Friday, July 06, 2007
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Fundamentals:
CBOT Dec corn futures were boosted Friday by a strong weekly export sales report and a bullish near-term weather outlook that denies the emerging crop the moisture it needs for successful development. Exports this morning were nearly 2 million metric tons for old and new crop combined which was well above analyst estimates and reinforced the sense that this market remains solidly underpinned by strong consumer demand. This upbeat sales figure added to the already positive mood of the market that had been lifted by near term weather outlooks that scaled back precipitation expectations while maintaining forecasts for hot weather across the Midwest over the coming days.
As the corn crop needs an increasing amount of rain while pollination takes place throughout the coming weeks, even a temporary shortage of rainfall is viewed as a supportive development for the market. Rains are still on the agenda in the longer-term models, but until they actually douse cornfields throughout key growing areas, this market will likely remain well supported.
Aside from eyeing the weather, the trade will be looking to position themselves ahead of next week's USDA monthly supply and demand report due Thursday, which will provide the market with the latest official estimates on the market's main statistics. There is a general sense that corn's feed demand component could be in for a change from last month's release, given the gaping chasm between wheat and corn prices over the past month or so that some thin may have prodded feedlot managers to opt for greater corn usage at the expense of wheat.
That said, as corn prices themselves have also been strong and volatile in recent weeks, others are expecting corn feeding totals to show weakness. This line of thinking has some backing in the recent USDA quarterly stocks report, which hinted at a slower feeding pace in the quarter up to June 1 via slightly higher inventories. We will have to wait and see what the report holds, but until then expect weather reports and position adjusting to dominate activity and likely make for fairly choppy price action. In the news today, market analysts Informa pegged US corn production at 13.375 billion bushels for the 2007-08 marketing year, using a yield of 156.6 bushels an acre.
Technicals:
December corn was higher, finding buying after yesterday's inside-up day which is a buying signal to some technicians after a steep move down. The high-range close above the pivot point suggests a bullish bias for Monday. Support now looks to be the previous resistance in the 315 area. Resistance is previous support at 354.5. Directionals seem to have turned, with the RSI now trending higher from its oversold condition. Stochastics looks to have crossed and ready to give a buy signal.
Recommendations:
NONE
Speculative:
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
Soybean futures were the featured price gainer for most of the session Friday, although corn gave it a run for its money and wheat rallied into the closing moments while the soybeans backed off their daily highs. On the week, the market posted just over 14 cent gains, basis the November contract, as the trade continues to digest the sharply lower US acreage forecast that the USDA revealed to us last Friday, and tries to get an early gauge on yield potential.
All things considered, the market held up fairly well in the face of mixed news reports this morning, and we have to assume that Friday's gains were largely attributed to weather forecasts that could adversely affect the crop if they don't bring some more all encompassing rain events into drier areas ahead of August.
As we've mentioned before, August weather is the most critical time for soybean reproduction, however with the progression of the crop being a bit ahead of normal this year, due to the swift pace of plantings, we are going to need to have adequate moisture throughout the coming month if we are to achieve above trend line yields, and keep year-on-year production forecasts from falling and even further and depleting new crop carryout levels.
Analysts Informa were out this morning with fresh insights as to their thoughts on US new crop production prospects. They have pegged US soybean production at 2.719 billion bushels, using a 43.0-bushel per acre yield estimate. For our part, we still contend that it is a bit too early to assume better than trend-line yields until we get into more critical growing stages and we get a chance to see how the weather plays out.
In other news, sales for the week remained solid as the whole complex was within or above trade expectations. Soybean sales came in at 328,400 tons for both old and new crop years, meal totaled 99,800 tons, and soy oil came in at a chunky 13,600 tons. However, these numbers came on the heels of news that China may be looking to washout on soybean purchases between now and August, or at least attempt to slow the pace of shipments coming into the country, in an effort to boost crushing margins that reportedly have turned negative in some areas.
Technicals:
November soybeans were higher on Friday and for the week. Action most of the week has been consolidation around last Friday's surge higher. Today's high-range close above the pivot point suggests a bullish bias for Monday. Directionals in general are trending higher, but are a bit choppy. The upper Bollinger Band of 897.4 and the contract high of 903.75 should be resistance. Support looks to be this week's low of 880.25. The trend is up, with targets based on the fall-winter rally suggesting a 940 objective from another 38% move or a 990 objective from another 240 point move from the spring low of 750.
