Tuesday, July 31, 2007
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Fundamentals:
CBOT corn futures rounded out the session with 5 ¼ cent gains, basis the December contract while drifting in only a 5-½ cent range on the day. Overnight strength that stemmed from the release of private forecaster and commercial grain house FC Stone's new crop production estimate and weather forecasts helped to boost the market in the opening minutes. However, buying interest certainly lacked conviction across the trading floor and the slightest improvement in rain event outlooks managed to ease prices off their highs ahead of the close. FC Stone released their latest forecast, on Wednesday, for total US corn production at 12.644 billion bushels versus the USDA's July estimate of 12.84 billion. Basically they accounted for lower production via a lower nation wide yield average and have pegged corn yields at 148 bushels per acre versus the USDA's current trend-line yield of 150.3 bushels per acre. This release gave the corn market some strength overnight and gave the market some solid footing to attempt to build on gains this morning. Weekly sales were out this morning, coming in well over trade expectations as old and new crop sales combined for a total of 1,776,200 tons. Trade estimates were looking for only 450,000-1.2 million tons, so this week's totals being well beyond that range of estimates was viewed as fairly supportive figure. Other market news was rather light but there was one story of note regarding the rising costs of food prices in the EU. The article talked bout how unfavorable weather has spiked prices for agricultural products, however the interesting part is that they are feeling the pinch so bad that they find themselves being forced to pass on the added cost to consumers, which is something they have largely been able to avoid in recent years when similar scenarios played out. On the day gains were limited and prices did close off their highs as fresh weather outlooks called some slightly more widespread shower activity than previously forecasted, although changes weren't dramatic they still served to limit price gains. Overall, we watched the market fall short of testing resistance at the 27-day moving average at 345 ½, as the trade is seemingly being a bit more conservative with investments into the agricultural arena these days. This is likely due to the fact that the USDA is already forecasting a sizeable crop, and due out with another production forecast next week. So the trade is left attempting to gauge the actual US crop size and market analysts' forecasts are just starting to roll in. Private analyst Informa is expected to release their estimates tomorrow, possibly at 10:30 CST, so participants need to be on the look out for that release, and fresh weather forecast updates.
Technicals:
December corn was higher, showing an inside-up day. The move higher continued the breakout above the downtrend line drawn off the June-July highs, but found resistance on the move above the 20-day moving average of 342.6, and closed back below it. Support should be the 10-day moving average of 334.2. Stochastics are trending higher after recently turning and giving a buy signal. The RSI and MACD show a slight uptrend, but at mid-range values could favor a move up or down. The 4-day crossed up through the 10-day this week, which favors the buy side.
Recommendations:
8-3-07: Buy 1 December Corn on a close above $3.47
Speculative:
Hedge Positions:
3-9-07: Bought December $4.00 Puts $.25 3/4
Soybeans:
Fundamental:
Soybean futures at the CBOT gained some fair ground and saw gains in-line with corn and wheat markets. November bean futures posted 5 ¾ cent gains on the day, but only traded in a rather tight 7 cent range. Weather forecasts were the main factor that dictated price action during Thursday's session and is surely going to continue playing a vital role in price action in the days leading up to next weeks USDA report. On the weather front, the next ten-day period is calling for above normal temperatures and limited rain events throughout most sections of the Midwest. The best chances for significant shower activity was expected in the northwestern growing areas over the next 5-7 days, or so. This type of forecast kept the trade interested in rebuilding some weather premium back into prices as we got the session underway. However, midday forecasts made some modest changes, expanding shower coverage this weekend a bit further south and east instead of confining rain events to the northwestern section of the belt, which served to limit gains on the day. Weekly sales this morning were fairly solid at 440,300 tons for old and new crop soybeans combined versus trade estimates of 250,000-450,000 tons. Meal sales totaled 110,400 tons for both old and new crop combined, versus trade guesses of 25,000-150,000 tons. Soybean oil sales were stellar at 27,400 tons versus, trade estimates of 0-20,000 tons. Other news was mostly light and the trade remains firmly fixated on weather forecasts for near term direction. In fact, unlike in the corn market, the trade seemed to shrug off FC Stone's higher yield/production forecast and opted to favor trading the possible impact that August weather could have on yield prospects. That said FC Stone raised their production forecast 2.681 billion bushels versus the USDA current forecast of 2.625 billion, with FC Stone using a yield forecast of 42.4 bushels per acre. Looking forward, the market must continue to focus on weather forecasts for the time being. With sharp year-on-year acreage losses any potential weather threat to the US crop can be viewed as detrimental to domestic balance sheets. That said participants will be watching for trade estimates for US production that have just started rolling in. Also, Informa is supposed to be out tomorrow morning with their estimates so the trade will be eagerly awaiting that release.
Technicals:
November soybeans were higher on Thursday, in an inside day that looks like it is marking time. Trade was between resistance of the 50-day moving average of 864.3 amid support of the 10-day moving average of 849.5. As expected, the 4-day crossed up through the 10-day, which is a buy signal to some technicians. Stochastics are working on a buy signal as they start to trend higher from an oversold condition. The RSI and MACD hold mid-range values that could support a move in either direction. Some are looking for a rally up to the 895-900 area to put in the right shoulder of a potential head-and-shoulders top (downside objective of 700). The bulls are still expecting the upward trend to continue after having just put in an ABC correction. A 138% retracement of the recent decline gives an upside objective of just below 1000. A buy strategy was initiated at 850, currently carrying a protective stop of 830 and an initial objective of 890.
