Friday, July 20, 2007
888-452-8751
Fundamentals:
CBOT Dec corn traded both sides of unchanged Friday as early concerns about forthcoming dry conditions across the Midwest were alleviated by Midday weather updates that forecasted more moisture and cooler temperatures over the course of next week. Given that the US crop is in the midst of its crucial pollination phase, when regular rains are vital, the additional precipitation on the radar will aid in crop development throughout key growing areas. While Dec futures briefly descended to their lowest levels since November 1, 2006 in response to these fresh forecasted rains, the selling pressure remained fairly in check as prices have already fallen around $1 a bushel over the past month as the US crop cleared crucial developmental hurdles. If rains remain fairly regular over the coming weeks in the Midwest, and especially on the fringes of the Corn Belt, then a hefty production total can be expected from the 92.5 million or so acres planted this year. However, strong demand is equally certain as ethanol plants continue to ramp up output, traditional sources of corn use expand as global population levels improve diets, and the world's feedlot managers balk at paying near historic prices for wheat and instead turn to corn which currently boasts a near $3/bushel discount to wheat. So while corn's production prospects appear decent thanks to the recent rains, the solidity of this market's demand profile reaffirms the notion that nearly every bushel will be required come the end of the marketing year. The outlook for next week will remain weather-driven, and the more rains that actually fall across the Midwest, the more corn prices will struggle to avert further slippage over the near term. However, given the above-mentioned demand prospects, any aggressive downside swoops will likely prove short lived as traders focused on longer-term developments attempt to scoop up corn at its lowest price levels in nearly nine months.
Technicals:
December corn was lower for Friday and the week. The low-range close below the pivot point suggests a bearish bias for Monday's trade. This week's low of 330.5 is seen as support. Resistance looks to be 348.5, the area of an opening gap. Directionals are trending lower to favor the sell side, although they are approaching an oversold condition.
Recommendations:
7-23-07: Buy 1 Dec Corn on a close above 344.00
Speculative:
Hedge Positions:
3-9-07: Bought December $4.00 Puts $.25 3/4
Soybeans:
Fundamental:
CBOT soybean futures started out the session on a higher note only to sell off sharply as the session wore on as fairly crop-friendly weather updates emerged. By the close new crop November contracts ended with 6 ¾ cent losses, while December soymeal ended $2.50 lower, and soyoil futures realized 17 point declines. There was a notable lack of fresh news for the market and price action was largely driven by speculative positioning and weather forecast influences. Weather forecasts didn't appear to bring any major changes since yesterday, as next week's outlook appears mainly dry with only limited chances for precipitation in major growing regions. Furthermore, forecasts don't show any significant chances for any rain events to ease stress in western areas until late in the ten-day period. That being said, this week's showers were surely beneficial in helping to recharge moisture supplies in a significant portion of US growing areas, and will likely be enough to sustain crop development until the next bout of showers moves through. In the news this afternoon, the ongoing energy crisis in Argentina is reportedly having an adverse effect on their soybean crushing industry. An unusually cold winter down there has strained supplies of electricity and natural gas, which has prompted the government to place restrictions on some business' activity, hampering their ability to operate. This is being interpreted as potentially less soy product output, and possibly less imports of soybeans with the Argentine crushing industry being deemed likely to need fewer inputs if their crushing capabilities are restricted. This story didn't seem to have much of an impact on trade today, but it is a supportive factor for the market as Argentina is the world's number one exporter of soy products. Looking ahead, the market's focus will be on future weather forecasts, which will likely set the tone of Sunday night's trade. After recent showers this past week the crop should be in relatively good shape, but the timing and placement of future precipitation events will be crucial as the crop is heading into its most critical stage of development. News releases on Monday will include crop condition reports, which should show week-on-week crop ratings improve on a nationwide average, likely around 1-2 points in the good-to-excellent category. Also, we will receive another export inspection figure, and that is expected to come in somewhere close to 10 million bushel area.
Technicals:
November soybeans were lower on Friday and for the week. The low-range close below the pivot point favors a bearish bias for Monday. Support is coming from an upward sloping trendline drawn off the previous swing lows. Directionals are trending down to favor the sell side, but have lost some momentum and are holding mid-range values that could support a move in either direction. The 940 objective of the long-term uptrend was reached, now seeing some retracement and consolidation.
