Corn Condition: The National Agriculture Statistics Service released its tenth crop conditions report for the 2008 corn crop. Pre release estimates suggested good-to-excellent corn conditions to come in a range of 63% to 64%. NASS estimates the August 03 conditions at 66% vs. last weeks 66% and year-earlier levels of 56% good-to-excellent and a five-year average of 62%.
Allendale suggests crop conditions are to remain steady to increase 1% throughout most of this week based on private and public weather forecast calling for beneficial weather. Cumulative pollination as of Aug. 3 is estimated at 83% vs. 59% a week earlier, 95% a year earlier and a five-year average of 91%. Private weather forecasts do not suggest any high heat for the major Midwest for the next ten days and a non threat to crop development.
Conclusion: Provided NASS's results above compared to pre release estimates, Allendale views Monday release as bearish for Dec corn futures.
Soybean Condition: The National Agriculture Statistics Service released its ninth crop conditions report for the 2008 soybean crop. Pre release estimates suggested good-to-excellent soybean conditions to come in a range of 60 to 61%. NASS estimates the Aug. 3 good-to-excellent conditions at 63% vs. last weeks 62%, year earlier levels of 56% good-to-excellent and a five-year average of 59%.
The percent bloom of soybeans at 72% vs. year earlier levels of 90% and compares to the five-year average of 88%. The trade is likely to remain very much focused on forecasted precipitation for the next 2 weeks to anticipate the potential crop size for 2008.
Conclusion: Provided NASS's results above compared to pre release estimates, Allendale views Monday's releases as bearish to November soybean futures.
Spring Wheat Conditions: USDA estimates spring wheat good to excellence ratings are 56% vs. week earlier levels of 60% vs. year earlier levels of 69% good-to-excellent. The trade was anticipating a 2% reduction in the good-to-excellent ratings. Allendale views this spring wheat crop condition report as bullish for Sept MGEX futures.
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.
Conclusion: Technically all the above have penetrated its respective #1 and #2 Moving Averages. More damaging is the fact all the above have closing prices below its respective pivot points and has turned the trader’s attitude to bearish. Until the above can maintain a close above the pivot points, look for the trade bias to sell rallies.
Preparing for August 12: Allendale has included the historical July to August soybean yield adjustment to its corn findings. Since 1998 USDA has shown a 70% tendency to decrease soybean yield from the July to August crop production report.
The maximum amount USDA has decreased soybean yield has been 3.2 bushels per acre which was in 2002 and its smallest reduction was 0.3 bushels per acre in 2003. Both in 2007 and in 1998 USDA left yield unchanged leaving only 2000 with a yield increase of 0.7 bushels per acre. In the seven years when USDA did lower yield it was by an average of 1.17 bushels per acre. Presently USDA is using a soybean yield of 41.6. If USDA is to use the average reduction of 1.17 bushels per acre it suggest yield in the August 2008 crop production report of 40.43 bushels per acre.
The trade's awareness of the forth coming USDA crop production report is growing. Much of last week and beginning of this week is spent with loose handed corn yield estimates discussed within the corn pit. Range of guesstimates are from a low of 151 bushels per acre (bpa) to as much as 160 bpa. Allendale clients asked what has been the history of yield adjustment from the July to August crop production reports; the following is Allendale's research findings of the past ten years July to August corn yield adjustments:
Five years when yield was increased an average of 2.98 bushels per acre; largest increase: 4.9 bpa in 2000, smallest increase: 0.4 bpa in 1998.
five years when yield was decreased an average of 4.68 bushels per acre; largest decrease: 10.6 bpa in 2002; smallest decrease: 1.1 bpa in 1999.
USDA is presently using corn yield of 148.4 bushels per acre. With an average increase of 2.98 would be 151.38, largest increase may be 153.3, smallest increase may be 148.8. With an average decrease of 4.68 would be 143.72, largest decrease may be 137.8, smallest decrease may be 147.3 bpa.
Conclusion: Odds have been 50/50 for an increase-decrease for corn and Allendale would suggest despite increasing good-to-excellent crop conditions of 4% since the July report, we do not anticipate a significant increase in yield. Allendale needs to remind of the much less than desirable emergence and its potential impact on yield. Allendale does respect the fact USDA's World Outlook Board may have restraint placed on it to keep ideas/perception of food price inflation control. With respect to soybean yield, odds favor a decrease in yield for the August soybean crop production report. Allendale plans to release its official production and yield estimates this week in anticipation of the August 12th report.
Corn: Weakness in the overnight crude oil and Malaysian Palm oil may have set the bearish psychology for not only corn and soybeans but several other agriculture markets as well, such as cotton, sugar, cocoa and coffee. Allendale doubts very seriously Monday's sell off was largely contributed to weather as much as technical based selling and lack of end user buying as long as the trend in crude oil remains down.
Old Crop Marketing: 4850 cash corn requires 4¢ per bushels per month to store on farm. The present Midwest cash market continues to offer adequate carry at least through the month of August. The present spread between September and Dec futures is offering 6.7¢ per bushels per month and will cover your cost to carry if hedged in the December futures. Make certain unhedged corn meets the criteria to offset cost of carry. Allendale has 30% of its 2007 production not priced to the cash market and will alert when to begin to move to the cash markets.
New Crop Marketing: Allendale is long 650 Dec calls at 34¢ to cover 50% of anticipated 2008 production. The total amount of anticipated 2008 production presently hedged is 25%. 5132 vs. the Dec 2008 is key support, immediate resistance is 6010. We will monitor and alert when to resume hedges.
