheat futures on a pullback. Tight world stocks as described above, shrinking Australia crop and no new supplies until India begins to harvest next March are all bullish to wheat futures. New crop wheat futures are expected to sensitive to winter kill stories throughout the world in the coming months. Old crop wheat futures are feeling the effects of economic rationing and bearish technicals
- Joe Victor
Allendale Lean Hogs: Another 16¢ lower wholesale pork price this afternoon keeps the negative trend in place. We will note today's CME action finally filled that downside objective which was the gap at $61.60.
At this point, we look for bearish action to remain for another few days. In general a sideways action from here into the end of the year could be seen. Typically, we near a significant low price point soon before looking towards better prices in the early part of the next year.
Allendale Live Cattle: We would like to argue a stable if not higher live cattle market could be seen in the next few days. Last week's cash cattle decline totaling $3 was dramatic. Today's boxed beef prices were a little higher. Packers could be getting ready for retail beef features to start after Thanksgiving is over. Though the industry believes live cattle marketings from big summer placements will start hitting soon our cattle feeding models suggest they won't hit until the start of next year, as most were lighter weight animals than usual. In other news this afternoon, we released our Cattle on Feed projections. Our sale barn data for the month of October suggested sales were down 13% from last year. Given a normal variation from that data we look for placements to be 91.5% of last year. Marketings were good at 103.9%. That leaves the total cattle in feedlots at 105.2%. That would be a record number for November 1. The main point here is lower placements should be in place for the next month or two until the industry feels more comfortable with the calf/corn price relationship. Fundamentally, we are suggesting this market has neared the low end of the trading range. Charts suggest sub $80's on the December contract.
-Rich Nelson
Rich Nelson and Joe Victor
(800) 551 4626
www.allendale-inc.com
research@allendale-inc.com
Allendale is registered with the CFTC and NFA and is a member of the NIBA.
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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