Recommendations:
Speculative:
7-23-07: Buy 1 Nov Soybean on a close above 888.00
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
As expected, consolidation remained the major theme in the wheat futures markets Friday following a fairly active week that featured fresh evidence of continued strong global demand as well as continuing concerns about global production prospects. Hot and dry weekend weather forecasts for Montana and the Dakotas offered additional support early, particularly at the Minneapolis Grain Exchange where the Hard Red Spring class of wheat traded on the MGE is grown. As wheat futures on all three US wheat exchanges are already close to multi-year highs, traders have lately proved reluctant to keep pushing prices higher. However, they have proved equally reluctant to set them lower, opting instead to steer quotes mainly sideways in recent sessions. On the day, Minneapolis wheat managed to sustain slight gains on behalf of the aforementioned forecasts, while Kansas City and Chicago settled lower 2-7 cents. To sum up the week, simply put, not much has happened. With respect to the December Chicago contract, only 2 cents have been lost to last week's settlement. Moreover, market signals that were once thought to separate the wheat market from others have not yet been able to. Instead, the current supply driven market has corn, soybeans, and wheat trading as one homogenous product. Market fundamentals have not changed though, and continue to be emphasized. French wheat futures have been consistently striking contract highs, largely based on the poor quality of this year's crop, and Ukraine's total grain crop has been projected today at 27 million metric tons, down 21% from last year. With more and more countries losing a significant percentage of their crops to drought or, conversely, excessive moisture prior to and during harvest, price rationing must at some point play a role in order to limit exports and spur additional seeding for the next growing year. At this point though, weekly U.S. wheat exports continue to exceed expectations and it appears that very little price rationing has been applied. We expect this demand to fuel this market in the long run, slowly but surely, once the market can focus its attention past tomorrow's weather forecast. These are long-term fundamentals that are not expected to change until it becomes known what this year's winter and spring crops yield. Prices can easily soar to new contract highs if the U.S. spring wheat crop is damaged due the recent and forecast hot and dry weather in the northern plains, especially if the world's appetite for wheat remains unabated.
Technicals:
December wheat was slightly lower on Friday and slightly lower for the week. Psychological resistance is the 650 area. Support today was in the 630 area. The chart looks to be trending sideways between 610 and 650, which would be viewed as consolidation of the recent surge higher. A breakout on the top of that range would suggest a target of 690. A breakout to the bottom of that range would suggest a target of 570.
Recommendations:
7-23-07: Sell 1 Dec Chicago Wheat on a close below $6.21 - but no lower than $6.15
Speculative:
NONE
Livestock:
Live cattle futures were slightly higher Friday, but for the week were lower for August while they were higher for October and December. August was pressured as the expectations for cash cattle prices softened through the week, and ultimately the cash trade occurred $1-2 lower. October and December benefited this week from ideas that today's Cattle on Feed report would show light placements. Trade was relatively quiet today in wait of the USDA reports. The monthly Cattle on Feed report showed on feed numbers at 98.8% of last year, reflecting placements at 85.1% and marketings at 97.4%. These numbers are considered generally bullish relative to the pre-release estimates. The funds are likely to use the friendly report to boost October, but the placement data is friendlier to December as the less than 700 lbs were down about 25% and the over 700 lbs were only down slightly. The light placements and light marketings relative to last year and expectations suggest that the bear spreads (selling August buying October and/or December) should work. The biannual Cattle report pegged the all cattle inventory at 99.6% of last year. This is in line with expectations, but the beef cow numbers and heifers over 500 pounds were above expectations and the calves less than 500 pounds were below expectations. The heifer category was above expectations but it was a mixed bag as beef replacement heifers were only 94% but milk replacement and other heifers were 103%. The inventory report in general seems to present a bullish undertone with the beef cow herd not expanding. The two reports together should reinforce the long term bullish scenario that futures are presenting for both live cattle and feeder cattle.
Lean hog futures were mixed. August was higher, supported by higher cash hog prices and firm pork prices. The other contracts were lower. October saw higher ground to put another contract high reversal tops on the chart. The difference between today and yesterday is that there wasn't the late buying. The weak close may be more attractive to sell, especially with futures being overbought, with futures having made a steep $7 rally this month to a new contract high, and when futures hold a premium to the cash hog market that normally has a seasonal for lower prices into the end of the year. Hog slaughter for the week was up 0.7%, which is in line with expectations. Pork production was estimated to be 1.7% higher than last year, reflecting heavier weights. This is a surprise to some as the higher feed costs were expected to prompt lower weights. The futures premium would seem to keep producers in a delayed marketing mode to try to capture the premium that August is showing. After the close, the USDA came out with its Cold Storage report. It showed total pork stocks up 14% from last year, even though pork production was down slightly from last year (there was one less slaughter day). This suggests poor demand. Belly stocks were up 3%, ham stocks up 53%, ribs down 20%, and loins down 8%. The whole increase in total pork stocks from last year can be blamed on the increase in ham stocks. If the ham market can upright itself, then there could be more hope for the hog market.
Milk futures posted strong gains for some contracts. October staged an impressive reversal, closing up 30 cents after having been down 30 cents. The gains were attributed to short covering ahead of the Cold Storage and Cattle reports as the charts are oversold and there has been a significant decline over the last four weeks (October fell from a contract high of 20.00 to today's trade around 17.00) that prompted some traders to take profits. The Cold Storage report showed butter stocks 5% higher than last year and total cheese stocks about even with last year. Some traders prefer to track American cheese which was down 7% from last year and down 2% from last month. This offers a little bit for both the bull and the bear. The Cattle inventory report showed milk cow numbers even with last year and replacement milk heifers to be larger than the highest guesstimate. This would seem likely to pressure the deferred contracts, which may spillover to the front end as well.
Positions:
NONE
Recommendations:
7-23-07: Sell 1 December Live Cattle on a close below 97.90
