Monday, June 18, 2007
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Fundamentals:
CBOT Dec corn bolted sharply higher on the open Monday to fresh contract highs of $4.31 per bushel after dryness over the weekend in key growing areas spurred traders to steer the market higher on concerns that the arid growing conditions would leave the crop struggling to maximize yields. However, some light rains were called for in the near term weather outlooks, and their existence, coupled with the fact that Dec prices were at contract highs, spurred some trader profiting taking and light short selling that pressured prices lower as the session progressed.
Despite the softer finish, overall selling pressure remained contained by the lingering uncertainty regarding the overall state of the US crop, which still remains in its formative stages. A fresh update on how its faring is due later in the USDA's weekly crop conditions report, although traders are looking beyond that release towards weather conditions that will prevail in key growing areas over the coming week or so.
Right now, it appears that if the rains called for in the near term forecasts manage to fall on dry parts of the Eastern Corn Belt, they could certainly replenish some of the soil moisture that has recently dried out. However, a true soaking rain is still not on the horizon, and until such a system arises, corn prices will likely remain fairly well supported into any spates of weakness. Export inspections this morning came in within trader estimates at 37.260 million bushels, compared with 34.277 million bushels last week. For this afternoon, US crop conditions are expected to decline by 2-4 percentage points from last week's 77% good to excellent rating.
Technicals:
December corn was slightly lower on Monday after putting in a new contract high. This reversal formation is likely to attract technical sell pressure, especially since Stochastics and the RSI show an overbought condition. There are multiple times that reversals were scored in June and proved unfruitful to sell, which should make sellers a bit cautious. The low-range close below the pivot point suggests a bearish bias for Tuesday. The chart overview looks like a breakout of the March-May correction to continue the longer-term uptrend. The 138% of the correction suggests an upside objective of about 460. Resistance is the contract high of 435. Support is the previous swing highs of 408.75 and 401.
Recommendations:
Speculative:
6-19-07: Sell 1 Dec Corn @ $4.15 ½ stop close only.
6-19-07: Sell 1 Dec Oat @ $2.88 3/4 stop close only.
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
CBOT soybean futures pulled out some fair gains Monday, with July futures settling up 8 cents at $8.55 ¼ a bushel and new crop November contracts up 8 ¼ cents at $8.89. The trek to the upside continued with fresh life-of-contract high closes across the board. Weather outlooks, uncertainties over crop condition figures this afternoon, and more strength in the Brazilian Real versus the dollar raising questions over the future of soybean expansion/production were all ongoing themes that aided another round of speculative-led buying interest.
Day session price action didn't quite seem the same strength that was witnessed overnight, as November contract highs topped out at $8.93 cents per bushel, which was 3 ¼ cents shy of overnight highs. Forecasts and expectations of a drop in crop conditions this afternoon, somewhere in the area of 2-5 points in the good-to-excellent category, were the main culprit that spurred the overnight strength, although the follow through buying interest failed to maintain its momentum as the day trade progressed. Export inspections fell shy of traders' expectations, coming in at 4.9 million bushels with the trade expecting a figure in the neighborhood of 7-10 million.
On the forecast front, it would seem that drought areas are set to expand further into the Southeastern Midwest and Delta growing regions as we see only limited chances for moisture on the near-term horizon. Also, adding to the firmer tone of the market was a correction in the long grains versus short soybean inter-market spreads.
Looking to the ongoing currency situation, the Brazilian Real made fresh highs against the US dollar today, which further added to the uncertainty of the future of soybean expansion by the smaller producers in Brazil. It would seem that the same stories of uncertainty over production prospects here in the US, and expansion possibilities around the globe, are going to continue to underpin values as we move forward.
But weather is the primary driver of these markets, and will continue steer prices going forward. If an all-encompassing rain event doesn't alleviate drought conditions in certain growing regions of the US, the market is sure to press higher in an effort to encourage expansion in global production, as demand will continue to grow, especially with bio-fuels gaining popularity. But the bears will contend that we will see at least some moderate relief to drier growing regions, and we still have until August when the soybeans will enter their most critical growing phases.
Also, technically speaking, the market has entered overbought conditions, and if crop condition reports come out closer to unchanged levels this afternoon, we could be in for a slight downward correction. On the products front, both soybean meal and soybean oil futures pushed higher in line with the beans Monday, and both markets look set to remain close followers of the complex leader going forward.
