Dec. 19, 2006 — Corn Fundamentals: Several energy related stories released over the weekend are bearish to corn: near-ideal weather conditions for #2-world corn exporter Argentina and forecasts calling for better days ahead for South Africa corn production. Bullish to corn is good demand, investment funds attraction to bio fuels and tight world-end stocks.
China: China’s agriculture minister suggested that only surplus grain, outside of annual food, feed and normal industrial use, could be considered for bio-fuel production. China has signaled the only part of the corn crop it would use for bio fuels is the crop residue and general waste. It was also announced over the weekend that China has agreed to allow Westinghouse to build four nuclear reactors to help generate energy needs, and finally OPEC's monthly report estimates 2007 crude oil prices to be weaker than 2006 as it has witnessed first hand how $75/barrel crude oil can have a negative impact on the U.S. economy. It also realizes by sustaining such high prices how it only encourages more alternative fuel sources to be built, invested in and planned.
USDA and the Energy Department have both gone on record to suggest $40 to $45 per barrel crude oil prices could place ethanol production at economic break-even levels; and let's not forget with the prospects of a bigger South American soybean crop, more competing soybean meal is expected to be available to livestock producers and how this 48% protein meal could continue to place price pressure on the value of Distillers Dried Grains. Could it be the investment funds are anticipating what we have discussed directly with the USDA and that is more DDG fed and less corn formula could be released in the Jan annual USDA WASDE report?
End Stocks: Projected 2006-07 global end stocks of 93 MMT are the seconded tightest dating back to 1980. In 1983, end stocks were 89 MMT and corrected 32% to a level of 118 MMT by 1984. Most recently in 2003 end stocks were 103 MMT and corrected 27% to a level of 131 MMT in 2004. Domestic end stocks of 935 million bushels, similar to 2003's 958 million bushels. By 2004 domestic end stocks corrected by 120% to a level of 2.114 billion bushels. Dating back to 1980, domestic stocks have been less than 1 billion bushels only four times. From 1993 to 94, end stocks corrected 83%, from 1995 to 96 end stocks corrected by 107%, from 1996 to 97 end stocks corrected by 83% and 120% from 2003 to 2004.
Corn Technicals: March futures close is 3656 vs. last Friday's 3690. Our key custom Moving Averages are 3700, 3700 (key resistance) and uses a 2920 bull to bear pivot point. July futures close is 3796, vs. last Friday's 3834. Our key custom Moving Averages are 3820, 3820 and a 3060 bull to bear pivot point.
Cash Corn: The Mar-May corn spread is at 8¢ carry. At $3.45 spot cash prices, the cost of carry is 4.1¢ per bushels 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 4.1¢ 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. We would not be surprised to see the March-May corn spread to trade sideways to weakening for the balance of the month of Dec as exporters have all the supply they need. However, we anticipate January-February needs could strengthen the spread.
Trade Position: We were stopped out of our long March corn futures position, but do remain long both July corn futures. Holiday markets have landed with its increased volatility and exceptional daily trade ranges. Our immediate plans are to re enter the long side of March corn futures by stopping in above key resistance. World stocks remain historically tight and until new crops begin to become available from the southern hemisphere, supplies are expected to remain thinner than normal. Weekend news discussed in the first section above is a nagging reminder of how ethanol has drawn a great deal of attention to the corn futures market and not all of the news is positive for the corn for fuel sector.
Soybean Fundamentals: We have explained most recently how the soybean pit was becoming less tunnel visioned on strong soybean demand from the U.S. crop and transitioning attention to South American soybeans. We can tell you first hand many of the investment funds this summer were calling for a smaller soybean crop, mainly because of the weak U.S. dollar to Brazil's real. It would not surprise us to see equal-to or larger soybean crops because of the investment inspired rally in bio diesel's soybean oil and the corn rally, which could be viewed as bullish for South American soybean farmers to plant bigger 2007 soybean AND corn crops. Weekend and this week weather for South America is near ideal because of timely rains. Demand remains solid, but we must also remind ourselves that our key buyers are now covering needs for February 2007. In just a matter of 30 to 45 days, world importers are likely to focus on South American potential supplies but not give up completely on USDA supplies as it creates competition. It is also important to remind ourselves this soybean futures rally is not demand driven so much so as corn futures and bio diesel driven.
World Stocks: Projected 2006-07 world stocks are 56 MMT and rising each day that South America has timely rains. Previous marketing year-end stocks were 52 MMT and a five-year averageof 42 MMT. Projected U.S. end stocks are 565 million bushels vs. year-earlier levels of 449 million bushels and a recent five-year average of 240 million bushels.
Cash Soybeans: The Jan-Mar futures spread is 14.4¢ carry. With the spot cash market at $6.45 per bushels, cost of carry per month is 6.3¢/bushel/month or 12.6¢. If the spread is less than the cost of carry, it is time to move cash soybeans. At present, the market is paying you to store soybeans. However as long as corn futures long term trend remains intact and pull soybeans higher, we will hold off announcing when to sell the 2006 soybean cash crop.