Recommendations:
Speculative:
7-31-07: Bought 2 Nov Soybean at 858.25 - risk a close under 848.50
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
Wheat contracts managed to close moderately higher today amid support from this morning's export news. News throughout the day was fairly limited though and contracts settled with only humble gains. Chicago December led the rally by posting a rally of 7 ½ cents, followed closely though by Minneapolis with a 4 cent rally and Kansas City posting 2 cent gains. The trade was supported throughout the session by the 1.74 million metric tons of wheat sales that was revealed in this morning's weekly report. Chicago's December contract managed to break through the $6.60 level for only the third time since the contract's inception. The question now is whether or not additional speculative buying will be triggered by such an event. It is apparent though that prices hovering around the 6.40 - 6.50 level will not accomplish the task of rationing export demand, particularly amid the potential for a heavy shortfall in European production. This week's export figure is second only to last week's with respect to record highs for the decade. The trade is engaged in a proverbial battle between harvest pressures and export demand. Today the market was able to shrug off news of, more or less, favorable harvest weather to support efforts through the beginning of next week. Temperatures are expected to remain below 95 throughout the northern plains and rains should begin to ease in Kansas and Oklahoma by the end of today. Only scattered showers are predicted through the beginning of next weekend. Volatility is expected to continue until the trade can better grasp northern hemisphere production. The USDA's August 10th production report will help with such an effort and hopefully help give the market some more definitive direction.
Technicals:
December wheat was higher on Thursday, making its third highest close for the life of this contract. Resistance was found as it approached the contract high of 678. Support was the June high of 658, which was resistance yesterday. An uptrend line drawn off the April-June highs suggests resistance above 700. The breakout above the top of the consolidation range suggested a target of 690. Traders may prefer to follow the uptrend channel in place for the month of July, which suggests support at 648 and resistance around 682 for tomorrow. Stochastics gave a sell signal Monday, but the RSI and MACD are chopping sideways and could support a move in either direction.
Recommendations:
8-03-07: Buy 1 December Wheat at $6.58 - risk a close below $6.55 ½.
Speculative:
NONE
Livestock:
Live cattle futures were lower on Thursday. Futures bounced from session lows as a surge of buying ran through the cattle complex (some feeder cattle contracts bounced 90 points in the last hour). Futures managed a bounce a couple of times today, but still put in a lower day to "confirm" yesterday's reversal tops. It is common for this formation to see some back and fill the next day, so higher ground wouldn't be surprising. Tomorrow's action will largely be based on the cash cattle trade. Packers are keeping slaughter schedules fairly aggressive considering their estimated negative margins. Cattle slaughter so far this week is running 13% higher than last year, and about even with last week. There is some speculation that Saturday's schedule may be sharply reduced. The year-ago Saturday slaughter was 61,000 head, suggesting that packers will want to make up some of that with the larger weekday schedules. Today's Actual Slaughter report showed live weights above year ago and up 15 pounds from the start of the July. This suggests that cattle owners have been backlogging cattle to take advantage of the better prices being suggested by the futures premium. Rightly so, but that usually means prices won't be as good as expected. I would be surprised if packers bid up prices again next week, but they surprised me last week. A further correction from these highs seems likely as more longs, but the bullish mentality isn't likely to go very far away.
Feeder cattle futures were sharply lower, seeing triple digit losses for the nearby contracts. Losses were much steeper, but saw a significant, late-session bounce. Sell pressure was attributed to the lower live cattle action and the higher corn action. The weekly futures chart is showing the potential for a bearish, outside-down reversal formation. To get it, August futures needs to trade below 115.30. That seems feasible with follow through selling, but traders will be watching corn and live cattle action. For the most part, feeder cattle contracts traded between their 10-day and 20-day moving averages, which seem likely to act as resistance and support, respectively. The exception was September which actually closed below its 20-day as the larger chunk of open interest there may have seen more long liquidation.
Lean hog futures were mixed on Thursday in another volatile session. Futures opened lower on weak cash fundamentals were able to rally to new contract highs for the October and December contracts. The 2008 contracts were lower, pressured by bull spreading that assumes exports to China will only be a short term situation as they get their disease problem under control. October and December futures prices look too rich for me, with no significant discount to account for seasonally increased hog supplies and seasonal price weakness. Hog slaughter was estimated at another large number of 398,000 head, putting the week-to-date figure up 4.3% from last year. This would seem to be a concern of larger than expected supplies as was portrayed with a university survey released at the June World Pork Expo that showed expansion closer to 5%. If that is the case, then demand will have to be much stronger than what pork prices are showing this week. There needs to be some kind of confirmation of China business rather than just the talk/hype. If there isn't pork price support soon, lean hog futures could see a pretty significant correction as there isn't much of a seasonal decline built in and cash prices can be hit hard in August.
Milk futures were sharply higher. September almost saw limit up, pushing above the 19.00 mark. Higher cheese prices were supportive as was some the triggering of buy stops on the move up. September futures stopped at the area where the 50% retracement and the 40 and 50-day moving averages reside. Considering the bearish talk about abundant milk supplies in the USDA Fluid Milk and Cream report, such gains look overdone. However, product prices are supportive of these higher levels. Thus, the futures discount is attractive to buy if product prices hold up or do even better which is out of the question with schools about ready to start to give demand a seasonal boost. Considering the rally seen over the last two weeks, there may be some interest in profit taking, especially before the weekend. Reversal action may attract a lot more selling.
Positions:
NONE
Recommendations:
8-03-07: Sell 1 December Live Cattle on a close below 99.62
8-03-07: Sell 1 December Lean Hog on a close below 71.05
