The most obvious lesson learned Tuesday in the electronic trade at the Chicago Board of Trade, and which carried into today's side-by-side trade session is, corn is able to detach itself from soybeans and wheat. When is the last time you saw corn futures open nearly eight times higher than the soybeans? Fundamentals are clearly speaking volumes after corn had 210 million bushels trimmed from last Friday's USDA crop production report and with a potential record South American soybean crop in the making and resting with projected world record stocks, appears unwelcome in such loftiness experienced by corn. As suspected even well before last Friday's report is how old crop wheat futures are viewed as the black sheep of the most popular three traded. On the day the more traditional funds bought 13,000 contracts of corn and a similar pattern as to last week, it was the index funds selling 16,000 contracts very near the close.
Corn Fundamentals: Bullish to corn is tight domestic end stocks and up until last Friday, strong export and domestic use. Elevated prices are bearish to corn, and are expected to place a crimp on corn for feed use and ethanol profit margins constricting. Thus far, the corn crops in South America and South Africa are doing well and will begin harvest in March, just about the same time USDA will release its Prospective planting report.
Domestic End Stocks to Use: At 6.4% corn end stocks to use are the second tightest on record dating back to 1980 with only 1995 smaller at 5%. World end stocks to use are now 10.7% and are the tightest dating back to 1980. These world-end-stocks-to-use levels compare to year earlier levels of 16% and much smaller than the last big bull rally of 2003's 14.3%.
Quarterly Corn Stocks: At 8.930 billion bushels, compare to year ago levels of 9.815 billion bushels. These stocks reflect usage of 3.582 billion bushels for the first quarter, which is a record. It suggests a drawdown use of 29% vs. a three-year average of 27%. The 3.582 billion bushel use compares to a three-year average of 3.327 billion bushel and five-year average of 3.214 billion bushel.
Ethanol Futures: February and March futures both closed below $2 per gallon. March futures have some minor technical support at $1.93 with resistance at $2. If $1.93 were to fail then the next objective could be $1.86.
2007 Corn Production: Allendale will release its 2007 corn supply and demand in detail at its Jan. 20 annual outlook conference, along with its projected July and December 2007 price projections. We will cover in much greater detail just how the recent 210 million bushel reduction in corn production by the USDA may set up projected end stocks for 2007-08; may lead to historically record-low levels of end stocks to use; push planted acres added to the second greatest amount dating back to 1970; and yet could set the big stage for the season average farm price to surpass the 2005 level by $1 per bushel.
2007 Corn Hedges: Please be sure to visit our Hedge Advice page for 2007 new crop advice. We did bring our 2007 hedge level up to 50% and have resting orders to hedge another 10% as described within the Hedge Advice page.
Corn Technicals: March futures close is 4030 vs. last Friday's 3964. Our key custom Moving Averages are 3750, 3750 and uses a 3030 bull to bear pivot point. July futures close is 4214, vs. last Friday's 4144. Our key custom moving averages are 3920, 3910 and a 3170 bull to bear pivot point.
Corn Trade Position: Fundamentally, we remain bullish corn because of tight world stocks and good demand. Technically, we are short-term bullish and remain long term bullish until 3530 support is taken out with two consecutive closes below that level. We reached our long March and May corn futures objectives today and will place new orders after Wednesday's trade on our Grain Trading Strategies page.
Soybean Fundamentals: As described in the 2007-corn production section just above, the stage is prepared for what could be a rewarding 2007 cash return to farmers. Bigger corn acres, fewer soybeans, but under average growing conditions, how on earth could the projected USA soybean end stocks for 2007-08 wind up larger than the corn end stocks? And what does it do to the average farm price for soybeans? Find out by attending this Saturday's Allendale Outlook Conference. It is not too late to register. Call (800) 551-4626.
Domestic End Stocks to Use: Projected 2006-07 end stocks to use are 18.8% vs. year earlier levels of 15.6%. We would have to venture back to 1986 to find bigger end stocks to use of 21.3%. World Stocks: at 56 million metric tonnes, projected world end stocks to use are 19.2% and larger than year earlier levels of 18.8%. This 19.2% end stocks to use are the largest dating back to 1980.
Quarterly Stocks: At 2.697 billion bushel compare to year ago levels of 2.501 billion bushel. These stocks reflect usage of 943 million bushels for the first quarter, which is 6 million bushels less than the old record of 949 million bushel in 2003-04. It suggests a drawdown use of 26% vs. a three-year average of 30%. The three-year average use for the second quarter is 846 million bushel, projected second quarter stock levels of 1.851 billion bushels, which is 11% higher than last years record level of 1.669 billion bushel.
Soybean Technicals: March futures close is 7084 vs. last Friday's 7164. Our key custom Moving Averages are 6850, 6820 and has bull to bear pivot point of 6310. May futures close is 7232 vs. last Friday's 7314. Our key custom moving averages are 6990, 6790 and bull to bear pivot of 6380.
Soybean Trade Position: We remain bullish to soybeans as long as corn can sustain its rally. Domestic and export demand remains good for soybeans but as prices have surged above $7 per bushel and in unison, a potential record soybean crop is in the making, look for export sales to begin to gradually switch away from the USA and to South America. We need to note: our target level to hedge another 10% of new crop 2007 soybeans was reached to day and can be found within our Hedge Advice page. New trade recommendations have been written within our Grain Trading Strategies page.
