Monday, July 09, 2007
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Fundamentals:
The prospect of thunderstorms and extensive rains across the US Midwest over the coming days pressured the corn market lower Monday, but prices managed to claw gently higher over the course of the session as weather forecasts trimmed precipitation outlooks over the course of the day. The rains are still deemed to be on the horizon, but the fact that there may be less coverage, or fewer inches, was viewed as supportive for the corn market as the day wore on. Yet a supportive feature is not the same as a bullish one, and CBOT Dec futures still closed out the session in negative territory.
More choppy trading around the $3.40-3.55 per bushel area looks likely for December corn in the days ahead as traders continue to keep close track of the weather but also ready themselves for Thursday's USDA World Agricultural Supply & Demand Estimates report. Traders were also somewhat timid Monday ahead of today's weekly crop progress report, which revealed a 3% decline in the crop's top rating to 73% good to excellent, which was a bit more deterioration than most of the trade had anticipated.
Focus over the rest of the week will be on how much rains the Midwest gets over the coming weeks, as the crop is currently in the midst of the crucial pollination stage when final yields are established and plenty of moisture is vital. Export inspections this morning came in below trade estimates at 22.4 million bushels. However, as we mentioned above, the market is more focused on weather conditions and positioning ahead of Thursday's report and so estimates of consumer intentions are overlooked for the time being. Trade on Tuesday and Wednesday looks set to be dominated by weather and positioning, so expect choppy action amid spurts of activity throughout. Action over the tail of the week will take its cue from the USDA report, and from Thursday morning's weekly export sales release.
Technicals:
December corn was lower, but traded both sides of unchanged. The close was slightly above mid-range and the pivot point to suggest a bullish bias for Tuesday. Directionals seem to have turned higher, with the RSI pushing up from its oversold condition and Stochastics having crossed and pushing up from its oversold condition as well. Near-term support looks to be the short uptrend line drawn off recent lows that looks like a bear flag. That offers support at about 343, while longer-term support is seen at previous resistance in the 315 area. Resistance for the short term is the 10-day average and previous support in the 355 area. Longer-term resistance would be the host of moving averages in the 378-388 range.
Recommendations:
7-10-07: Buy 1 December Corn @ 348.00 - risk a close below 342.00
Speculative:
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
The soybean market enjoyed fresh speculative buying interest Monday and closed higher on the day after weather forecasters decreased their confidence in precipitation events for the 6-15 day outlooks. By the close, the soybean market managed to post 6-cent gains on the day and a new life-of-contract high close, basis the November contract. Although news for the market was light in general, the soybean market continues to see speculative buying interest drive prices higher, with balance sheets set to tighten considerably for both the domestic and global situations in the upcoming USDA report Thursday.
Furthermore, any threatening weather forecasts that could hamper yield potential certainly exasperate the situation, and will continue to draw more speculative buying in an effort to put a larger weather premium in soybean values. In the news today, export inspections for soybeans totaled 4.7 million bushels, which was under trade expectations of 6-10 million. Also reported on the wires Monday, the International Energy Association with a report stating they still see biofuel output more than doubling 2006 levels by the year 2012, but see bio-fuel use as only a marginal component of overall energy consumption.
The IEA also went on to reinforce their concerns over the economic viability of biofuels as an alternative energy, as their feedstock's need to compete with human consumption needs. However this didn't seem dampen or sour any thoughts by the investment community, as soybean oil values were net gainers on the day as well. Looking ahead we received an updated crop condition report this afternoon that showed declining week-on-week condition ratings and this combined with any forecasts changes will dictate price direction over the near-term. That said, Thursday's report will give the trade their first look at new crop balance sheets after acreage revisions, and is expected to confirm expectations of a longer-term bullish fundamental picture.
Technicals:
November soybeans were higher on Monday, posting a new contract high. Still the action looks like consolidation around last Friday's surge higher, putting out feelers as to how much resistance is above the market. There is an upward sloping trendline that has been offering resistance. For tomorrow, that line resides at 906.2. Today's high-range close above the pivot point suggests a bullish bias for Tuesday, but wouldn't be surprised to see a turn-around Tuesday kind of trade. Directionals in general are trending higher, but are a bit choppy. The upper Bollinger Band of 910 and the contract high of 906 should be resistance. Support looks to be last 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:
7-10-07: Sell 1 November Soybean on a close below 885.00
Speculative:
NONE
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
CBOT wheat prices took a step back Monday and closed out the day 9 ½ cents lower at $6.13 a bushel basis the December contract. Profit taking and hedge selling were behind the weakness seen, and more such pressure could well be seen in the days ahead without fresh bullish fundamental news. Wheat's bullish big picture appeal is still intact, as global inventories look set to continue declining and production prospects remain limited. However, this is all pretty old news by now, as the market rallied strongly on the back of it throughout the month of June.
