Thursday, June 28, 2007
888-452-8751
Fundamentals:
CBOT Dec corn remained under pressure more or less from the opening bell Thursday as traders continued to pare down exposure ahead of Friday's USDA report and in advance of the month/quarter end. Weather forecasts for continued rains through the Midwest into July also cast a bearish shadow over the market, and ensured potential buyers remained fairly scarce throughout. The market is clearly in the grips of a liquidation phase at the moment that appears not to have run its course yet, and we could well be in store for a final burst of liquidation pressure Friday as the second quarter of the calendar year wraps up. Open interest in corn has declined sharply in recent weeks, but there are still more than 1.17 million contracts open (versus around 1.26 million contracts as of mid-June), some of which could yet be taken out. Whether or not more longs bail really depends on tomorrow's report on acreage and quarterly stocks. The market seems to be bracing for a higher acreage figure as estimates are averaging around 90.585 million aces while the USDA's previous projected total was 90.454 million. On the quarterly stocks figure, estimates average around 3.467 billion bushels. If the USDA comes out with a higher acreage total it previously projected, and pegs quarterly stocks (as of June1, 2007) at 3.5 billion bushels or higher, then we could well see a fairly aggressive selling spree smack the market lower. And any such slide could be accentuated further if weather forecasts continue to call for rains and somewhat cooler temperatures as the corn crop's pollination phase gets under in July. However, this market's demand story remains more than solid, and will only strengthen further if prices decline to benefit corn users. Export sales have been consistently decent for the past several months and once again this morning were strong at over 988,000 metric tons, while corn is already staking an increasing claim to feed rations versus wheat on the back of wheat's recent red hot rally. Meanwhile, ethanol producers will be delighted to see lower corn input costs as they continue to pursue expansion plans. So, while we have to allow for a further shakeout of this market over the near term, we still like corn's prospects from a longer-term perspective and fully expect to see prices regain a rising path once the current liquidation phase is over.
Technicals:
December corn was lower, trading in the lower-range of yesterdays big down day. This looks like consolidation. The low-range close below the pivot point suggests a bearish bias for Friday. There is the potential for a gap lower open, but that would look like an exhaustion gap. Support is the 138% retracement of the June rally, which coincides with the spring low of 354.5. A move below that would seem likely to trigger sell stops, but this market is oversold. Directionals are still trending lower to favor the sell side. Resistance should be the lows of the early- week trade in the 373 area.
Recommendations:
6-29-07: Buy 1 December Corn on a close above $3.69.
Speculative:
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
The soybean market ended higher Thursday as friendly numbers this morning and uncertainty over what Friday's reports will bring likely fueled some small speculative buying interest as well as spurring some short covering. New crop November futures ended the day with 4 ¾ cent gains, while meal futures sagged slightly and soybean oil closed firmly with 53 points gains on the day. This morning's sales figures were fairly good for this time of year for the entire complex, and that likely sent a small wave of speculative buying interest into the market when prices dipped lower. Old and new crop soybean sales were decent at 247,900 tons, meal sales were fair at 78,300, but oil sales were stellar at 29,300 tons, which marked the third week in a row over 20,000 tons of sales. Crush figures were fairly bullish throughout the complex as well, with crushings coming in nearly 800,000 bushels over the high end of trade estimates along with seeing product stockpiles drop sharply from April to May despite the higher crush. All these figures combined to keep thoughts of good domestic and foreign consumption for US soybeans and products fresh in traders' minds ahead of Friday's reports. And speaking of Friday, it will mark quite a day for the markets as it brings with it both the Quarterly Stocks and Acreage reports as well as first-notice-day against the July contracts and end-of-the-month/quarter. That said, for third quarter ending stocks estimates are running in the 909-1.12 million bushels range, which should be a record third quarter stocks figure. Soybean acreage is seen coming in anywhere from 66-69 million planted acres, versus USDA's March intentions estimates of 67.14 million acres and 75.522 million acres seeded in 2006. Also, we will also get a June 1 hogs and pigs report, with average guesses for herd size running at 101.4%, kept for breeding 100.5%, and kept for marketing 101.5% versus year-ago figures. Estimates for deliveries against the July soybean contract range from 1,000 to 2,500 contracts, meal deliveries are estimated at 0-300 lots and oil at 1,000-3,000 lots. So, Friday will give us a lot of new data to digest, and we'll have to reassess where the market stands after its release. However if the soybean market does realize some acreage loss to corn then the market should continue to enjoy support, as we need to keep prices high in an effort to get South America to account for year-on-year acreage losses in the US.
Technicals:
November soybeans were higher on Thursday. The action continues to look like consolidation after last week's sell off. The last four sessions have consolidated between the 50% and 38% retracement of the May-June rally. The trade is still above the 40, 50, and 100-day moving averages to suggest that the long-term trend is up. Directionals are trending down to favor the sell side, but seem to have lost some momentum this week. Resistance looks to be previous support at 847. Support looks to be the lower Bollinger Band and the 40-day moving average in the 827-832 area.
Recommendations:
Speculative:
6-29-07: Buy 1 November Soybean on a close above $8.48.