Soybean Technicals: Jan futures close is 6480 vs. last Friday's 6574. Our key custom Moving Averages are 6630, 6670, and has bull to bear pivot point of 6170. March futures close is 6630 vs. last Friday's 6722. Our key custom MA's are 6780, 6820 and bull to bear pivot point of 6260.
Trade Position: We have placed new updated trade recommendations to re establish longs in soybeans, soybean meal and soybean oil. We believe both the soybean oil and corn futures are the greatest of influence to the soybeans trend both short and long term because of its attachment to renewable fuel.
Wheat Fundamentals: The International Grains Council came up with a stunner during its recent two-day get together. The IGC has announced projected 2006-07 world end stocks are expected to be tight for the second consecutive year. But here is where it becomes interesting, the IGC suggest a correction to world stocks similar to that of 1995-1996. Domestically end stocks increased by 17% from 1995 to 1996 and then 63% from 1996 to 1997.
World stocks increased by 5% from 1995 to 1996 and then by 20% from 1996 to 1997. What did that do to the 1997 July wheat futures? The Dec 1996 low was near 3300/bushels rallied to 4600 by April of 1997 and then dropped to 3200 by the beginning of July. Yes, the world did respond to globally tight stocks and higher world prices. Is the world ready to repeat the same performance ten years later?
End Stocks: World end stocks for 2006-07 are projected at 121 MMT vs. year earlier levels of 147 MMT. Dating back to 1980, only in 1980 and 1981 have end stocks been tighter, both years at 113 MMT. From 1981 to 1982 worlds stocks corrected 15% and more recently from 2003-04 (the most recent bull rally) world end stocks corrected 14%. Only once since 1980 have domestic stocks been less than present projection of 438 million bushels. The year was 1995's 377 million bushels and corrected to 444 million bushels or by 17%.
Cash Wheat: The Mar-May CBOT spread is at 8.2¢ carry. At $4.40 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 4¢ carry. At $4.50 spot cash prices, the cost of carry is 4.8¢ per bushels per month or 9.7¢. The Mar-May MGEX spread is at 9¢ carry. At $5.15 spot cash prices, the cost of carry is 5.3¢ per bushels per month or 10.7¢ for the period. Anything less than 10.7 is a warning flag to move cash spring wheat. Please be aware all three exchanges wheat spreads are widening or weakening. Allendale suggest this could be temporary in nature through the month of Dec with cash prices firming into March and April.
Wheat Technicals: March CBOT SRWW futures close is 4874 vs. last Friday's 4942. Our key custom Moving Averages are 4900, 4900 and 4470 bull to bear pivot point. March KCBT HRWW futures close is 5030 vs. last Friday's 5096. Our key custom Moving Averages are 5080, 5090 and 4970 bull to bear pivot point.
March MGEX spring wheat futures close is 5020 vs. last Friday's 5110. Our key custom Moving Averages are 5070, 5050 and uses a 4830 bull to bear pivot point.
Trade Position: We remain long July wheat futures at all three exchanges. Weather related stress in India, dormancy risk in the southern Plains is regarded as bullish to new crop July futures. The lack of export progress for old crop wheat is disappointing to old crop wheat futures.
Allendale Lean Hogs: Bears on in control of this market. Producers are very interested in marketing before the holidays. We look for cash hog weakness to remain until Wednesday here. One a positive note we can see today's kill was 421,000 head. Swift is about back to normal. Between Tuesday and Friday, the kill ran from 397,000 to 414,000 head. Overall, a lower cash hog trade into Jan. 1 is not unusual at all. The short-term trend on most hog futures right now is negative and there could be a bearish Head and Shoulders formation on some contracts. That fits in with our ideas that CME futures are currently overpriced.
Allendale Live Cattle: Today USDA reported the average free market cattle price last week was $85.12. That implies there were many more $85's sold late in the week than $86's sold on Tuesday.
Today, traders are keeping their eyes on the latest weather forecast. Drew Lerner, Allendale's contracted meteorologist, looks for the storm to be focused a little more north than what much of the trade is looking for. His focus is on Western Nebraska and South Dakota with snows of six to 12 inches. The big feedlot areas in southwest Kansas could see three inches while the Texas panhandle could be limited to an inch or so. The trade could keep prices steady at worst this week on that news. In the big picture, this is not a long-term problem. Based on today's close December futures are implying cash cattle trade this week at $85. For trading, the storm has widened that Aug-Feb spread out. We have noted in the past that this is not a spread to hold onto past this month. This means it is time to start looking to get out if a chance back at $2.50 is seen. In other news, Cattle on Feed will be out on Friday. We estimate placements will be 86.9% of last November. This is the third month of lower placements and will lighten the summer supplies pretty well. On the other hand, those feeders will have to be placed sometime. It could imply last half 2007 supplies will be heavy.
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