Also, this morning's export inspections figure was pretty soft at 10.846 million bushels - versus estimates in the 17-23 million bushel range. Further, the US winter wheat harvest is ongoing, and has now passed the halfway mark at 58% complete, versus 65% complete at this point a year ago. The USDA reported late Monday that the condition of the winter wheat crop declined by 1% on the week to 47% good to excellent, while the rating of the spring wheat crop also declined by 1% to 88% in the top rating. These condition ratings were largely as expected, and so will likely not provide too much of a price response.
Instead, the market will likely focus on global growing conditions, and worldwide demand - especially after news reports today revealed how the world's users of wheat are becoming increasingly savvy at covering their needs. Firstly, India declared today that although it is still in the market for wheat, it will only consider making purchases at an upper price band of $330 per metric ton. This price dictation suggests the country has no pressing need for supplies right now, and that it is prepared to pass on offers that it deems too expensive.
Later in the day, it was reported that Iraq was finalizing a deal to secure 400,000 metric tons of wheat flour from Turkey - not usually atop any lists as a big wheat supplier. This reveals not just that countries are prepared to shop around for the best offers, but also that, given the right price, supplies can emerge from somewhat unlikely sources. What this all means is that wheat prices may have a tough time holding above $6 for now as both supplies seem to be creeping up and demand seems to be scaling back. However, these minor behavioral changes will likely not alter the fact that world stocks of wheat remain precariously low and production totals will not be sufficient this year to notably replenish inventories. So while we are allowing for additional price weakness in the days ahead, we are not expecting any aggressive sellers to emerge ahead of Thursday's USDA findings.
Technicals:
December wheat was lower, posting an outside down day to give some credibility to the key reversal posted five sessions ago. The low-range close below the pivot point suggests a bearish bias. Directionals are mostly trending lower, but don't have much 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 641.2. Support today was the short term moving averages in the 612 to 617 range. 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:
7-10-07: Sell 1 December Chicago Wheat on a close below 606 (but no less than 600)
Speculative:
NONE
Livestock:
Live cattle future were mostly slightly higher. October and December led the way as they are the focus right now of the bullish sentiment. The gains can be attributed to firm cash fundamentals, including today's higher beef prices, to spread activity as the roll gets under way, and to technical aspects, including the breakout above a downtrend resistance line on the chart. Gains were limited, finding plenty of selling, due to the overbought condition and the premium already built into futures. Last week's cash cattle trade was higher, but it was limited in numbers, which means there should be more available this week to keep a cap on cash cattle prices. Steady prices would seem likely, unless beef prices see a big rally. Steady cash prices would seem to suggest sideways futures for the near term.
Feeder cattle futures were mixed on the close. August futures, where most of the open interest resides, showed a loss to post a new contract high reversal. That potential topping formation may lead to some sell pressure tomorrow as futures have posted a $8 rally in 8 sessions (since the middle of June it has been almost $10). This, the premium futures holds to the feeder index, and the overbought situation seems to make futures ripe for longs to want to take their profits. However, the Oklahoma City auction reported $2-3 higher feeder prices as feeder demand seems strong with $3.50 corn and high optimism for fat cattle prices.
If corn starts to move higher again to temper feeder demand, then futures would seem likely to back and fill to make some kind of normal correction. A 50% retracement of the rally since mid June would be back to the $110.50 area which would roughly coincide with the 40 and 50-day moving averages. If corn moves sideways, and feeders move higher, then maybe the correction would only be back to the 38% retracement of around $111.50.
Lean hog futures were widely mixed, not much different than at mid session. July and August finished near session lows, continuing to find pressure from weak cash fundamentals. The morning National Direct trend was $2.81 lower. The lean hog index is projected for Friday to be 72.52. Even with today's losses, that only puts July at a $2 discount. Cash hog prices could find strength here if supplies are slowed by hot weather. But if pork demand stays weak, cash prices could move even lower. As I said Friday, there seems to be no confidence in the pork market. Pork belly futures were down hard again, falling to the mid $80s at a time of year that seasonal demand usually has prices at their highs. Highs lately have been well over $100.
Milk futures were mostly narrowly mixed. The exception was the nearby July contract that jumped higher as it finds its expiration value. Expiration isn't until August 2, but most of the data that determines July's values are in place from mid June to mid July. Trading ranges for the contracts beyond July, were exceptionally small (non-existent for Sep-Dec that saw the same value for the open, high, low, and close). The lack of trade seems to reflect the fact that cheese and butter prices offered no direction, and traders are looking for direction. Consolidation may continue until there is some insight from temperatures or from the Milk Production or Cold Storage reports.
Positions:
NONE
Recommendations:
7-10-07: Buy 1 October Lean Hog at 64.40 - liquidate a close below this level.