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
CBOT wheat futures put in another solid showing Thursday as lingering concerns about global production capabilities continues to stifle selling interest. Dec wheat on the CBOT closed out the day 4 ½ cents higher, while Minneapolis Dec wheat settled 9 ½ cents up. More rains in the already soggy wheat belt offered most of the support as farmers continue to have their hopes dashed of a pick up in the harvest pace. A bullish report from the International Grains Council also buoyed the market after the group lowered its global wheat output total by 7 million tons to 614 million tons due to recent drought in key growing areas. The demand side of the story has also been supportive lately, especially this morning's export sales total of 622,800 metric tons, which came in more than 100,000 tons above analyst estimates even though prices were comfortably above $6 a bushel throughout the period concerned. Despite all this, the market is beginning to look a bit heavy, so may struggle to aggressively extend its recent upswing as we end the month and quarter and hedge selling continues from the US farmers who have been able to gather their crop. Indeed, we would not be surprised to see prices come under some form of pressure Friday if the USDA report does deliver a fresh bullish take on the state of the market. Certainly there are still a huge number of concerns about production prospects globally, but we have already priced in such issues so need something new to fuel another round of buying - or else we will likely encounter heavy spurts of liquidation and profit taking as the week wraps up. Another factor to bear in mind is that the longer wheat maintains such a steep price premium to corn - more than $2.70 Dec wheat versus Dec corn Thursday - the less appealing wheat will be to feed purchasing managers and other users of wheat who can somewhat easily substitute to another crop. For Friday's report, the average trade guess for all wheat acreage is running at 60.350 million versus the USDA's previous forecast of 60.303 million in March and 57.344 million last year. Spring wheat estimates are running around 13.835 million versus 13.807 million estimated by the USDA in March, and Durum acreage is seen at 1.996 million versus 1.990 million forecasted in March. The average trade guesses for final stocks for the 2006-07 marketing year are running in the 422 million bushel arena versus 417 million estimated by the trade currently and 571 million last year.
Technicals:
December wheat was higher, failing to confirm yesterday's potential reversal top. The action looks like consolidation; with the mid-range close at the pivot point suggests no particular bias for Friday. This week's higher price levels came with relatively lower values of Stochastics and RSI. This divergence should attract technical selling, especially as the directionals are trending down from an oversold condition. A move lower to test the uptrend line drawn off the recent lows should be expected. That support is 616. A bounce from there could prompt ideas of a head-and-shoulder top formation. The potential "head" came with lower open interest which makes such a formation more credible. Resistance looks to be around the left shoulder high of 637.5 and the contract high of 646.5. This area may be worth a sell.
Recommendations:
NONE
Speculative:
NONE
Beef:
Live cattle futures posted strong gains on Thursday, rallying right into the close. The bullish mentality was very evident, despite nothing particularly significant to lead the way higher. Funds were noted buyers. Technical traders were on the buy side following yesterday's reversals. Fundamental types that follow the beef were buyers as the beef market is showing a potential bottom at this floor level. June was the upside leader as there was optimism that the higher futures would trigger higher cash prices than seen earlier this week. I still haven't seen or heard of any cash trade out of the Southern Plains. June futures expire tomorrow so at about 87.00 and a typical premium for the cost of delivery it would seem to suggest a cash price of $85-86. The August contract didn't register near the gains of the others, as it remained under pressure from the spread trade. The pre-Goldman roll had longs selling August buying October to move their positions. None-the-less, August futures traded and closed above the expected resistance at the 10 and 20-day moving averages in the 90.10 area. The strong close leaves the potential for a gap higher open. Such a gap would look like a break-away gap, but as a measuring gap would give an upside objective over 92.00. A bearish corn number in tomorrow's USDA report would be one reason for such a gap. Another reason would be stronger than expected beef numbers in this afternoon's report.
Feeder cattle futures were sharply higher, posting triple digit gains on the close. There isn't much new to offer from what I wrote at midday. Plus, tomorrow's direction will likely be a result of what USDA reveals about corn acreage. That report is scheduled for Friday at 7:30am Chicago time. If it is much different than expected, there is the possibility that some cross-trading may occur in the electronic cattle market until corn trading opens. If there is very much of this, it will make things volatile if there isn't enough to take the other side. August feeder cattle punched up through resistance of the 100-day moving average of 109.26. The strong close suggests a bullish bias and leaves the potential for a gap higher open. Such a gap would give an upside objective of about 112.50.
Lean hog futures were mixed at the end of Thursday's day session. July was the downside leader, pressured by weak cash fundamentals that included lower cash hog prices and a lower pork cutout value. The gains were limited as futures hold a sizeable discount to the lean hog index. The deferred contracts managed slight gains, finding buying due to spillover from the sharply higher cattle futures complex and short covering before tomorrow's USDA reports. December hog futures are oversold, having fallen $6.00 while corn future have plunged lower (lower corn prices more pork production). The talk is about larger than expected expansion. Thus, if tomorrow's Hogs and Pigs report is in line with the published pre-report guesstimates (breeding herd at 100-101% of last year and market hogs at 101-103% of last year), then futures would seem likely to rally.
Milk futures were limit down. The synthetic price wasn't as low as earlier in the day, as sellers worked their way out via options or selling the deferred contracts. The thinking is another 20 cents lower for the July contract rather than the 40-50 cents at midday. The limit-down action expanded from the third quarter contracts all the way through the March 2008 contract. The losses were attributed to profit taking, so maybe finally we will see open interest going down. There are still a lot of longs in here as open interest was a record large 41,744 contracts coming into today's trade. Cheese prices were sharply lower to prompt "the running for the door" selling. The dairy product prices are still at a level that supports $20 milk. Thus, the direction from here depends on whether cheese prices go lower or not.
Positions:
6-21-07: Sold 1 August Live Cattle @ 89.92 - liquidated at 88.35 (Profit = 230.00 less commission)
New Recommendations:
6-28-07: Buy 1 August Live Cattle @ 89.57 Stop Close Only.
