Paragon Investments, Inc.
Monday, August 06, 2007
888-452-8751
Corn:
Fundamentals:
CBOT Dec corn opened down 10 cents at the day's lows of $3.33 a bushel after weekend rains plus precipitation-laden forecasts for the coming week sparked trader selling and long liquidation as the week got underway. However, follow-through sale volumes were very thin as world wheat prices scurried in the opposite direction thanks to another confirmation of strong global demand from Morocco and news that Syria was mulling canceling 700,000 metric tons of exports of Egypt. This robust push higher in wheat reinforced corn's appeal as a feeding alternative by stretching the differential between the two crops back towards historic highs in excess of $3 a bushel, and extended the recent theme that while both markets are facing very different production prospects at the current time, global feed demand will likely continue to shift away from wheat and towards corn as wheat prices push higher. So while corn prices under normal circumstances would head lower as rains fall on an emerging crop, arbitrage and opportunistic buying from the world's feeders will likely limit corn's downside room as long as wheat prices remain firm. A reluctance to extend positions ahead of Friday's monthly USDA supply and demand report also muted the follow-through selling interest in corn early Monday, and also helped offer the market some support as the session wore on and short-term traders moved to balance positions ahead of the close. Corn export inspections Monday were on the light side at 24.517 million bushels, but took a back seat to weather concerns and spillover interest from the stronger wheat market. Looking forward, the market will likely continue to gyrate back and forth on weather updates and in response to movements in the wheat price. More wet weather across the Midwest would be conducive for crop development and by itself would justify a softening in prices. But, if wheat prices continue to charge higher on strong demand then corn can be expected to pick up additional demand from the feed sector that should limit corn's overall downside room. Crop ratings this afternoon declined by 2 percentage points to 56% good to excellent.
Technicals:
December corn was steady, closing near the session high as it made an impressive bounce off the uptrend line draw off recent lows. The high-range close above the pivot point suggests a bullish bias for Tuesday. For Tuesday, that uptrend line support is 333. Resistance is last week's high of 346.75. Stochastics are trending higher. The RSI and MACD show slight uptrends, but at mid-range values could favor a move up or down.
Recommendations:
8-7-07: 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 managed to stage a recovery from sharp losses witnessed early on during the session, with the November contract rounding out the session with only 11-cent losses, which was actually a decent close from considering the 20 ½ cent losses realized at one point in early trade. Weather was the primary driver that sold the market off early, and looks set to be the main focus of the trade going forward, along with Friday's USDA report. On the weather front, we already saw weekend coverage end up being a bit more extensive than expected and forecasts did wind up being wetter for the coming week. And its well known how timely rains can add yield potential to the crop during the most important stages of development, so any rains at this point over the next few weeks are expected to be largely beneficial to crop development. So, this morning's weakness was largely weather driven as the trade looked to scale back some more of the weather premium that has been built into prices during the growing season. It should also be noted that today's weakness developed despite expectations of crop rating declines this afternoon, so it is quite clear that the trade is firmly focused on future weather forecasts rather than how the crop has shaped up to this point. On the news front, reports were mixed today, with export inspections coming in on the higher end of expectations at 10.5 million bushels, where as the trade was looking for a figure around 5-10 million. In other major news, Farm Futures magazine has released their estimate for the US crop size, and yet another analyst that topped the USDA's July projection of 2.625 billion bushels, with a US crop of 2.680 billion bushels. It pegged the nationwide yield at 42.36 bushels per acre, versus the USDA's trend-line of 41.5 bushels per acre. News out of South America saw forecaster Celeres pegging planted area for soybeans up only 5.4% year-on-year, which would be on the lower end of trade guesses of a 5-9% increase from last years planted area. Also, a 5.4% increase seems to conflict with an earlier estimate by another private Brazilian forecaster, who sees acreage rising 7% on the year. So in all, this news was slightly friendly to the trade but really it's going to be a "crap shoot" on pegging actual South American acreage expansion plans until we get into their planting season, so the trade should still monitor these types of reports closely. Looking forward, weather is going to be the primary driver of prices but we are surely going to see plenty of market analysts' production forecasts and positioning leading up to Friday's report, which will aide in steering prices. And for now it seems as though the trade is looking for larger US yields to offset the impact of acreage losses. That being said, the Delta and many Southern growing regions have been shortchanged on moisture and we've seen a lot of acreage move down to those areas this year, so the trade must be prepared for surprises in the upcoming report. Also we have roughly double the amount of double crop soybean acres around the nation, and inclement could further exasperate the potential yield drag that those acres already may see. This afternoon's crop conditions report revealed bean ratings in the good to excellent category declined by 2 percentage points to 56% in that top category.