Technicals:
November soybeans were higher on Monday, pushing to another new contract high. Session weakness came back and filled the opening gap, doing away with what looked like a possible exhaustion gap. The close was mid-range, giving no particular bias for tomorrow's trade. Stochastics and RSI are slowly trending down from an overbought condition to suggest divergence and attract technical selling. Support has been the 10-day moving average, which is 864.5 and rising. Resistance is likely going to be the psychological 900 level.
Recommendations:
Speculative:
6-19-07: Sell 1 November Soybean @ $8.60 Stop close only.
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
Consolidation was the name of the game in wheat Monday as traders took a pause from their recent buying exertions and allowed prices to tick quietly sideways to slightly lower over the course of Monday's session. CBOT Dec wheat finished out the session with a modest gain, but actually started out the day with a setback to the $6.19 ½ a bushel vicinity after profit takers dented global wheat values overnight.
This selling pressure persisted throughout most of the session, but sell side volumes remained light throughout given the lingering uncertainty regarding wheat's overall production prospects. Fresh reports calling the current dryness in the Ukraine the "worst drought in a century" served to highlight how extensive the challenges are for wheat producers, and how important a role Mother Nature continues to play in crop development.
Also, the demand side of the story remains healthy, with Morocco this morning reporting a tender for 250,000 metric tons of EU soft wheat. Export inspections this morning meanwhile surpassed analyst estimates at 16.390 million bushels, versus 9.095 million bushels last week. For this afternoon, good to excellent ratings for the US winter wheat crop are seen falling by 2-3 percentage points due to lingering wetness in the US Plains which is slowing harvest. Conditions of the spring wheat crop, meanwhile, are seen flat to slightly higher.
Looking forward, wheat prices could well encounter additional profit taking over the near term that could make for some further choppy price action. But, global production prospects remain meager at best, and global wheat inventories are widely reported to decline to their lowest levels in three decades by the end of the current marketing year. As a result, while we cannot rule out additional whippy movement in both directions, we expect this market's overall bias to remain to the upside for the foreseeable future.
Technicals:
December wheat was slightly higher, continuing to consolidate after the recent surge higher. Support looks to be about 615 and resistance is about 630. The mid-range close near the pivot point suggests further consolidation. Stochastics and the RSI are overbought, likely to attract technical selling. Open interest is increasing on the sharp rally, suggesting a bonafide bull market. A 38% retracement of the recent steep rally would be all the way back to the 576 area.
Recommendations:
NONE
Speculative:
NONE
Beef:
Live cattle futures were mixed at the end of Monday's day session, showing slight gains for the 2007 contracts, but steady to slightly lower for the 2008 contracts. The most active August contract closed near session highs just below resistance of the 40, 50, and 100-day moving averages (91.47, 91.55, & 91.46 respectively). The October contract continues to find support from last Monday's minor reversal bottom, also running into resistance at a host of moving averages in the 95.25 area.
Futures seem to be a little ahead of themselves based on current cash fundamentals, but that is their job. Show lists in total look to be larger than last week, so it seems unlikely that packers would raise bids this week with beef prices only supporting a packer breakeven pay price of only $89. Beef movement for the domestic market last week was down 5% from last year, and increased exports are not making up for that. Obviously the beef market will need to be strong to support the price premium built into futures.
Feeder cattle futures were lower, pressured by ideas of higher grain prices. Corn actually closed lower, helping futures to close nearer to its session highs. Trade volume was quite light, estimated at less than 3,000 contracts. Trade action looks like consolidation between last week's highs and lows, which for the August contract was 108.25 and 105.50, respectively. The direction of any breakout of this consolidation range seems largely dependant on the weather and how well beef demand holds up amid high energy prices.
Hogs:
Lean hog futures were lower at the end of Monday's day session. July led the way down, finding pressure from ideas that futures had moved to too much of a premium relative to the lean hog index. Cash hog prices were higher, suggesting that that the lean hog index will continue climbing higher.
However, the bearish mentality ruled because the pork market hasn't been able show strength to maintain an upward cash price direction. Hog slaughter was pegged at 387,000 head, up from 375,000 a week ago and up from 347,000 a year ago. The higher numbers seems likely to attract additional sell pressure on further talk of larger than expected supplies.
Estimates for next Friday's Hogs and Pigs report are starting to circulate. Expectations are likely to for a 1-2% increase in total and market hog supplies, with a slightly larger breeding herd number. There was a university study released last week that suggested faster expansion than what the March report suggested, which could keep a cap on any further rally this month.
Positions:
New Recommendations:
6-19-07: Buy 1 August Live Cattle @ 90.20 - risk a close below 88.00
