Technicals: For the short-term trader, Allendale uses its own unique custom Moving Averages to monitor price momentum, define key support and resistance levels as well as advise where key pivot points are located when bulls may turn bearish and bears to turn bulls. We also include last week’s closing price for the weekly chartist as we draw closer to the end of the week to anticipate the possibility for futures to have a positive weekly close or if weakness is ensuing. A detailed technical look at the grains and livestock are available within our Allendale Advanced Charts.
Observation: May and July corn futures #1 and #2 Moving Average resistance penetrated and could now be used as support. Look for soybeans to use recent support of its #1 and #2 Moving averages as new resistance.
Corn Planting: pre-release trade estimates for Mondays planting progress was 17 to 19% and the floor trade suggesting the five-year average is 30%, Allendale's research suggested it’s actually 35%. Sure enough, NASS released its weekly planting pace results which came in at 10% vs. a five-year average of 35%.
We would have to venture back to 1995 to find only 9% planted. A crop that went in rather well; then drought decimated that particular crop. Historically planting progress for LAST week IS typically 18% and NASS data suggest only 6% was made, not even half of the normal progress was made. For this week of the year, typically 24% progress is made. This would suggest a planting pace of 34% for next Monday's release vs. a five-year average of 59%. Allendale estimates rather than 24% progress made this week, only 9% to be made suggest next Monday's NASS to be reported at 19%, again vs. a 5 year average of 59%. We would have to venture to 1995 to find only 16% planted. Noted planted delays are IL, 49% behind its five-year average, IA 30% behind, MN 26%, and MO 58% behind.
National Weather Service: the latest 6 to 10 day forecast calls for above normal precipitation and normal temps for AR, MO, IL, IN, MN, WI and southwest MI. The two week forecast suggest below average temps for much of the northwest Corn Belt and the vast majority of the Midwest. In four words: bullish corn, bearish soybeans. The five day outlook suggests much of the central Corn Belt from West to East to potentially receive .25 to as much as 2 inch rains.
Spring wheat planting progress is said to be 34% complete vs. 20% the previous week and vs. a five-year average of 40%. Number 1 spring wheat producing state, ND planting progress 30% vs. 30% five-year average and #2 producing state MN 6% planted vs. 33% five-year average.
The winter wheat crop condition report was released for the fourth time in 2008. The 18 states which made up the majority of 2007 production came in at 46% good to excellent vs. 45% the previous week. One year ago, conditions were 56% good to excellent with a five-year average closer to 52%. The trade was anticipating today's report to come in a range of 46% to 47% good to excellent. The five-year average suggest for the next five weekly reporting, condition report decline nearly a total of 5%, suggesting a target in five weeks of 40% good to excellent, 10% below year earlier levels of 55% good to excellent.
Corn Fundamentals: the key focus remains on planting delays and since last Friday may be witnessing the trade finally realizing, fewer corn acres and more soybean acres. Immediately after the release of Monday's crop progress report release rumors are circulating of the potential for non penalty release of CRP acres. Allendale suggest, too little too late and price will need to ration where corn is used in 2008-09. Look for the potential for Dec corn futures to be limit up in Monday's overnight electronic trade. End users give serious consideration of placing protective measures on rising corn input cost for 2008-09. Contact your Allendale Representative for alternative ideas. 800 551 4626.
Old Crop Corn Sales: Allendale made additional corn sales from the 2007 harvest, the week of April 21. We know historically the peak cash price typically is made in April-May. Rather than roll 35% of our May hedges to the July, we converted hedges to cash. Allendale has a balance of 30% of its inventory remaining from the 2007 harvest and will alert you when fundamentals and economics are appropriate.
Ethanol: The Energy Information Administration has released its most recent ethanol production and end stocks data (for the month of Feb). The EIA has released its month of February ethanol production estimate at 15 million barrels vs. record 15.8 million barrels the previous month and 10.8 million barrels a year ago for the month of February. More news from the EIA is the ethanol end stocks level had a slight decrease to a level of 10.5 million barrels vs. 10.7 million barrels in January. One year ago for the month of February ethanol end stocks were estimated to be 8.7 million barrels. In order to reach USDA's target to use 3.1 billion bushels of corn for the 2007/08 marketing year, February production needed to reach 16.7 million barrels. For the month of March, ethanol production will now need to reach 18.4 million barrels. In order to reach USDA's target use of 3.1 billion bushels. Each month production for the remainder of the marketing year will need to be 55% higher than year earlier levels. At present, based on the EIA data, USDA needs to trim corn use for ethanol by 53 million bushels.
