Thursday, July 12, 2007
888-452-8751
Corn:
Fundamentals:
CBOT Dec corn managed to shrug off an ostensibly bearish USDA supply and demand report and pushed to its highest level in 10 days as focus shifted to looming weather patterns that threaten to deny the emerging corn crop the moisture it needs for full development. Corn futures certainly got off to a soft start in the wake of this morning's release, which revealed builds in both old and new crop corn inventories, as well as forecasts for slightly less corn feeding and exports.
However, the market had been pretty much prepared for as much in the wake of the June 29 USDA Acreage and Quarterly Stocks report that strongly hinted that stocks build was in the offing. As a result, by the time the USDA's comments finally emerged this morning, prices had already adjusted to that heftier inventories outlook - and were looking beyond that to the rest of the ongoing growing season and in particular the weather that will accompany it.
The US crop is currently in the midst of a critical developmental phase, and any shortage of moisture over the coming weeks could have a serious negative impact on final yields, and therefore on final output totals. It is difficult to overemphasize how crucial a role Mother Nature still has to play in determining the size of this year's crop. If conditions remain largely hot and dry over the balance of the month of July, as many forecasting models are suggesting, then the impact on yields could be significant.
The crop currently needs about a quarter of an inch of moisture per day in order to maximize ear and kernel development. If a plant encounters heat and dryness stress during this crucial formative stage, then kernel and ear count will drop off as the plant attempts to conserve moisture, which obviously places a drag on overall output totals. As a result of this potentially hostile weather outlook, CBOT corn prices managed to push higher Thursday despite the early setback, and gathered additional upside steam mid-way through the day as Dec prices overcame resistance in place around the $3.60 level for the first time this month.
Additional gains look likely Friday if weather outlooks remain threatening and shorts who are still in the market feel they will likely take on too much risk if they retain a negative bias towards the market as weather outlooks turning increasingly unfriendly. However, if rains start to emerge in forecasts overnight or Friday, then it is possible we'll see renewed selling pressure emerge to make for fairly choppy trading conditions as the week draws to a close.
Technicals:
No comments today.
Recommendations:
None
Speculative:
7-10-07: Bought 1 December Corn @ 348.00 - reverse on a close below 350.50
Hedge Positions:
3-9-07: Bought December $4.00 Puts / Sold December $5.60 Calls @ ~$.25
Soybeans:
Fundamental:
CBOT soybean futures saw double-digit gains on Thursday with the November contract ending the session up 18 ¾ cents, to post yet another new life-of-contract high close. This morning's USDA release was largely as expected, so the report was more-or-less neutral to slightly friendly for the market. However, it was weather forecasts that remained the driving force in this market as any threats to production will tighten balance sheets even further. Looking to the weather forecast models came into better agreement today and are indicating that dry conditions will persist for the next several days in the drier northwestern and eastern sections of the Corn Belt. And this is ahead of a heat ridge that's supposed to start moving through the northwestern states later next week, with only slight chances for precipitation. And after today's USDA release it would seem that any adverse weather conditions or potential threats to the crop's yield potential is going to have an added impact on prices as US stockpiles are already expected to drop sharply year-on-year.
Turning focus to the USDA World Agricultural Supply and Demand Estimates, the report was neutral as the numbers were more or less in-line with what the trade was expecting. In our opinion the USDA may have been a bit conservative in raising old crop usage estimates, and they only raised old crop use enough to leave stock estimates running at 600 million bushels.
But if recent usage trends continue, it looks like total use may be a bit larger, and ending stocks could well be whittled down to around the 580 million bushel area. However this is more important to new crop balance sheets that are already seeing sharp declines in year-on-year production that is expected to cut stockpiles roughly 69% from 2007 to 2008. The USDA's lower acreage figure and trend line yield forecast now has US production totaling 2.625 billion bushels, while total use is pegged at 2.985 billion.
As one month's use has generally been running well above the 200 million bushel area, these numbers don't leave much room for any more declines in production before the US comes into some type of rationing situation. In summary, the USDA report confirmed the bullish sentiment of the bigger fundamental picture, and it has left all major market themes in tact for the time being.
As for other news, export sales were deemed fair throughout the complex, with soybean sales totaling 184,000 tons for soybeans, meal coming in at 73,100 tons, and soyoil realizing another solid week of sales that totaled 9,300 tons. Reports out of South America are that an early cold snap has caused some strain on Argentina's energy sector, and the government has asked that and some industries cut down on power needs in an effort to conserve energy as their winter months get underway.
