Dec. 5, 2006 — Corn Technicals: We lead with the technicals as it is Allendale's assessment today's futures action in more related to the need for a technical correction rather than related to any single or group of fundamentals. Word from the CBOT trade floor is do not be surprised if by Thursday futures are 15 to 20¢ lower than where they finished tonight. Impressive is how March corn futures have gained more than $1 in two months especially during the brunt of the harvest. However rather than try to climb higher into March without a correction, could prove to reduce trader participation. Even in two similar historical years, March futures did correct without taking out the March futures month of Nov low in the month of December. Last months March futures low was 3344. Ironically and technically March futures came close to testing 38% retracement of 3710 today.
50% retracement is 3640 with 68% retracement at 3570. We suggest funds could have the ability to push futures down between the 50 and 68 percent retracement levels and then prepare to set up for the next wave higher. March futures close is 3754 vs. last Friday's 3870. Our key custom Moving Averages are 3850, 3830 and uses a 2880 bull to bear pivot point. July futures close is 3846, vs. last Friday's 3946. Our key custom Moving Averages are 3940, 3900 and a 3000 bull to bear pivot point.
Mid session comments: as we explained in our 12:30 pm update today, with an erratic Dec calendar to work with, fund managers are most likely willing to take profits and make certain the last quarter of 2006 profits shine for corn investments as well as their bonus check.
Important Fundamentals: Yes, there are signs of economic rationing for corn but with a correction; profit margins for ethanol manufacturing could improve as long as cash corn prices also recede with the futures. Most importantly is the tight world end stocks to use, the United States is for all intents and purposes the only store in the world which has not crimped the flow of exports such as Argentina and China has and the very obvious fact the next fresh supply of corn does not appear until Argentina begins its harvest in March of 2007 and then South Africa in the month of April. Another key fact will be to see how basis levels react to Monday's correction. If basis slides along with futures and spreads widen or weaken then the futures slide could be greater than anticipated. However if our hunch is right both the spreads between March and May futures remain steady to firming and basis reacts by holding firm to improving, the futures correction could be temporary in nature.
Cash Corn: The Mar-May corn spread is at 5.4¢ carry and continues to channel narrower or become stronger. At $3.53 spot cash prices, the cost of carry is 4.1¢ per bushel per month or 8.2¢. Anything less than 8.2¢ is a warning flag to move cash corn. As long as you are hedged in the March futures, you have paid to store your corn on farm. If you are not hedged in the futures you need to look at your local cash bids to see if the local cash markets are paying you to store month to month at a minimum of 4.4¢ per month. If the local cash market has gone to an extreme and is inverted, where the spot-month cash price is higher than the following month then you may sell cash inventory but replace the moved inventory with a long futures and or options. We fully anticipate futures and cash to work higher into the March-April period.
Trade Position: We are willing buyers of corn futures but on a pull back. The pull back point was achieved today and we are now long both March and July corn futures. World stocks did not become any larger than its level from last Friday, no next new supply of corn until Argentina harvest in March 2007 and dry weather conditions continue in S Africa. We remain aware of the fact of early warning signs of economic rationing in poultry, weak feeder cattle futures and a round of profit taking for the last quarter of the year.
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Ethanol: How does ethanol futures gain when corn futures close lower. It is the speculative trade’s interest in owning energy and the understanding that as corn futures correct lower, profit margins per bushel increase for each gallon of ethanol produced. Technically ethanol is immediately trending higher. Key technical resistance is $2.32 per gallon for Jan futures while key support is $2.10 per gallon, tonight's close 2.29 or 6¢ higher than Friday's close.
Soybean Fundamentals: Two analytical groups from within Brazil have increased its estimates for soybean production for the 2007 harvest. New estimates are now much more in line with USDA present forecast, which is nearly unchanged from year-ago levels. Investment funds were of the opinion that production for Brazil would actually shrink because of the country's weaker currency. It has been our belief that world grain giants highly dependent on handling as many bushels of grain and oilseeds carried a very big stick into private talks with the Brazil government explaining why it was important to bow to farmers needs. And of course as CBOT corn futures drove higher, fundamentals meant very little to the spec trade, only that they needed to buy something cheap and attached to renewable fuels and corn had already made a bold move higher. By driving soybean futures higher on the heels of corn and soybean oil, this development only provided a solid foundation for Brazil farmers to plant more and more.
Weather Watch Page: This morning's Weather Watch page describes in detail how much of Brazil is doing well with 2006 plantings but also explains how the southern region of Brazil is in need of rains as soils begin to firm.
It is not unreasonable for this to happen especially during an El Nino year. However the most recent forecast suggest timely rains may help relieve some of the southern region stress.
Cash Soybeans: The Jan-Mar futures spread is 14.2¢. With the spot cash market at $6.34 per bushel, cost of carry per month is 6.2¢/bushel/month or 12.5¢. If the spread is less than the cost of carry, its time to move cash soybeans. At least for today, the market is paying you to store soybeans.
However as long as corn futures continue to trend higher and pull soybeans higher we will hold off to announce when to sell the 2006 soybean cash crop.