Trade Posture: Long term Allendale remains bullish to old and new crop corn. Our research suggest with present planting delays, 211 million bushels vs. present old crop corn stocks of 1.283 billion bushels, may not be far away for 2008/09 marketing year corn, what do you think?
Soybean Fundamentals: If the Argentina government does not make progress with the country's four main farm groups by this Friday, farmers are most likely back on strike, minus the road blockades. The new Economy Minister announced he is not willing to bend on present policy. The Commerce Minister has nothing positive to express about farmers or grocers who raise food prices for the country's domestic consumers. It may take a miracle to solve the present sliding tax on soybean exports. This development is more positive to old crop U.S. soybeans than new crop. New crop soybean futures are under pressure from ideas of planted acres to increase vs. the prospective planting acreage report to the June planted acreage report. This could be the first increase from the March to June reports since 2004, unless weather straightens out post haste and forecasts do not bode well for that to happen.
China: China is on a mission to transport 10 million tonnes of corn and rice from the northeast to the south to help control food inflation. The planned movement may take as long as two months. In 2002 China was using the excuse of GMO Health Safety certificates as a reason for soybean import delays. Truth of the mater was drought hit the south and China was so focused on railing rice from the north to the south; they refused to use rail cars to off-load scheduled soybean imports. This China action hurt the Brazil and Argentina soybean export market. Be aware, a repeat performance could happen again but this time drag U.S. beans into the fray as the United States has picked up some export activity via the Argentina strike.
Trade Posture: the trade remains focused on Argentina strike developments and Midwest weather forecast. Stocks of USA soybeans remain tight and are expected to tighten further in the May WASDE based on better than average exports. With much of the focus on corn planting progress, Allendale recommends to sell rallies for the short term after taking profits on Monday from its previous short position. Corn planting delays outweigh the Argentina strike.
Wheat Fundamentals: Wednesday evening a letter of intent may be written by Egypt for the purchase of 1 million tonnes of French wheat imports. If this develops, France could meet 14% of Egypt’s annual wheat import needs. Canada's Federal Ag Department estimates wheat production in 2008, up 29% vs. 2007 levels and higher than last months estimate of 25.15%. Monday's higher futures are tied directly to the strengthening corn futures and technical correction from oversold status. Bearish to wheat futures is the prospects of a 41 million metric tonne (1.5 billion bushels) increase in world production in 2008 vs. 2007. Allendale suggest the United States is likely to lose some world market share but continued strong domestic and world demand. Allendale's Season Average Farm Price for 2008/09 is estimated at $5.80 per bushel vs. 2007/08's $6.65 per bushel.
Spread: the present July CBOT wheat vs. CBOT July corn spread is 2.27 premium the wheat and in a major downtrend from a recent level of 3.00. Immediate resistance is 2.50 and then 2.68. Key support is 2.15 and then 2.00. One year ago the spread was quoted at 1.08 premium the wheat. You may consider stopping into a long wheat/corn spread just above the 2.50 level with a 2.68 objective. Use a risk-reverse of 2.42 and an objective of 2.15.
Trade Posture: even though present U.S. winter wheat crop conditions are less than average, globally the crop is doing well and headed towards larger production than year ago levels. World wheat stocks are expected to rise to 128 million tons in 2008-09, up 14 million tons from 2007-08. At this juncture Allendale is willing to sell corrective rallies via call options. New orders are found within our Grain Trading Strategies page.
Lean Hogs: We noted on Friday how this cash hog and cash pork market has been completely astounding. While it has been surprising we still wonder just how high it can get. Our estimates suggest exports will take up to the 40% of the big increase in pork production. The main variable is how much pork, and at what price, will consumers take the remaining 60% of the increase. Current cash hog prices are now equal to 2007 levels.
