Soybean Fundamentals: We lead with soybeans, as soybean and soybean oil have made the boldest move over the last five days of trade. Bullish to soybean futures are expectations of 6 to 10 million fewer acres of soybeans to be planted in 2007. Allendale's pre-farmer survey estimate is 6 million less acres, as not all farmers will be eager to make a bold shift as they plant in the spring for anticipated bullish demand in the fall. Bearish to soybeans is the fact while prices are driving higher, corn prices are parked in sideways trade. This soybean rally is viewed as a world oilseed rally and is likely to be acted upon by global suppliers of oilseeds in the northern hemisphere as well as South America looking at very favorable prices when they plant later this year.
New Crop Hedge Advice: We were fortunate to have another 10% of 2007 new-crop soybeans hedged and brings our level of protection at 40%. New orders have been placed for another 10% as outlined in our Hedge Advice page. Our measuring stick as to what levels above are a result of our Jan. 20 projected prices for Nov futures found within our website or as a subscriber to our service we can e-mail, or U.S. mail the projections to you.
Trade Position: We remain long new-crop soybeans and missed our objective by less than 1¢ today and will leave the objective as is for Tuesday's trade. We have orders to buy soybean meal on a corrective dip and presently short the soybean oil as it reaches levels where it is no longer economical to use soybean oil for biodiesel production.
Corn Fundamentals: Corn has a battle on its hands. It needs to find support because of tight world end stocks and buy acres to meet expanding demand from the ethanol sector. Bullish to corn is soybean's rally, which could help support if not bring corn higher as the ratio between corn and soybeans has been much more favorable to buying corn acres than soybeans up until five trade days ago. Pressuring corn is number 2 world corn exporter Argentina, which is working on producing a record corn crop and declining wheat futures. Also pressuring corn is the fact of the lack of big-ticket corn sales from foreign buyers over the past six days of business.
Old Crop Corn Marketing: Allendale remains hedged in the July 2007 corn futures- covered with May 270 corn calls and is poised to begin to move inventory as early as the middle of February. Most recently it was in the late winter/early spring of 2004 when stocks were tight, that cash corn values peaked. More distant but with even tighter end stocks in 1996, cash corn values found much of its strength in the April-May period. With the development of demand placed on corn from ethanol, more recently old crop corn's futures rally has not only pinched margins on livestock but also ethanol production. With crude oil near $50 per barrel just recently, it was never more apparent how net profit per bushel had forced some facilities to slow or close for maintenance purposes. We need the assistance of a rally in crude oil to convince Allendale to hold onto corn inventory beyond very early spring. Our cash corn sales for this period, mentioned above, will not only be aware of futures and basis levels as well as spreads, but as important we must be cognizant of timing in this short stock year.
Cotton Acres: The National Cotton Council has released its estimates for intended acres to be planted in 2007. The estimates suggest 2 million fewer acres to be planted than year ago levels. Dating back to 1985 Allendale's research can find only one year when cotton acres dropped by more than 2 million acres and that was in 1996 at 2.3 million acres. That particular year found corn acres increasing by 7.8 million, wheat by 6.1 million and soybeans increasing by 1.7 million. Other than fewer cotton acres, other obvious reductions were found in oats and sunflowers. Latest estimates suggest a range of 10% to 25% of last years cotton acres could be switched to corn acres in 2007 because of attractive forward contracted prices.
Allendale's research could find no stable correlation between reduced cotton acres of more than 1 million and the influence on corn plantings. A step further, in years when corn plantings made large additional plantings, it was not soybeans that took the brunt of the decline. Since the mid 1990s, more often than not, wheat acres were reduced while corn and soybean acres responded favorably. Price is attractive when locking in forward contracts or hedging, but no one hedges 100% of anticipated production and that leaves the question of how to plan for planted acres. We believe you plan plantings based on projected demand once the harvest commences. With a great deal of global emphasis placed on using grain and oilseeds for renewable fuels, it would come as little surprise if by June of 2007 fewer additional acres of wheat are harvested and more acres of soybeans than presently estimated (6 to 10 million fewer trade range) are planted. One other item to consider when putting plans into action would be, once the grain is harvested, where is your deepest quality grade discount found, in a bushel of corn, soybeans or wheat? Even though you may have forward contracted wheat at $4.50 per bushel, are you surprised at the total amount of quality grade discounts taken out of that bushel of wheat when leaving the elevator?
