Tuesday, July 10, 2007
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Fundamentals:
Spillover strength from the rallying soybean market as well as short covering ahead of Thursday's USDA supply and demand report lifted corn prices Tuesday to six-day highs, and further upward probes could well be seen Wednesday on final spurts of short covering and positioning ahead of Thursday's release. With regard to the report, 2007-08 corn ending stocks are estimated at 1.418 billion bushels, sharply above the 997 million estimated in June, according to a survey of 15 analysts by Dow Jones Newswires. The average ending stocks estimate for the 2006-07 crop year was 1.031 billion bushels, 44 million bushels above the 987 million estimated in June. The higher stocks figures come on the back of a surprise surge in planted acres reported in the June 29 quarterly stocks and acreage report, and that hefty plantings figure could well spark other notable changes in Thursday's monthly statistics as well. (Please see our separate USDA Preview report attached for more details on what to expect in Thursday's release.) As a result, we are expecting traders to continue positioning themselves Wednesday before counting down the clock until the report's release. That said, the trade will also remain abreast of the latest weather forecasts for the Midwest, as rains are required throughout the Corn Belt as the crop advances into its key pollination stage. Near term forecasts do call for the needed precipitation, but longer-term outlooks call for hot and dry conditions, which have the potential to impede yield potential. If rains remain scarce in the 6-10 day window and beyond, then corn prices will certainly remain supported going into the report, and could well proceed to push higher beyond the report should the USDA's findings not cast too dark a shadow over the market in terms of near-term fundamentals. In the news today it was reported that popcorn prices have risen more than 40% since 2006 on the back of the aggressive demand from the ethanol sector, and that additional price strength is expected as ethanol output expansion further eats into popcorn production by diverting acreage to regular corn.
Technicals:
December corn was higher, able to push up through resistance of the 10-day moving average. This should now be support, especially as it resides near previous support of 354. The high-range close above the pivot point suggests a bullish bias for Wednesday. Directionals have turned higher, with Stochastics giving a buy signal today. The 4-day looks to cross up through the 10-day moving average in the next day or so, which is a buy signal for some technicians. Resistance looks sparse until all the way up to 374, which would be the 38% retracement of the recent decline.
Recommendations:
None
Speculative:
7-10-07: Bought 1 December Corn @ 348.00 - risk a close below 342.00
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
CBOT soybean futures led the way higher Tuesday as a combination of price friendly fundamental news and bullish technical chart patterns renewed speculative buying interest around the agricultural arena. November soybean futures ended with solid 18 ½ cent gains, while December soybean meal closed out the day an impressive $7.90 higher, and December soybean oil gained 0.42 cents per pound. Monday's drop in crop condition ratings, and weather forecasts that aren't shaping up to be very "yield friendly," were the main catalysts for the buying interest throughout the complex today. Crop conditions already saw week-on-week declines of 3% in the good-to-excellent category, and there doesn't seem to be much of an all-encompassing rain event on the way that could substantially ease dryness stress in Northern and Western areas of the Corn Belt. Furthermore, while we are expected to see milder temperatures through the balance of this week, the extended forecasts are calling for some heat ridging to come through the Midwest about 10-days or so from now. And with lower than expected acreage forecast, any threats to production will have an added impact on prices as South America now has to shoulder an even bigger share of the burden of increasing planted area for soy to help meet the worlds consumption needs. And turning focus to the financial situation of the Brazilian farmer, we saw the US dollar decline sharply and the Brazilian real make fresh highs today, which doesn't exactly encourage production expansion by the Brazilian producer. Thus, more speculative buying interest was needed to offset any weaker values for producers, as it is becoming ever clearer how imperative it is that South America picks up the steep drop in soy production area that the US is set to realize in 2007. Looking ahead, the trade is awaiting Thursday USDA World Agricultural Supply and Demand Report, which will reveal the USDA's latest take on balance sheets after they revealed their new quarterly stocks and planted acreage figures back at the end of June. Expectations are for sharp drops in US and global ending stock figures for the 2007-08 marketing year, and this continues to be the main driver of prices and a long term bullish fundamental factor.
Technicals:
December corn was higher, able to push up through resistance of the 10-day moving average. This should now be support, especially as it resides near previous support of 354. The high-range close above the pivot point suggests a bullish bias for Wednesday. Directionals have turned higher, with Stochastics giving a buy signal today. The 4-day looks to cross up through the 10-day moving average in the next day or so, which is a buy signal for some technicians. Resistance looks sparse until all the way up to 374, which would be the 38% retracement of the recent decline.