Will this astounding U.S. consumer demand continue? While we can agree cash hogs and pork will generally increase into early May we are unsure if summer futures need to hold the size of premium they have. Our reason concern however, is with the October and December futures. December futures expired at $55 last year. We are now just under $75. A $20 (35%) premium is a bit excessive. We can understand a $10 premium to $65 being a little more reasonable. As of tomorrow morning we will be adding the last 25% of hedges on 2008 marketings to bring us to 100% covered. On the liquidation issue we continue to note we are doing great. We need to keep sow slaughter over 10% higher and keep it there for two to five months. However, any liquidation will only affect 2009 production and not 2008. We will not add any more 2009 hedges than the moderate 25% level on the February until we have more information on that front.
Tyson Foods: Allendale has become one of the main sources, if not the source, for hedge funds to ask questions about their commodity investments. Wall Street's insatiable interest in commodities means in the past three years we have consulted on everything from commodity companies (John Deere, Bunge, Smithfield, Swift, etc.) to direct investments in futures or through some type of index product. With that in mind one of the companies we monitor and make projections for is Tyson Foods, the nation's largest meat company. They are involved in chicken production processing, hog production/processing, and cattle processing.
Tyson Chicken: Results for the largest chicken producer/processor indicated the worst numbers in company history. Profits in chicken production and processing are determined mainly by chicken production (chicken prices and grain prices). The dramatic rise in grain costs and minimal chicken price increase meant a $61 million loss for the chicken segment. Our projections for grain and chicken prices indicate these solid losses will continue through the quarter before getting to breakeven by the fourth quarter. We are assuming chicken production as a whole will need to dip down to 5% to 8% lower in order to see profitability return. The latest egg set data posted shows they are running 2% lower now.
Tyson Pork: Tyson is the nation's 11th largest hog production and the 2nd largest pork processor. Their pork segment profits come more from pork processing than hog production. Therefore the massive profits from pork processing far outweigh the losses in the hog production area. Big supplies mean fantastic capacity utilization (lower fixed cost per hog) for packers. They also usually mean a better processing margin as live hog prices generally fall more than pork prices. In tight supply years pork processors get hit the opposite way. The net result is a $63 million profit for the pork segment. This is second only to the previous quarter of $76 million. Big profits will continue through 2008 for pork processors. Losses will remain in hog production through 2008.
Tyson Beef: When the Swift purchases of National Beef and Smithfield's beef segment Swift will be the number one beef processor. Now that Tyson has dropped the Emporia Kansas plant off the slaughter schedule it drops to third place after Cargill's Excel unit. In the first quarter their beef segment saw losses of $11 million in beef processing. That is compared with the $85 million loss the previous quarter. They should post a moderate profit in second quarter numbers as the beef/cattle spread has improved and we expect a good deal more cattle to show up at their front door. They also hope renewed South Korean exports in mid May will improve the picture. We do not look for beef processors to make any consistent money after summer however as live cattle supplies dry up.
The Tyson Message: Tyson estimated grain costs will increase by $600 million for fiscal year 2008 which ends in September. Not only with that cramp livestock feeding profits but keep in mind the tightest corn numbers will come with the 2008 crop which is fed through most of 2009.
Live Cattle: In the past few weeks we have laid out the long term plan. Supplies will increase in May and June as they normally do. This year's increase will be even larger as extra winter placements hit. We have respected the increase in warm weather demand, and subsequent short term price rebound. Now we are watching daily wholesale beef reports. When the beef turns we will have our sign to say bulls will give up control of the CME trade. We look for June futures to reach down to $88. After that period we remain solidly bullish for the second half of the year. We are 100% hedged in June and August futures and have nothing for remaining contracts. December/June Live Cattle Spread: If we are right about slowing demand and rising beef supplies the main speculative trade for livestock will be the December/June spread. The spread peaked on the 9th at $14.50 premium to the December. With the rising market, focused on the June contract, that premium hit a near term low Friday at $10.55. If this cattle market breaks and that June falls the hardest, as we forecast, that spread could widen back out to around $15.
Joe Victor and Rich Nelson
(800) 551-4626
research@allendale-inc.com
www.allendale-inc.com
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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.