Wheat Fundamentals: Rains are returning to Australia in front of 2007 wheat plantings. There are thoughts of winterkill in the eastern Midwest soft red winter wheat. If wheat is killed, then corn is likely to be planted. U.S. wheat export sales are running 14% less than year ago levels, at 682 million bushels sold compared to a three year average of 852 million bushels. New crop wheat in the key western Kansas region is under adequate snow cover, the E.U. winter wheat crop avoided disaster of winterkill just recently and the technicals are long-term bearish for old crop futures. New crop wheat is trading sideways and very much dependent on the futures direction for corn. However with each passing day old crop wheat continues its downtrend, it only reflects the inevitable on new crop; and that is a widening of spreads between the two and the likelihood of selling pressure on new crop as the crop draws closer to its harvest.
Spreads: We analyze the futures spreads for the grains to monitor if the market is willing to pay to store crops or move them out of the bin. The March-May corn futures spread finished at 12¢ carry. With Midwest cash corn prices at an average of $3.80 per bushel, this suggest a per bushel per month cost of 3.8¢ or 7.4¢ to store for the two-month period. The spread is actually paying more than what is required and may be viewed as a signal by the market; there is sufficient supply to meet immediate demand.
The March-May soybean spread is at 15.4¢ carry with a monthly on farm storage cost of 5.8¢ or 11.6¢ for the two months. Once again, the market is sending signals there is sufficient supply to meet immediate demand. For CBOT SRWW wheat, the spread is 13.6¢ and on-farm storage has a monthly cost of 4¢ or 8¢ for the two months. The cost to store $4.40 per bushels HRWW is 4.25¢ per bushel per month on farm or 8.5¢ for the two months. The current spread is 10.6¢. To store a $5.35 bushel of spring wheat, the on farm cost is 4.8¢ per bushel, per month. At present, the March-May futures spread is 10.6¢ or 1¢ more than what is required for the two-month period.
Allendale Lean Hogs: Bird flu in the United Kingdom was something to talk about today, but not a subject to trade from. Theoretically, it could encourage them to switch some demand from poultry to pork. It should not affect U.S. prices much, as we do not ship much pork to the United Kingdom. It could be a positive factor for French or Danish pork producers but not here. The other item in conversation was the cold temperatures. Due to the forecast last week, many producers were hesitant to deliver today. With that in mind, some plants reduced kill numbers, while one plant did not run a day shift. Today's kill was 374,000 head compared with 387,000 head last week. Since marketings were delayed last week due to cold temperatures, packers are playing the wait game. Those hogs will have to gone to town at some point, no matter what the temperature is. In the big picture, at our conference on Jan. 20, we noted a bullish stance and that most futures were undervalued. In the resulting rally since that point, prices have appreciated enough to reach our upside objectives. We are not saying a top is in or that will not go even higher. However, we will keep our heads screwed on straight and recognize that Chicago Mercantile Exchange (CME) prices are pretty good. With that in mind, we have put out orders to work on marketings at both current and higher prices. The amounts and prices can be found on the Hedge Advice page of this report.
Allendale Live Cattle: Last week's and this week's cold weather is seen as a problem for feedlots trying to get back on daily gain schedules for active marketings. Last week's cash cattle trade averaged $88.32, which implies a few more $88s were seen rather than $89s. Most newswires are suggesting the average trade was $89. Either way, last week's cash cattle trade was higher. There is talk this week's action could be steady to $1 higher. On the bearish hand, feedlots have a few extra cattle left over from the delayed marketings during the storm season. Also, beef packers have slipped back into the red now that cattle prices have rallied and beef prices have fallen. For the near term, cold weather is a positive factor. In the big picture, we continue to note current prices are higher than forecast. We have waited for a good rally before starting hedges and we have it now. Orders have been placed to sell against marketings through April using the April contract.
Today's the deadline for Allendale's Annual Conference "Capturing the Commodity Run" on Video. The conference was a huge success. Detailed merchandizing and trading ideas for specific discussions were presented on the grains, livestock, marketing and trade ideas as well as a long range forecast for Midwest and world weather. The entire day's proceedings were professionally recorded and will be made available on your choice of DVD or VHS. Contact an Allendale Representative at (800) 551-4626, procure your copy and receive the conference manual at no extra charge. We will accept orders through Feb. 6 at 12 noon as we prepare to place the first and final order. www.allendale-inc.com/products/products.aspx
Joe Victor and Rich Nelson
research@allendale-inc.com
www.allendale-inc.com
(800) 551-4626
Allendale is registered with the CFTC and NFA and is a member of the NIBA. The bottom line is we are a regulated firm, which can be extremely important in this day and age.
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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