Moreover, the government has asked soybean crushers to slowdown or suspend operations, and this could possibly have an adverse effect of their export markets, as well as on soyoil prices which is their feedstock for biofuel. So, market watchers should keep close tabs on new developments in this story, as it could potentially keep US product exports strong, and allow the US to sustain a fairly brisk crush pace during a time of a seasonal slowdown.
Looking forward, weather forecasts and old crop demand numbers should be paid close attention to over the coming month for indications that carryover supplies may be a tad smaller than the USDA is currently estimating, and for indications of US yield potential. And until weather forecasts turn more conducive to crop reproduction the market is likely to stay well supported, as we are already forecasting a sharp tightening of balance sheets in the 2007-08 marketing year.
Technicals:
No comments today.
Recommendations:
7-13-07: Sell 1 November Soybean on a close below 916.50
Speculative:
NONE
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
Wheat managed to stay positive amid its reaction to this morning's somewhat neutral USDA supply and demand report. However, the report did spur some spread activity between the wheat classes, which caused Chicago soft red winter wheat contracts lose ground to Kansas City and Minneapolis classes. Also contributing to the day's price action was some supportive export news, and adverse weather forecasts for the spring wheat crop. On the day Chicago September wheat futures actually closed down ½ cent, with deferred contracts ending higher; Kansas City September wheat ended with 7 cent gains, and Minneapolis wheat closed in positive territory with 4 cent gains.
The USDA revealed smaller hard red winter wheat production, mainly due to heavy rains in June cutting yields in Oklahoma and Kansas. However, these declines were partially offset by gains in soft red winter wheat production and better-than-expected yield forecasts for spring wheat. On the world front, the USDA surprised the trade a bit by projecting a rise in global stockpiles, which mainly came on higher wheat production and ending stocks forecasts for China.
Additional international news included the Brazilian government rejecting requests to suspend the nation's 10% import tax on wheat. Apparently the government feels as though the recent gains in the Real will offset increasing global wheat costs from abroad. In fact, wire reports indicate that a Brazilian subsidiary of Bunge plans to import even more wheat to offset the nation's untenable stockpile levels. Moving forward from today's report, the market should focus on the hot and dry weather forecasted for next week as the spring wheat crop is well into its heading stage and needs ideal weather at this point.
Also, participants need to pay attention for any increases in shower potential in the Southern Plains that could spur more harvest delays, and possibly quality declines. Adverse weather in the coming weeks could send prices higher; however the market may have reached a short-run top. The market seems to have absorbed well the production lag and cannot trade at such a premium to corn for much longer, assuming no extreme lack of moisture during critical development stages. Also, close attention will be paid to tender activity and weekly sales reports to judge whether the level of demand can be sustained at such prices.
Technicals:
No comments today.
Recommendations:
7-13-07: Sell 1 December Chicago Wheat on a close below 620 (but no less than 613)
Speculative:
NONE
Livestock:
Live cattle and feeder cattle futures were higher much of Thursday, but spent the last half of the session backing down from session highs on profit taking as the charts are overbought and as corn futures creped higher. USDA's cattle/beef outlook as released in this morning's Supply/Demand report shows expectations not very different from last month. USDA is expecting a slight decrease in beef production in 2007 relative to 2006. The decline looks scheduled for the fourth quarter, helping to explain the futures optimism for cattle prices at the end of the year.
USDA does not have that same optimism for prices, showing an $85-91 range for the third and fourth quarter average prices compared to futures upper $90s. Beef exports are expected to increase more than beef imports this year and next year, keeping per capita beef consumption declining slightly and suggesting strong prices into 2008. Beef will have to put up with more competition from increased pork and poultry production and lower pork and poultry prices, according to USDA's forecast.
Lean hog futures were up sharply as long as you looked beyond the July contract, which is anchored by its expiration next Monday and by the fact that the lean hog index is declining. August futures flirted off and on with its 300-point limit much of the day. The buying was significant as shorts covered and new longs were encouraged by the talk that China may be in the market for US pork.
Whether it's true or not, it is likely to trigger retailers to buy pork and packers to buy hogs a bit more aggressively just in case pork is more expensive later. August futures have moved to over a $4 premium to July, suggesting buying now rather than a month from now. USDA in their morning report forecast continued increases in pork production for 2007 and 2008, which means new record highs. But the growth is slow and gradual, basically keeping pace with the population growth as per capita consumption of pork is forecast to be relatively stable at 50 pounds a person.
Exports and stocks increase slightly to make up the difference. USDA forecasts hog prices to be up 4.7% this year, but down 3% in 2008. USDA has price falling to average in the lower $60s for the fourth quarter of 2007 and for the first quarter of 2008. Futures are a bit more optimistic than that, especially after today's talk and action.
Positions:
NONE
Recommendations:
7-13-07: Sell 1 December Live Cattle on a close below 97.00
