Monday, July 30, 2007
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Fundamentals:
Corn futures traded on both sides of unchanged levels during the coarse of Monday's session but managed to close out the day in positive territory, to the tune of 3 ½ cents higher in the December contract. Actually the market nearly managed to close out the session on its daily highs, likely due to speculative bargain hunting with the trade looking for steady to lower crop condition ratings and weather forecasts that aren't all that optimal for crop development, for this week at least. News wise there just wasn't a lot to talk about and month end positioning was a likely a larger contributor to the day's price action until the last wave of speculative buying that managed to push the market to fresh daily highs ahead of the close. Looking to the number releases today, export inspections were unimpressive for yet another week, totaling 36.7 million bushels, which was more-or-less the low end of the trade expectations. However the crop progress and condition report after the close was a bit more interesting. Conditions ratings declined 4% in the good-to-excellent categories for the 18-state average. States that saw the biggest drop in ratings in the good to excellent category were South Dakota down 13%, Colorado down 12%, Michigan down 11%, Minnesota down 10%, and Wisconsin and Texas both down 6%. The drop in conditions was a bit more than the trade was looking for and could likely give the market some added support moving forward. Looking ahead, the trade still needs to get a better handle on the crop size and will be looking intently to the August report where the USDA will take their first stab at a yield guess by figuring in actual data. But any further deterioration of crop ratings or major shifts in weather reports will certainly have an impact on prices until then, so participants must keep in tune with those updates as well.
Technicals:
December corn was slightly higher, but posted a bullish looking outside-up day. The high-range close above the pivot point suggests a bullish bias for Tuesday. The move higher looks more like a breakout above the downtrend line drawn off the June-July highs. This line should be support, which roughly coincides with the 10-day moving average of 333.6. Resistance looks to be the 20-day moving average of 343.2. Directionals have turned higher, with Stochastics giving a buy signal today as it starts to push out of its oversold status.
Recommendations:
7-26-07: Bought 1 Dec Corn at 333.00 - risk a close below 328.00
Speculative:
Hedge Positions:
3-9-07: Bought December $4.00 Puts $.25 3/4
Soybeans:
Fundamental:
Soybean futures saw a choppy trade to start off the week, but managed to close out the session with fair daily gains, as the new crop November contracted ended with 7 ¼ cent gains. After opening up with solid gains the market was met with month end position squaring and liquidation ahead of first notice day Tuesday, which managed to push prices to unchanged to slightly lower levels early on in the day. However the market rebounded ahead of the close as thoughts centered on ideas that we would get a lower crop condition rating this afternoon and that weather forecasts for this week aren't all that conducive to crop development. Monday's trade was in-line with recent market action, staying within recent price ranges. Early calls shaped up to be firmer with fresh weather forecast updates that are calling for a mostly dry week with rising temperatures over the next few days. Although some relief is expected to come by the weekend in the form of rain events, the soybean crop needs adequate moisture during this all-important developmental phases of pod-set and fill, so price impact from weather forecasts are likely to be most volatile at this time. In the news, export inspections were out this morning, coming in at 7.5 million bushels, with trade expectations of 5-10 million. Crop condition ratings were a bit more highly anticipated by the trade, and another week of declines will likely be a large influence on prices in the coming days, especially with the current forecast. The 18-state average saw ratings fall 3% in the good-to-excellent category. States that saw the biggest drop in ratings were Michigan and Minnesota down 10%, North Carolina down 9%, South Dakota down 8%, Missouri down 6% and Illinois and Tennessee both down 5%. These areas will be watched closely by the trade for any possible further deterioration in conditions and participants need to keep a close eye on all weather forecast updates as the trade tries to gauge the size of this year's crop. That said, we have first-notice-day against the August contract for the complex and likely another day or so of end-of-the-month positioning to get through Tuesday. However weather forecasts and their impacts on crop ratings are likely to take center stage in light of Monday afternoon's fresh developments.
Technicals:
November soybeans were higher on Monday, posting a higher day but still within the range of the previous four sessions. The sideways consolidation continues after last Monday's freefall. Support has been 833, while resistance has been the previous swing low of 855. Stochastics are trending down, but are starting to turn in an oversold condition, likely to give a buy signal soon. The RSI has been mostly sideways of late, but shows more room to the upside than to the downside.