Recommendations:
7-11-07: 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 Dec wheat prices put in a mixed performance Tuesday as although the market got off to a firm start and stayed in positive territory throughout, prices remained below recent highs throughout as follow-through buying interest remained scarce. Declining crop condition ratings in the US, and spillover buying from the corn and soybean markets seemed to be the main catalyst for the early nudge higher in CBOT wheat futures that saw the nearby September contract gain 2 ¼ cents on the day. Kansas City and Minneapolis hard red contracts didn't quite see the same buying enthusiasm as CBOT futures, and their markets took on a moderately weaker tone for the day. That said, all wheat futures did manage to "hold their own" in early trade but failed to sustain buying interest as we headed into the close. Early buying interest was deemed to be spillover buying from the firm durum wheat market in Europe, the stronger corn and soybean arenas, and also from some additional speculative buying that stemmed from wheat tender activity. It was announced late in the morning that Egypt opted to buy 120,000 tons of US and Russian wheat, of which 60,000 tons was US soft red winter. Other tender activity this morning featured India now seeking only 511,000 tons of optional origin, Japan seeking 100,000 tons of optional origin and Taiwan passing on a tender for 88,000 tons of US supplies. Both news and global weather wise, we still don't see anything that's extremely price negative for the market. However, it seems as though longs are taking profits and rolling long positions to deferred contracts ahead of Thursday's report. On the global weather front, Australia seems to be doing okay, but Europe and the Balkan states seem to still have some ongoing dryness issues. Reportedly, French durum wheat prices soared as excessive rain events have lowered crop quality, and Ukraine, although having seen some precipitation events, remains amid drought conditions. For now, the market looks set to grind mainly sideways as we search for the next batch of news that will break the market out of recent price ranges. And the trade could be waiting for Thursday's USDA report that will reveal fresh balance sheets for old and new crop wheat, along with a by-class breakdown for the new crop classes. And fresh insights from the USDA may be just the thing the market needs to break its recent trading bands, as the market has been lacking definitive direction of late. Prices need to stay high in an effort to encourage global production increases, but must also find a fair price that stimulates global demand while we wait for more solid production data. With regards to Thursday's USDA report, the average trade estimates for 2007-08 all winter wheat production is 1.584 billion bushels, down from the USDA's June estimate of 1.610 billion, according to a Dow Jones Newswires survey.
Technicals:
December wheat was slightly higher, posting an inside-up day that looks like consolidation between the technical bear that is touting the late June key reversal and the technical bull that is touting a correction before another move higher. Directionals are mostly trending lower, but have been choppy around mid-range values that could support a move either way. Resistance is the contract high of 658 and the upper Bollinger Band of 638.7. Support today was again around the short term moving averages in the 616 to 617 range. Until the reversal top is negated there will be downside targets of say the 50% retracement of 574.5 and/or the filling of the 557.75-561.25 gap.
Recommendations:
7-11-07: Sell 1 December Chicago Wheat on a close below 606 (but no less than 600)
Speculative:
NONE
Livestock:
Live cattle futures were lower at the end of Tuesday's day trading. The outside-down day and weak close at session lows suggests a bearish bias. However, strong support is expected at the 100-day moving averages, which are 91.69 for August, 95.50 for October, and 95.84 for December. Obviously, these numbers leave room for a correction, especially October and December. The overbought condition of the charts and the higher corn futures made it easy to start that correction today. The higher beef prices today are prompting expectations for cash cattle prices this week to be steady/better, despite the larger show lists because of light sales last week. There still seems to be plenty of time for weakness to return. Whether cash cattle markets are strong or weak for the rest of the summer largely depends on how well beef moves to the consumer. For the rest of the year, the ability for the market to move higher or lower will be a supply issue as well. One of the main questions being how many cows and heifers will be in the slaughter mix. Profits are there for the cow-calf guy to want to expand (retain cows and heifers), but the high hay and grain prices and dryness concerns in certain areas seem likely to keep them cautious and may actually contribute to more beef production (liquidating cows and heifers due to lack of feed or desire to stay in business). Right now there seems to be a bullish undertone, largely attributed to ideas of low June placements to keep fed cattle numbers near year-ago levels with the hopes of expanding export demand. High chicken prices (12-city broiler price at 81 cents versus 67 cents last year) and increased media attention from increased bird-flu cases may help beef demand.
Feeder cattle futures were slightly lower on the close of the day session. Early on it looked like feeders were leading live cattle futures lower, pressured by the higher corn futures. In the last half of the day session it looked like live cattle were the downside leader. The relative strength in feeders may have been due to some reports of higher cash feeder prices, which would help narrow the futures premium and reduce the attraction to sell. Sell pressure was attributed to long liquidation. We will have to see if open interest went down. The overbought condition and yesterday's reversal in the August contract made it easy to justify taking profits. If futures are correcting, then natural support areas would be the 38% retracement of the 111.50 area and the 50% retracement of the $110.50 area. This latter support would roughly coincide with the 40 and 50-day moving averages.
Lean hog futures were widely mixed, not much different than at mid session. July finished lower, pressured by lower cash hog prices. The lean hog index is projected for Monday to be 71.98, about $1.50 higher than July futures. July expires on Monday, July 16. Cash prices could easily go down that much and more or could rally over the next four trading sessions. Despite the weakness in July, the other contracts posted relatively strong gains, continuing what looks to be a short covering rally. We will have to see what open interest did to define that clearly. But there appears to be buying interest for these deferreds. Bears spreads may continue working if soybean meal futures continues to make new contract highs. Meal is a significant portion of feed costs and that could prompt herd liquidation that would pressure the nearby market, while creating a more bullish scenario for the deferreds.
Milk futures were mostly higher, with the exception of the nearby July contract that is trying to find its expiration value. Other than July, milk futures were mostly higher. The optimism here may once again be tied to the idea that higher feed costs will prompt lower milk production, which is price supportive. Trading ranges were narrow once again, continuing the consolidation of the last few sessions.
Positions:
NONE
Recommendations:
NONE
