Tuesday, June 19, 2007
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Fundamentals:
Decent rains across Midwest growing areas washed the corn market sharply lower Tuesday, knocking both the July and Dec contracts to their exchange-imposed limit lows amid active trade. The downdraft marks quite a turnaround from the tone of trade at the opening on Monday, when Dec prices scaled contract highs on the back of persistent dryness across much of the Eastern Corn Belt. And it also comes against an ostensible bullish downgrade in the USDA's crop condition estimate from 77% last week to 70% this week due in large part to the dryness that had been prevailing up until this week. However, just as the threat of lingering dryness lifted corn values sharply higher, the actual arrival of rains aggressively shunted it lower as traders scrambled to get ahead of the rest of the pack. Technical factors also played a decisive role Tuesday as Dec prices slipped below recent support levels to close below the 10-day moving average in place around $4.06 ¼. More chart-based sales can't be ruled out given the obvious strong downside momentum characterizing prices Tuesday. Indeed, more weakness would have been seen Tuesday were prices allowed to decline more than the 20 cents limit imposed by the exchange. Options-related activity suggested that synthetic July corn futures traded 4-6 cents below the officially quoted low ($3.96), which would have dragged the market back towards the $3.90 level, while synthetic Dec futures traded as low as $3.98-4.00. Any further slippage would draw the $3.85 area into view as a potential goal for the July contract, while in Dec futures the 100-day moving average in place around $3.92 ½ could well be targeted should the downside momentum remain intact. Looking beyond technical drivers, corn looks set to continue ‘ping ponging' back and forth on every changing weather update. More rains will equate to more selling, as much of the cropland in the Midwest has been denied steady rains for the past several weeks and regular showers are required going forward for maximum crop development. However, any drying up in weather outlooks for key growing areas - especially in forecasts that reach into the month of July - will be supportive for corn prices, as the corn crop will become increasingly needy of moisture as the crucial pollination stage approaches. So while we expect corn to remain in the grip of a liquidating market over the near term, look for any weather model updates that pare back rainfall expectations to have a supportive effect on prices. Also, bear in mind that large parts of the US Southeast and Delta region remain hot and dry, and if they stay that way through pollination the corn crops there will have a tough time recording hefty yields.
Technicals:
December corn was limit down on Tuesday. The lower action puts an exclamation mark on the confirmation of yesterday's contract high reversal. The low-range close below the pivot point suggests a bearish bias for Wednesday. However, the sharp sell off has already retraced 50% of the June rally. Stochastics and the RSI show the start of a downtrend from an overbought condition that could attract follow through selling. It is not uncommon to get some back and fill after a confirmed reversal. Resistance is the contract high of 435. Support is the previous swing high of 401 and the 396.5-398.75 gap.
Recommendations:
Speculative:
6-19-07: Sell 1 Dec Corn @ $4.17
6-19-07: Sell 1 Dec Oat @ $2.88
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
CBOT soybean futures saw sharp losses with the rest of the agricultural arena in Tuesday's session. Crop condition ratings dropped 5% from the good-to-excellent category, and weather forecast models seemingly have increased chances for precipitation for central IL, and central IN nearly through the remainder of the week. Today was mostly weather-related, so generally speaking other fundamental factors were brushed aside for the day. We have showers passing the Ohio River Valley today with more rains forecasts throughout the week to favor Midwestern, northern and eastern sections of the Corn Belt through Saturday. One forecaster stated coverage is expected to be 55% of growing areas, with at least 0.5-1.5 inches of rain locally with up to 4.0 inches in some areas. This was a slight increase in precipitation potential from earlier outlooks, but it was also mentioned that rains are not likely to bring much in the way of relief to dry Southern and Delta growing regions. Furthermore, for what its worth, the later outlooks still look to bring above normal temperatures and below normal precipitation throughout the Midwest, although the 11-15 day forecast did bring better chances for more precipitation in the far eastern Midwest compared to previous forecast models. Participants must keep in mind that there are many weather forecasters out there with varied opinions, but today's price action firmly stated that it looks as though we are in for a wild ride in this weather market, especially with the situation of global agricultural staple balance sheets. In our opinion, the showers, if developed as forecasted, will bring needed relief to some crop areas in the Midwest and eastern sections, which is likely to aid crop conditions. But, we still have an on-going drought in the southeast and Delta growing regions, which doesn't look set to see much relief in any of the outlooks. Furthermore, August is the most critical timeframe in which most growing regions will need to have adequate moisture supplies and field/growing conditions for optimal soybean yield production potential, but that's not to say that adequate moisture and moderate temperatures couldn't aide the crop in early development stages. News wise, there just isn't much to talk about other than the same old ongoing themes. The Brazilian real remains at its highs versus the US dollar, and this could limit expansion by smaller Brazilian soy producers when it's time for them to set their planting intentions. And this will continue to bring into question the ability of South American acreage expansion, in Brazil in particular, to make up for the year-on-year acreage losses that we have witnessed in the US this marketing year. In other news, midday Gulf barge basis quotes on the news wire services saw bids a shade weaker. Technically speaking, the market saw a rather poor close after witnessing new life-of-contract highs Monday, and we did close the November contract under the widely watched 9-day moving average that has been a relatively fair support level since the May USDA report. In addition, the market was holding above our pivotal price area, and after today's sharp slide we have watched the market pull out of overbought conditions and now have to watch open interest reports to see if today's forecast was enough to spur some more speculative long liquidation after watching open interest reach record levels. Looking forward, weather is set to remain the primary driver of the market, but all other major themes still apply. The US carryout will undoubtedly shrink due to lower planted acreage intentions and global production/carryout projections still remain in question. However significant changes in the forecast are sure to cause volatile price swings and technical momentums can quickly change with the weather forecasts.