Recommendations:
Speculative:
7-30-07: Buy 2 Nov Soybean on a close above 854.00
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
In a binge sell off, wheat contracts settled sharply lower today. End of the month book squaring seemed to play a greater role than previously expected. But with wheat prices seeing the most strength during the month of July, we can't say it was surprising to see participants take some profits off the table. December Chicago ended down by as much as 20 cents. Additionally, there was likely some inter-market spreading occurring that added to the price weakness as we began another week. There wasn't much in the way of overwhelming fundamental news out this morning but it was noted that European wheat prices fell amid a drier forecast. The dry weather is not expected to persist however as showers are expected to roll through Germany and parts of France by midweek. That said, the lack of fresh news to "feed the bull" allowed for some profit taking as record high prices simply induced traders with long positions to exit the market on month end. In the news export inspections totaled 17.2 million bushels, which was more or less in line with trade expectations. Also out this afternoon was another weekly crop progress and condition report. The winter wheat harvest is now seen at 88% completed, just behind the pace of 2006 where 90% of the winter crop was harvested by this time. As for spring wheat conditions they were down sharply with 7% declines in the good-to-excellent category for the six-state average. Looking ahead, volatility is likely to continue as attempt to gauge global production prospects and global weather forecasts will continue to play a large role in the day-to-day price changes. In the US forecasts provide mixed signals for the market. Showers are expected in Texas and Oklahoma winter wheat regions through Wednesday but dry weather should enter the region by the end of the week to allow the harvest to wrap up. And the northern plains look to be hot and dry early and slightly cooling off by the weekend. The future of prices is more-or-less contingent on global wheat production and with that being a largely unknown factor at this point the market may still be able to find some support at these higher prices. That being said, as we've emphasized before, production numbers are simply a mystery and will provide further market instability. For the time being, the market is well underpinned by the demand for U.S. wheat abroad and periodic sell offs amid these record high prices should be expected, especially if forecasts turn a bit more conducive to crop development.
Technicals:
December wheat was sharply lower on Monday, posting an outside-down day. The close below mid-range and below the pivot point suggests a bearish bias for Tuesday. The move down tested support in the 650 area, which held despite modest pressure today. On the chart, support looked like it was the 10-day moving average of 647.2. Last week's move higher and closes above 650 suggests a breakout to the upside of the recent sideways consolidation pattern. An uptrend line drawn off the April-June highs suggest resistance in the 700 area. The breakout above the top of the consolidation range suggests a target of 690. Directionals are trending very slowly higher, but momentum has stalled as they have reached an overbought condition, with Stochastics giving a sell signal.
Recommendations:
7-30-07: Sell 1 Dec Chicago Wheat on a close below $6.57 - but no lower than $6.52
Speculative:
NONE
Livestock:
Live cattle futures were slightly higher on Monday, finishing near session highs in what was described as quiet action. August led the way due to firm cash fundamentals and bull spreading. The cash fundamentals included higher beef prices and optimism that cattle prices would continue to improve as the seasonal summer low was in. The bull spreading was encouraged not only by the firm cash fundamentals but also because August is the only contract of the front five that isn't bumping up against that $100 resistance mark. The December through April contracts pegged contract highs at 100.00 or better. Such prices look a bit extended to me. Beef prices are not supporting current cash prices, showing a packer breakeven pay price of only about $86.75 according to my estimates, which compares to last week's purchases for $91-91.50. That seems to be a legitimate concern, especially amid larger supplies of chicken and pork to compete with beef amid the high energy prices, weak housing market, extended credit, and stock market sell off that are beef demand concerns. Things are not super bearish, but it is difficult to justify prices much higher at this time than the premium already held by futures. The bears are forecasting prices in the low $90s at best for the rest of the year. The bulls are looking for prices around $105. The hedge table below is updated through the first half of 2008. Futures prices look very attractive relative to the midpoint of the quarterly USDA price forecasts.
Feeder cattle futures were mixed on Monday. The August contract was slightly lower, while the other contracts were slightly higher. This may have been largely due to the feature of rolling positions out of August into September. Corn futures were lower much of the day, but that didn't seem to offset the concerns about the cash market catching up with the futures premium. Corn futures posted a rally to session highs after the day pit closed, which should prompt some concerns to bulls. The other perhaps main concern is that corn prices are significantly higher than the last three years, keeping optimism contained. The last three years (2004, 2005, & 2006) saw feeder cattle futures post annual highs in the Aug-Sep-Oct quarter, peaking out at 118.70, 119.75, and 119.35, respectively, according to the monthly nearby chart. Buying enthusiasm may perhaps be drying up with the feeder cattle index trading about $4 lower than futures and corn prices likely to be significantly higher than the last three years (235, 209, & 268 for highs in the corresponding months of the feeder cattle highs).
Lean hog futures were sharply higher on Monday. The buying was attributed to short covering, fund buying, and buy stops. The action has been volatile seeing some back and forth before settling strong. There is continued talk about the bullish scenario if China takes some of our pork, but that seems to be a pretty big if according to much of the commentary that I have read. Friday's action was at the bottom half of Thursday's super wide trading range. Today's action was at the top half of that range, thus posting the highest close for the Oct, Dec, and Feb contracts. These prices are well above levels of last year, which may soon attract selling if there isn't something more concrete from the demand side amid the large pork supplies coming to market. Hog slaughter today was pegged at 391,000 head up 4.3% from last year. Cash hog prices were mostly reported steady to 50 cent lower, although the late-reporting USDA number showed the National Direct trend down more than $2.
Milk futures were sharply higher on Monday. Cheese and butter prices were higher to offer support. However, the optimism was there from the start seeing the 2007 contracts gap higher on the open. There may have been some optimism from the heat forecast this week that could hurt production. There was some commentary about world prices staying high due to production problems in Europe and Australia and strong demand from the developing nations of China and India. These comments talked about some favorable technicals that may have also prompted short covering. Directionals on the charts are trending higher, still working on reversal bottoms.
Positions:
7-26-07: Sold 1 December Lean Hog at 68.65 - risk a close above 71.40
Recommendations:
7-30-07: Sell 1 December Live Cattle on a close below 99.15