This Saturday: The conference manual is in the printers hands and is one of our best publications to date. Included in the manual are our long-term supply/demand tables under poor-, average- and good-growing conditions. Speeches have been prepared on the grains, livestock, weather, ethanol, option strategies, and crop-and-livestock marketing and trade ideas for 2007. If you are interested in attending this year’s conference, do not delay. Act now. Distance should not be your biggest concern, information should. Testimonials from one year ago include "Very professional and well done! Excellent people, speakers did a great job!" MM, Northwest, IA. "I really enjoyed it. The speakers were very good!" JM, Northeast, MO. "Very enjoyable and worth the time and money to attend. This was my first conference" PD, Central, OH. "David Hightower and Drew Lerner were outstanding presenters; I will be back next year!" MM, Central, IN. Sign up today and reserve your space at the mock trading session and the Allendale Outlook Conference. Contact an Allendale Representative at (800) 551-4626, or sign up on web: www.allendale-inc.com/products/events.aspx
Wheat Fundamentals: Be aware of two very important developments. Just as bearish is the moisture to the Hard Red Winter Wheat crops in the southern Plains, too much rain, causing flooding in the soft red winter wheat region is bullish.
As long as new crop wheat futures are heading lower and corn acres are heading higher, these unprotected water laden SRWW acres could be switched to spring corn planting easily and thus reduce production prospects for SRWW in 2007. The other more obvious development, which the trade is not trading from the long side, is the dry weather conditions in India. The crop was trimmed by 1.2 MMT just early last week. With a dry outlook for the next ten days and with the crop entering the key reproductive phase, the country's 800,000 tonnes production surplus over demand could reach neutral very quickly. Bearish to old crop futures is poor domestic and export use.
Winter Wheat Plantings: at 44.089 million acres, are 3.579 million more than year ago levels. Using Allendale yield estimates and percent harvested acres; production is estimated at 1.676 billion bushels, which is 378 million bushels more than 2006. At 44.089 million acres, they are wedged between 2003, which yield 1.716 billion bushels and 2004's 1.5 billion bushel.
Domestic End Stocks to Use: At 23.3% domestic end stocks to use, compare to year earlier levels of 26.5% and marginally higher than the last bull rally of 2003 when end stocks to use were an anemic 23.2 MMT.
World End Stocks to Use: projected end stocks to use are 16.8% vs.19.9% a year earlier. 16.8% would be the smallest end stocks to use level dating back to 1980.
Quarterly Stocks: At 1.315 billion bushel compare to year ago levels of 1.429 billion bushel. These stocks reflect usage of 436 million bushel for the second quarter vs. 494 million bushels one year ago. This usage implies a drawdown of 25% vs. a three-year average of 25.6%. The three-year average use is 507 million bushels and five-year average of 496 million bushels. At 436 million bushels usage, it would represent the second-worst usage, second quarter, dating back to 1976-77. The smallest use was 429 million bushels in 2002-03. Average third quarter use is 468 million bushels, suggesting March 1 stocks of 860 million to 865 million bushels vs. 972 million bushels a year earlier.
Wheat Technicals: March CBOT SRWW futures close is 4640 vs. last Friday's 4794. Our key custom moving averages are 4620, 4650 and 4540 bull to bear pivot point. March KCBT HRWW futures close is 4920 vs. last Friday's 5052. Our key custom moving averages are 4880, 4830 and 5010 bear to bull pivot point. March MGEX spring wheat futures close is 4914 vs. last Friday's 5070. Our key custom Moving Averages are 4880, 4860 and uses a 4890 bull to bear pivot point.
Trade Position: We remain long term bullish new crop July wheat futures based on dry weather for India's crop and the uncertainty winter weather may present for the crop in the USA and northern Hemisphere. We remain fundamentally long term bearish to old crop wheat futures on poor performing demand.
Allendale Lean Hogs: USDA dropped their pork production estimate for 2007 from +3.7% to +3.0% on Friday. Our estimate is a for a more moderate 1.3% increase as we believe hog producers will start to react to these new highs in corn costs. Current talk is producers will start to lose money with February slaughters.
This could help limit fourth quarter 2007 slaughters. The other way producers may moderate production is with weight management. The last phase of feeding animal agriculture is the least efficient. In the near term, the market is focused on cash hog prices. Today they traded steady to higher as cash pork closed up a strong $1.61. That news, plus the normal tendency for actual kill numbers paints a supportive near term picture. With that in mind, we look for a little more upside in the coming weeks.
Allendale Live Cattle: A lower open was seen for both live and feeder futures but the close wasn't too bad. There's a lot of confusion right now as corn moves higher, the storm has finished in the plains, and cash cattle may have posted a near term top. One positive factor yet to be talked about is with the wholesale beef price rally posted in recent weeks, beef packers are actually back to running plants at a profit. On the storm front significant problems remain in the plains and many feedlots will see delayed marketings for weeks. On the other hand, they went into these storms with more than adequate market ready cattle numbers. Another question here is just what is fair value to feeders and calves? We were not able to judge much today as Oklahoma City, probably the most watched auction in the nation, canceled its sale after three days of precipitation. Some clients at local auctions today noted auctioneers were practically trying to give away these animals. Keeping it simple in the short term, we are now turning bearish. Though cash cattle prices typically appreciate into March the big market ready supply that normal seasonal run. The long-term picture could be a little better as continued low placements equal low slaughters in the late summer time frame. In the big picture, we will keep our hat on our heads and realizing current futures prices are above our forecast and represent a chance to hedge. Prices can be found on the Hedge Advice page of this report.
Joe Victor and Rich Nelson
(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.
Secure your seat to Allendale’s 17th annual outlook conference HYPERLINK "http://www.allendale-inc.com/products/events.aspx" “Capturing the Commodity Run”. Jan 19 & 20th, 2007
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