Soybean Technicals: Jan soybean futures left a very noticeable gap in the Jan futures chart from 6754 to 6750 and we would anticipate this gap to be filled before the end of the year if southern Brazil continues dry. Another driver, which could force soybean futures higher, would be corn and or soybean oil futures to rally based on the ideas of renewable fuels. Jan futures close is 6592 vs. last Friday's 6770. Our key custom Moving Averages are 6740, 6720, and has bull to bear pivot point of 6150. March futures close is 6734 vs. last Friday's 6920. Our key custom MA's are 6860, 6850 and bull to bear pivot point of 6230.
Trade Position: Our long Jan and March soybean futures position had its protective risk stop triggered today for scratch trades and a $340 loss on our long Jan soybean meal position. We will pause to allow the correction to shake out and then enter orders to re establish longs. We fully believe both the soybean oil and corn futures are the greatest of influence to the soybeans trend both short and long term.
Wheat Fundamentals: Russia revised its grain production estimate higher and India announced its planted wheat acres in the month of Nov exceed year earlier levels by 1.4 million hectares (3.46 million acres). After last Thursday's strong weekly export sales, a truer test may come this Thursday to see in fact if a stronger trend to buy US wheat is building or it last weeks data was a flash in the pan before the holiday season backs buyers away. We do not anticipate much if any change to domestic end stocks for wheat in next Monday's WASDE report but could see world stocks pinched a bit more because of Australia's drought. Allendale suggest today's weakness in futures may have been two fold. Number one is the need for a technical correction. Number two, the weakness in corn as the lead domino that fell into neighboring trade pits.
Wheat Exports: Remain disappointing for the present marketing year.
Cash Wheat: The Mar-May CBOT spread is at 4¢ carry. At $4.50 spot cash prices, the cost of carry is 5¢ per bushel per month or 10¢. Anything less than 10 is a warning flag to move cash soft wheat. Similar to what we have spelled out in the corn section, as long as you are hedged out in the March, you have already paid yourself to store the wheat. If you are not hedged then its costing you more to store than what the market is willing to pay and you need to check your local cash markets to see if there is adequate carry or not. Mar-May KCBT spread is at a half cent inverse (March futures are a half cent higher than the May futures and clearly signaling end users it wants the wheat now. At $4.75 spot cash prices, the cost of carry is 5.3¢ per bushel per month or 10.6¢. The Mar-May MGEX spread is at 5.6¢ carry. At $5.60 spot cash prices, the cost of carry is 6¢ per bushel per month or 12¢ for the period. Anything less than 12 is a warning flag to move cash spring wheat.
Wheat Technicals: March CBOT SRWW futures close is 5186 vs. last Friday's 5206. Our key custom Moving Averages are 5180, 5130 and 4440 bull to bear pivot point. March KCBT HRWW futures close is 5374 vs. last Friday's 5454. Our key custom Moving Averages are 5440, 5380 and 4940 bull to bear pivot point. March MGEX spring wheat futures close is 5252 vs. last Friday's 5284. Our key custom Moving Averages are 5260, 5220 and uses a 4800 bull to bear pivot point.
Trade Position: recent long July futures positions we achieved at all three exchanges. We have written new trade recommendations within our Grain Trading Strategies page. Long term we remain bullish to new crop wheat futures based on global tightness in stocks and until India's wheat begins to move out of the field and into the bin, and the drought breaks for Australia and there is zero chance for winter kill in the USA, Russia, China, Ukraine and EU, we anticipate there may be much more upside potential than downside risk. We are not as bullish to old crop wheat futures because of the miserable export pace.
Allendale Lean Hogs: If you are looking for one specific reason for today's +$1 losses for many deferred futures contracts you are not going to find it.
On the fundamental side, cash hogs were generally higher and much of trade looks for steady to higher prices remaining. On the pork end, today's pork cutout was up 53¢. On the weather side, though snows will be limited to Minneapolis on Tuesday and the eastern cornbelt on Wednesday we will note temperatures are forecast to drop into Thursday. For long-term price direction, we have noted in recent weeks it will be hard to tell if high corn prices are actually stopping the expansion. Sow slaughter is up around 4% in recent weeks. There are no stories floating around at this point of new construction being canceled and such. With that in mind, we are generally bearish in the long-term picture. In the short term, fundamentals are suggesting more of a neutral tone.
Allendale Live Cattle: General talk is to expect steady to $1 lower cash cattle trading this week. Show lists will be higher this week as free market cattle purchases on Friday were lower than expected. Is there a need for December futures to break anymore? They are already implying cash cattle will trade down to $83 or so by the end of this month. On the weather side, there are no snows expected but temperatures may remain low. While much of the trade is in a bearish mindset our prime trade right now is only doing bear spreads such as selling the February and buying August. That spread could work through most of the month of December before seasonals reverse it in early January. Last week when we mentioned it, February was at a $2.50 premium. Today, that premium is $2.02. That could reach down to 50¢ o 75¢ before widening back out next month.
Rich Nelson and Joe Victor
Allendale Research
research@allendale-inc.com
www.allendale-inc.com
(800) 551-4626
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
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