Recommendations:
NONE
Speculative:
NONE
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
CBOT wheat prices endured a choppy end to the week Friday by coming under pressure early on end-of-week profit taking before rallying into the close on the back of short covering. The market is clearly struggling to find direction at the present time, as while the recent themes of strong demand and limited global production expansion remain in place, prices have already just recently scaled 11-year highs on the back of that bullish scenario - leaving traders reluctant to buy into the ‘fully-priced' market or already on board. Also, while heavily delayed, the US winter wheat harvest does continue in several areas of the US Plains to help replenish near-term inventories. So a pause for breath and consolidation is apt for this market right now, and should continue into next week as we await the USDA's next batch of market statistics.
This morning's export sales report extended the recent theme of strong demand, with 538,400 metric tons being sold to foreign buyers during the week to June 28. As US prices during that period we perched above the $6 mark, the extent of the buying interest was impressive, and certainly suggests that the demand in this market is more enduring during price rallies than many may have thought. The market did not react much to Informa's production estimates (Hard Red Winter: 989 million bushels; Soft Red Winter at 359 million bushels; spring wheat at 520 million bushels) as focus remains more on a global level. News that Argentine wheat plantings are falling behind schedule due to cold, dry conditions was also largely ignored.
Focus next week will be on how the rest of the US winter wheat harvest progresses in the US Plains after heavy rains stalled gathering in recent weeks to the extent that the overall harvest remains well behind schedule. An update on this will be released Monday evening by the USDA and should help frame the market's expectations for the following few days in the run up to the monthly supply and demand report.
Technicals:
December wheat was higher on Friday, and is higher than last Friday, looking like some back and fills after last Friday's key reversal top. Directionals are mostly trending lower, but have lost the momentum and with mid-range values could support a move either way. Resistance is the contract high of 658 and the upper Bollinger Band of 648.4. Support today was the 20-day moving average of 611.5. Until the reversal top is negated there will be downside targets of say the 40-day moving average of 574.6 and/or the filling of the 557.75-561.25 gap.
Recommendations:
NONE
Speculative:
NONE
Live cattle future were sharply higher, seeing triple digit gains for the front contracts all the way out through the April 2008 contract. The nearby August led the way, supported by ideas of stronger cash cattle prices. There were some reports of some light trade in Nebraska at $140 dressed, which would have been $3 higher than what they got last week. That converts to about $88 live, which would have been about $1 higher than the bulk of last week's higher priced trade in the Southern Plains.
The gains, futures and cash, came despite a lack of strength in the beef product market. Cattle slaughter was a bit light, 2.7% below last year, with the bulls likely to tout tighter supplies while the bears will say that packer demand is down and will prompt the backlogging of supplies. The futures gains were also attributed to fund buying. Much of that fund buying was likely in the October, which broke out above resistance of a downtrend line drawn off the spring highs. The May high for the October contract was 97.22, which would seem to be the next likely resistance, and where long locals will try to push to trigger the next round of buy stops.
Feeder cattle futures were sharply higher. August was leading the way. The primary support was the higher live cattle futures, which raises the optimism of feeder demand staying strong. The charts looked like there was little resistance between 112.00 and the previous contract high of 114.40. Futures covered that ground quickly, posting a new contract high, and then found some sell pressure, but buyers came back to push it even higher and close strong. There is the potential for a gap higher opening, but that would look like an exhaustion gap with the overbought condition shown on the chart and doesn't fit well with corn prices trading higher.
I have a tough time justifying feeder cattle prices this high, but they have been higher over the last three years. Traders are now looking at the highs up around $120 as potential targets for the current rally. Cash feeder cattle price are going to have to show some support soon or the futures premium will look too attractive not to sell. Considering the gains and overbought condition, longs may be easily convinced to take some profits, especially if there is a reversal signal.
Lean hog futures were lower. The July contract saw a triple-digit loss for a while. There seems to be no confidence in the pork market. Pork belly futures were down hard after some had hoped that yesterday's big reversal would start a rally into bacon-lettuce-tomato (BLT) season. Hog slaughter was up 1.8%, with pork production up 2.7% for the week compared to last year. This pretty much discounts for now the ideas of the lighter weights and smaller supplies being touted by the bulls.
If supplies turn tight and retailers turn to pork, which is attractively priced relative to last year compared to beef and chicken, then maybe pork and hog prices will be able to pull off one of those double summer top years. But otherwise things look weak, and traders are apt to sell rallies rather than buy the dips.
Milk futures were lower for the nearby contracts and narrowly mixed for the deferreds. The nearby contracts saw support from the higher cheese prices, but still posted losses as they consolidated from the volatile trade of the last month. This consolidation may continue until there is some insight from temperatures in important production areas as it impacts the milk supply or from the Milk Production or Cold Storage reports due out later this month.
Positions:
NONE
Recommendations:
NONE