Technicals:
November soybeans were lower on Monday, but did bounce off session lows to close in the top half of the trading range. The close was above the pivot point so there may be a slight bullish bias for Tuesday's trade, perhaps a "turn-around Tuesday". Resistance is seen at the 50-day moving average of 865.3 and last week's high of 867. Support is the recent lows just above 833. Directionals are trending slowly higher. 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, initially carrying a protective stop of 830 that may have risen as last week's low was 840. The initial objective on the spec long is 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:
CBOT Dec wheat charged to fresh contract highs of $6.85 per bushel Monday after overnight reports of strong tender activity by Morocco - 350,000 metric tons of EU soft wheat plus another 630,000 tons of optional origin - rekindled speculative buying interest and short covering in the market and kept sellers at bay. News that Syria might back out of an agreement to export 700,000 tons of wheat to Egypt was also supportive as it implies Egypt will likely have to turn to other nations for its wheat needs. Export inspections, meanwhile, came in at 25.127 million bushels, which was substantially above trader estimates and sharply higher than the prior week's total. Overall, these stories once again reaffirmed the recent theme in this market - that demand remains strong despite shortfalls in global production - and ensured sellers remain scarce as prices seemingly push ever higher. However, we believe it is significant that wheat's renewed strength Monday had a spillover affect on corn values, plucking the latter crop's prices off early lows and lifting them steadily as the session wore on. The wheat/corn spread widened early Monday to historic highs in excess of $3.40 a bushel as corn headed lower and wheat rallied, but that divergence worked in corn's favor as the session progressed by luring increased demand from the feeding sector away from wheat and towards the considerably cheaper corn. We expect this to remain a recurring trend in this market as wheat prices itself further out of feeding rations while corn scoops up some of that extra business. That said, we can't rule out additional spurts higher in the wheat price if global demand for the crop remains as stellar as it has been of late.
Furthermore, in light of the fact that this market continues to defy expectations of a setback, we would not be surprised to see any lingering shorts in this market ‘call it quits' and cover those positions in the run up to Friday's USDA release, which could well underscore the bullish tone of this market in an official update of this market's supply and demand statistics. The USDA has previously announced that it would provide an update of wheat harvested acreage in Kansas and Oklahoma in this week's report after extensive flooding in those states wiped out certain portions of the winter wheat crops there. Should the USDA's revision be more bullish than the market is anticipating, another pop higher in wheat prices is almost inevitable. So while wheat's price strength is likely shaving off certain portions of use that can be substituted to other crops, we cannot rule out further spurts higher if foreign demand continues to hold up as well as it has in recent weeks.
Technicals:
December wheat was higher on Monday, making a new contract high and highest close for the live of the contract. The high-range close above the pivot point suggests a bullish bias for Tuesday. However, the new high came with a relatively lower Stochastics suggesting divergence that may attract sell pressure, especially with the RSI and Stochastics near overbought levels. Resistance is expected at higher ground as the upper Bollinger Band is 684 and the top of an uptrend channel I have drawn is at 685.4. Support is the June high of 658, which was previous resistance, and 653 the bottom of my uptrend channel. An uptrend line drawn off the April-June highs has some pulls shooting for a test of that line above 700. The breakout above the top of the June-July consolidation range suggested a target of 690.
Recommendations:
NONE
Speculative:
NONE
Livestock:
Live cattle futures were slightly lower on Monday. Cash optimism seems to remain strong, looking for cash cattle prices to be better than last week's $91. However, sell pressure came to futures as they already hold a premium and there are some concerns that beef prices may not be able to climb high enough to support cattle prices this high amid financial woes reflected by the stock market, credit industry, and housing industry. It seems that beef prices are the key to direction this week. Beef movement last week was up from last year, up 4.4% domestically and up about 70% for exports. But prices were relatively low, so movement should have been good. The question is whether beef will continue to move as beef prices climb higher as suggested by the live cattle futures premium. Futures closed near session lows implying that there are many concerned that beef prices won't be able to lead the way. The October chart looks like it is saying that the area of the 20-day moving average of 97.42 is the "line in the sand". If it holds as support, the next move is higher. If it fails to hold, then further retracement to the 96.20 July floor seems likely.
Feeder cattle futures were slightly higher. The lower grain futures were supportive, as were the higher cash feeder reports. Gains were limited due to concerns of the futures premium and the weak live cattle performance. The chart action didn't offer much in sight either. In general, I am bearish since corn prices are much higher than the last three years suggesting that perhaps feeder cattle prices can't make it as high this year.
Lean hog futures were sharply lower on Monday, seeing triple digit losses for the October through next June contracts. August was the exception closing slightly higher as this contract tries to figure where the cash market will be at expiration. The upward push was attributed to ideas that heat stress this week will limit hog marketing's, deter weight gains, and prompt increased death loss. Obviously heat won't be an issue in October. October loss the most as it is the most active and saw the largest run up on Friday. There may also have been some unwinding of bear spreads (today buying August and selling October). Hog slaughter has been much too large from my perspective to like a bullish bias. But today's slaughter was significantly less, pegged at only 341,000. Interestingly that was still larger than last year, which means there is annual maintenance or something to account for the sharp week-to-week decline. It could just be packers are tired of looking at relatively low pork prices and decided to cut back to do something about it. It will be interesting to see what the commentary has for tomorrow. The charts are still in an uptrend, but the lack of a significant seasonal decline should be a worry to the bulls. August pork belly futures continued its retreat, down the expanded limit of 450 points once again. That is 1500 points in four sessions (300+300+450+450).
Milk futures were mixed. Lower product prices offered pressure, but cash fundamentals are generally strong. The hot temperatures that are expected to stress livestock this week may have prompted some of the renewed buying today.
Positions:
NONE
Recommendations:
8-06-07: Sell 1 December Live Cattle on a close below 99.62