Trade Posture: Fundamentally Allendale remains long-term bullish to corn on tight stocks to use for specifically corn and total world grain stocks to use. Technically Allendale is bearish to futures and suggest futures rallies to be sold and probe a potential bottom with long calls.
Wheat: Demand for U.S. wheat, remains impressive vs. year earlier levels both for export sales and inspections. Egypt has wasted little time after Monday's lower close as they have announced a tender for 55 to 60 K tonnes. Look for the United States, Russia and Canada to potential sources to answer Egypt’s tender. Wheat futures did succumb to weakness in corn and soybeans, and if there is a positive, although corn and soybeans did reach limit down, wheat did not.
Wheat Crop Marketing: $5.55 cash wheat requires 4.3¢ of carry per month. If not hedged, make certain your local cash markets are offering you sufficient carry. August 1 to Sept 1 cash markets may offer as much as 10¢ per bushel to carry wheat and may be cost effective. The present Sept-Dec wheat futures spread is offering 25¢ carry (actual cost is 12.9¢) Allendale has 65% of anticipated 2008 wheat production hedged in the Dec futures. We see no reason to hedge new crop above the 65% level we have on for now.
Cash Peak: Dating back to 2000, odds favor a national cash wheat peak for the month of December. Of the most recent eight years, dating back to the year 2000, the national cash peaked has hit the month of December 50% of the time with various other months such as Oct and Nov, April and May only once. We will monitor cash and futures spreads and the history stated above to make our decision to make initial 2008 cash sales.
Trade Posture: Technicals have turned immediately bearish on spill over weakness from soybeans and then corn. Fundamentals remain bullish as USA demand is more positive than year ago levels as evidence in export sales and inspections. Declining Spring wheat conditions is supportive to Sept MGEX futures. Allendale would recommend building a bullish base via at the money or slightly out of the money long calls and then add to the long position with futures when its respective key pivot point are penetrated above.
Soybeans: Tthe hand writing was on the wall as overnight electronic trade fell in large part as a result of weakness in crude oil and palm oil futures. Add to the overnight weakness, 10 day weather forecast, which proposes no high heat threat for the next ten days and a deluge of rain in Chicago as traders made their way into work Monday morning. Prospects remain good for soybean growth the next six to 10 days via private and public weather services. Similar to corn, as the immediate trend remains under pressure, the is an absence of end user buying as the technical trend is down.
Old Crop Marketing: $12.70 cash soybeans requires 8¢ of carry per month. If not hedged, make certain your local cash markets are offering you sufficient carry. Contact an Allendale representative for alternative marketing strategies for your specific operation. The present August/Sept futures spread is at 2¢ inverse, suggesting it does not pay to store old crop inventory. New Crop Marketing: We will hold hedges of new crop at 40% of anticipated 2008 production and alert when to resume. Technical chart based support is 12650. We will alert before resuming hedges, and plan to cover short futures hedges with bull call spreads.
Trade Posture: Allendale remains long-term bullish to soybeans as 2008/09 ending stocks are estimated at 140 million bushels and has a projected end stocks to use of 4.7% vs. old crop stocks to use of a record low 4.1%.
Lean Hogs: Futures reacted about as you would expect given limit down corn trading. While nearby's managed to tread water the 2009 contracts fell. The main concern 2009 contracts have is that pork producers start to limit sow slaughter if corn prices continue to fall. In the most recent three weeks of data available sow slaughter was 10% to 12% higher than last year. We will admit that data set is limited as it is for the first three weeks of July. How is it now that corn has fallen 70¢ since then? We have said sow liquidation needs to maintain 10% or higher, compared with last year, for two to five months in a row. To justify $95 summer 2009 hog prices though we would suggest it needs to be 14% higher.
On the weather side we will move from a high temp period down to a below normal temp period by the end of the week. That should alleviate some concerns about timely marketing. One other thing to consider here is this market may have some Olympic hopes built into the recent run higher. They run from the Aug. 8 through the Aug. 24. Though purchases of U.S. pork were completed weeks ago to hit that demand period we could be seeing some psychological impact here. In the big picture though the recent rally in the nearby August was more than expected we are still generally neutral the August and slightly bearish the October and December. We are also very concerned about those big premiums summer 2009 contracts have.
Live Cattle: We have a bottom in cash cattle for the summer. Given the low placements, confirmed on the Aug. 22 Cattle on Feed report, we will have low slaughters through the rest of the year.
Additionally packers are making big money. Around mid July our cattle processing model implied a gross margin of $261 per head. In JBS Swift's latest quarter earnings release they noted fixed costs of $164 per head. That implies almost a $100 profit per head. Though that has likely come down in the last two weeks the point is clear. Packers are making very good money and have the incentive to "go after" cash cattle as numbers tighten up in the coming weeks. The main point we are saying is we feel October and December futures are correctly priced. Brian Splitt, here in Allendale's headquarters, noted this could be a time to sell option premium by selling a call and a put. That would seem to be the right course of action for speculative trading. On the feeder cattle end it is clear futures are looking at lower corn prices combined with high future cash cattle prices. Though there are many who say we have a good deal of grass based feeders coming to the market in the fall we have a hard time seeing how it could break this market. Our cattle feeding program is implying steers bought today, and finished out in January, are penciling out a $50 profit per head. Cash corn in Garden City Kansas is now $5.00! We cannot say the last time our cattle feeding program implied that profit.
Joe Victor and Rich Nelson
Allendale Research
www.allendale-inc.com
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. c2008