Technicals:
November soybeans were sharply lower on Tuesday. The push lower found support around the 10-day moving average of 865.1 and the uptrend line drawn off the early May lows. That uptrend line held as support two other times this month to give it more credibility. Next support looks to be the 20-day of 851.5. Key support is seen at 843, which as previous contract high also roughly coincides with the 385 retracement of the May-June rally. The low-range close below the pivot point suggests a bearish bias for Wednesday. Stochastics and RSI are slowly trending down from an overbought condition to suggest divergence that should attract technical selling. Resistance is likely going to be the psychological 900 level.
Recommendations:
Speculative:
6-19-07: Sell 1 November Soybean @ $8.60 Stop close only - OR - $8.90
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
CBOT wheat prices got caught in the selling spree that dented corn and soybean values Tuesday and closed out the day with over 20 cents losses in the July and Dec 2007 contracts. A drier weather outlook for parts of the US Plains, which will allow harvest to pick up pace over the coming days, also lent on prices, as did reports of rains in parts of Australia where dryness has so far had raised concerns about crop production problems. But, most of the selling pressure Tuesday was merely by association with the sharply softer corn market, as speculators moved ‘en
masse' to whittle down long sided exposure to the grains arena. As a result, more softness in wheat values cannot be ruled out going forward if corn prices remain on the defensive. However, given that the global production outlook for wheat remains meager due to the continuing drought in parts of the Ukraine and the Balkans, any extended spates of wheat prices weakness should be viewed as a buying opportunity, especially since the USDA only recently projected that global wheat inventories will register their lowest totals at the end of this marketing year in 30 years. For the time being, though, this market's path of least resistance lies to the downside, so look out for additional softness over the near term. Price-wise, any slip in Dec wheat futures to below the $6 a bushel mark brings the $5.90 area into view as a potential downside goal. In the news today, the Australian Bureau of Agricultural & Resource Economics, or Abare, pegged Australia's new wheat crop at 22.5 million tons, down from its March estimate of 25 million but in line with the U.S. Department of Agriculture's June estimate of 22.1 million.
Technicals:
December wheat was sharply lower, quickly correcting for the steep gains this month. There are no specific sell signals, although the chart was/is overbought as seen by the high values for RSI and Stochastics. Some consolidation seems in order. Support looks to be the 10-day moving average of 591.5. Resistance is the contract high of 628.75. The low-range close below the pivot point suggests a bearish bias for Wednesday. Open interest increased on the sharp rally, suggesting a bonafide bull market currently looking for a correction. 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 Tuesday's day session. June was lower, with the other contracts showing slight gains. June was pressured by weak cash fundamentals, with bear spreading also offering pressure while supporting the deferreds. Futures closed near session highs, bouncing off the lows as feeder cattle posted impressive gains on the limit down corn futures. What had looked like an outside-down day turned out to be an outside up-day. The higher action still respected recent resistance, once again positioning to either fail or insight a breakout. The resistance for the August contract is the 100-day moving average of 91.50. It would see likely that there are buy stops above there that would be triggered on any further rally, and likewise for the October contract in the area of its 100-day of 95.18. The more deferred contracts hold even higher prices as they show the optimism based on the idea that high corn prices, high hay prices, and drought concerns have limited expansion and perhaps prompted liquidation. There is also optimism that the export market can only get better as well.
Feeder cattle futures were sharply higher, finding support from the limit down corn futures. The strong gains still only took futures up to the 100-day moving average of 108.70, positioned for a test and failure or a breakout to the upside. Corn prices will have a lot to do with what happens. Cash feeder prices that I saw were generally lower, but markets for today may be more optimistic than yesterday's cash action. All in all, futures look too high based on the ability for feedlots to turn a profit, but then that is and has been the general case for cash feeder prices. Cash feeder prices of $90-100 seems much more realistic than the $100+ prices, but maybe that is me just living in the past. Perhaps the "fix" that needs to occur is for fat cattle prices to move another step higher.
Lean Hogs:
Lean hog futures were lower at the end of Tuesday's day session. October seemed to be the focus of the selling, down over 100 points, but likely was due to a relative lack of volume amid the sell pressure. The selling seems attributed to longs giving up, concerned about talk of larger-than-expected hog numbers. Hog slaughter so far this week is up 7.5% from last year to give some credence to that talk. Other fundamental factors offer support to the bulls. The National Base report showed weights down about a pound from last week. The negotiated hog prices have been higher than the formula prices, which typically suggest strong packer demand. There are reasons for the pork cutout value to hold up, with July Fourth and BLT demand still to come this summer. There are years where cash hog prices peak in July or make a second peak in August. Futures seem to be expecting cash market weakness around the July Fourth holiday due to reduced slaughter schedules, with seasonal weakness continuing for the most part into the November/December lows.
Dairy:
Milk futures were widely mixed, with July up 13 cents, but August down 11 cents. Traders seem to be looking at strong support for the nearby market, but that increased production and some consumer reluctance to higher prices may make for lower milk prices into the fall. The Milk Production report showed cow numbers on the increase
Positions:
New Recommendations:
6-20-07: Sell 1 August Live Cattle @ 90.20 stop close only.
6-20-07: Sell 1 August Lean Hog @ 75.50 - risk a close above your entry price.
6-20-07: Sell 1 August Dairy @ 20.50 stop close only.
