Monday, June 11, 2007
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Fundamentals:
CBOT July corn ended 14 cents or 3.6% higher Monday after a strong rally fueled by brightening technical pattern and concerns about dry growing conditions in the US Midwest where rains are needed to boost yield potential. A broadly neutral USDA report offered a somewhat supportive backdrop, particularly the fact that the USDA does not foresee US ending stocks climbing back above the 1 billion bushel market within the next year.
The dry weather outlook sparked most of the buying, especially as forecasters rimmed moisture expectations over the coming days to leave large parts of the Midwest hot and dry. Rains are necessary to replenish soil moisture levels and aid in crop development, and the longer emerging crops are denied water, the harder it will be for the crops to record strong yields. Forecasters are also calling for a ridge to form across the Midwest that could ensure current conditions persist for prolonged periods - potentially up to pollination when a water shortage could have serious negative consequences.
It is really still too early to trade off such outlooks given the changeability of the weather in the US Midwest. Nevertheless, the absence of rains in the 6-10 day outlook will remain a supportive influence for the market until rains eventually do arrive. Another driver of today's gains was corn's emerging technical pattern, which drew in fresh buying interest as prices pushed higher on the charts.
In July futures, prices overcame established resistance in the $3.95-3.96 a bushel area for the first time since the March 30 planting intentions report, which had been the cause of corn's early April meltdown. Dec corn futures also surged Monday and reached their highest levels since March 23 of $4.08 ¼ a bushel before closing at $4.06.
The strong closes in both contracts should ensure corn futures remain on the radar of chart-tracking traders, and so we cannot rule out additional technically-driven gains going forward. The USDA's supply and demand report also spurred some gains Monday, although by and large the USDA's findings held few surprises.
Of the changes they did make, the raising of old crop and new crop carryout levels by 50 million bushels apiece, as well as the trimming of US exports by 50 million bushels, was the most notable. None of those could be construed as bullish, yet the market seems to focus instead on the fact that US corn inventories will remain below 1 billion bushels for this year and next despite a surge in US corn production this summer. Also, given that the current weather is so far not deemed as conducive for a truly large crop, even those carryout levels were only penciled in lightly.
Overall, this market has been firmly entrenched within a narrow trading band for over two months, as traders waited to see how the US planting and growing season went. So far the big acreage number - estimated at more than 90 million acres by the USDA - has acted as a drag on prices, but continued strong demand, and recently, tricky growing conditions, have also limited downside pressure.
Now that we are a bit deeper into the growing season, traders have shifted their focus to growing conditions throughout the growing season, especially during pollination when weather can play such a decisive role in determining yields and overall crop size. The current dry weather outlooks don't yet extend into that crucial period, but will start to do so for some areas within the next few weeks. As a result, any changing weather forecasts, and not USDA data, will likely by the key driving force in moving prices over the rest of the summer.
That said, the USDA's key quarterly stocks report, due June 29, will offer fresh updates on inventory levels and other key statistics, and so could well prompt a price response well before large-scale pollination gets underway. In other news today, inspections of US corn for export came in below analyst estimates at 27.861 million bushels, compared with expectations in the 40 to 45 million bushel region. This afternoon, we are due another weekly crop conditions update which should shed fresh light on the state of the US corn crop currently in the ground.
Technicals:
No technical comments today
Recommendations:
Speculative:
NONE
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
CBOT July soybean futures peaked at $8.37 a bushel and contract highs Monday before closing out the session at $8.30 as the initial buying enthusiasm waned and made way for late-session profit taking. The dry weather outlook that lifted the corn market Monday did the same for the beans in early dealings, especially the prospect of a moisture-blocking ridge formation.
Continued dryness in the Delta and parts of the Southeast also buoyed prices. Technical momentum also played a constructive role as previous resistance levels were bettered to draw fresh chart tracking traders to the buy-side of the arena. In addition, the USDA report that revealed that 2007-08 US ending stocks would nearly halve to 320 million bushels versus the end of the 2006-07 marketing year was also supportive.
However, bean prices have managed to score contract highs repeatedly over the past few days so plenty of scale-up profit taking took place into the strength to slow overall upside momentum and ensure prices closed off their highs. Nevertheless, the late selling pressure remained fairly light given the market's uncertain production outlook, and this bullish future is expected to continue offering cushioning to prices going forward.
Export inspections this morning were 10.874 million bushels, versus 5-10 million expected by analysts. On the product front, soy meal and soybean oil both finished higher in line with the general tone of trade elsewhere, although overall activity levels in both of those markets were well down versus the other market markets.
Technicals:
No technical comments today
Recommendations:
Speculative:
NONE
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
US wheat futures bolted sharply higher Monday on strong speculative buying and short covering sparked by bullish technical momentum, an uncertain production outlook and the prospect of recording the lowest inventories in 30 years despite steady advances in production over recent years. While this market had been in a broadly bullish mode in recent weeks anyway, the USDA's report Monday kicked the buying interest into a higher gear.
In addition to noting that global wheat ending stocks for 2007-08 look set to register a 30-year low, the USDA also pared their estimate for US all winter wheat production, against expectations to the contrary. This theme of stuttering production matched with steady erosion in world wheat stocks has sent global wheat prices to multi-year highs over the past month or so, and looks set to remain a supportive influence on prices going forward.
However, the US winter wheat harvest is currently underway and despite a potential overall production shortfall, those producers who are currently engaged in gathering their crop will no doubt be delighted so see which high prices prevail at this time in the season - and will likely be hedging aggressively accordingly.
Consequently, while an uncertain general production outlook should keep prices well underpinned, sporadic hedge selling pressure can't be ruled out from time to time to keep price activity fairly choppy. Export inspections this morning were 8.239 million bushels, well below the 15-20 million expected by analysts and 16.7 million registered the week before. However, as we stated above, the onus in the market currently is on production, and not supply, and so this somewhat disappointing news was largely ignored through the session.
Going forward, trader focus will remain on global production progress, especially in the Ukraine, Russia and Australia - major exporters who have so far this year had less than ideal planting/growing weather that could undermine their ability to produce a surplus crop for the export market. The state of the US winter wheat crop will also remain closely watched, and this afternoon is expected to reveal a slight rating drop akin to the USDA's downgrade announced this morning.
Technicals:
No technical comments today
Recommendations:
NONE
Speculative:
NONE
Beef....Feeders closed sharply lower in reaction to the jump in corn prices. The live cattle worked lower during most of the session only to snap higher late on large buying by three or four brokers. The show list size is reported about the same as last week. The trade is likely probing for a seasonal low which some sources indicate could develop this week. The beef was stable at noon on moderate box beef volume. Today's kill was pegged at 129,000 compared to 121,000 last year. Look for some upside follow through Tuesday as the live cattle attempts to forge a seasonal low.
Pork....Cash hog prices were quoted steady to lower but the outlook for the middle part of the week is for a steady to firm tone in the cash hogs. The board closed mixed with solid buying in the July futures while the expiring June finished slightly lower. The debate remains whether seasonal strength is possible in the hog market or if a top is already in place.
It appears that rising feed costs will restrict expansion as many producers will be faced with losses for several months this year. In the meantime, light average hog weights will continue to present a bullish fundamental. Today's kill was pegged at 375,000 compared to 389,000 last week and 344,000 last year. Look for the hog numbers to begin tapering off for the remainder of June. In the short term, I'd be looking for seasonal strength in cash, futures and the dressed pork, especially in the face of continued strength in corn prices. The dressed pork was lightly tested at noon. However, hams appear to be in good shape, quoted steady to up 2 cents with loins and bellies not tested.
Positions:
New Recommendations:
None
