Wednesday, August 08, 2007
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Fundamentals:
CBOT Dec corn climbed 6 cents a bushel Wednesday to build on Tuesday's gains and score its highest settlement since July 13. Short covering and position squaring ahead of Friday's USDA report was the main component of the buying interest seen, as traders become more and more convinced that the report's conclusions may be more bullish for the market than previously expected. Persistent dryness in the south of the Corn Belt also spurred some buying interest, as concerns grow about the quality of the emerging crop in that region amid its final stages of development. Positive technical momentum combined with positioning ahead of Thursday's weekly export sales report also offered lift to the market, and ensured potential sellers proved content to stay away throughout as prices pushed higher. Trader estimates for Thursday's sales report range from 500,000 to 700,000 metric tons for old crop corn, and 450,000 to 800,000 tons for new crop. Overall, the mood in this market has brightened notably within the past few sessions and few traders are willing to apply pressure to prices ahead of Friday's report. Opinions vary widely with regard to what to expect in the report, especially on the contentious issue of yield estimating, which remains precariously difficult at this point in the season. The USDA has thus far used a trendline yield estimate of 150.30 bushels an acre, but recent independent analyst reports have come in on either side of that level to reveal a continuing disparity of opinion on the state of the crop. Regardless of what the actual final yield will be, whatever the USDA proclaims it to be on Friday will set the tone of the corn market for the next several weeks, and will certainly surprise a few traders in the market. Consequently we expect further position squaring and short covering in the run up to the report that could lift prices further Thursday, especially is export sales come in on the higher end of expectations. Potential upside targets for Dec futures include the $3.65 a bushel level initially followed by the $3.70-3.71 and $3.73-3.75 areas. Technicals:
December corn was higher. The high-range close above the pivot point suggests a bullish bias for Thursday. There is the potential for a gap higher open that would project an upside objective of 394.5. There are several layers of resistance to get that high. The first was today's resistance of the 40-day moving average of 359.2. The upper Bollinger Band and the 50-day moving average are at the 365 area. Today's gains took prices above the top of the uptrend channel, suggesting that would no be support, which for tomorrow is 352. Directionals are trending higher to favor the buy side, although Stochastics are moving into an overbought condition.
Speculative Positions:
8-7-07: Bought 1 December Corn at $3.52 - risk a close under 3.51.
Hedge Positions:
3-9-07: Bought December $4.00 Puts $.25 3/4
Soybeans:
Fundamental:
November soybean futures closed with solid double-digit gains Thursday as fresh buying interest emerged in the days leading up to Friday's USDA report. Dry weather in the south is the primary driver of the marketplace, although positioning ahead of Friday's report is certainly adding to the positive tone of the market as there just isn't much in the way of hugely bearish factors to weigh on prices. With regards to the weather, we started out the week on the defensive as rains emerged in the northern portion of the Corn Belt to boost yield potential in bean fields throughout that key region. However, the Southern portions of the Midwest have not received adequate rains to replenish dry soils, and it is that lack of comprehensive rain coverage that gave the market its lift lately. Turning attention to the news today, the only significant story of note was a report that a US trade group sees China importing lees soy this year. The report went on to say that industry reports led them to believe that 50 million pigs had died as a result of blue-ear disease, and that meal demand would be curbed, leading to less soy imports. In all, they forecasted that China would only import 29 million tons of soybeans in 2007 versus earlier projections of 31 million tons. However, we haven't seen a heavy slowdown in US sales and shipments to China out of the US we are now hearing reports that the situation has begun to ease a bit. On Thursday we will get another round of weekly export sales, and trade expectations are looking for a figure somewhere between 300,000-600,000 tons, which, if realized, would continue to show that demand for US beans is on a rather brisk pace. Turning focus to the big picture, Friday will be another benchmark USDA report release, and although production remains a mystery the USDA will give us their first stab at a yield estimate. Trade guesses for soybean production are ranging from 2.550-2.722 billion bushels, with yield forecasts that vary from 40.3-43.0 bushels per acre. Moreover old crop stocks estimates range from 575-603 million bushels, and new crop estimates are ranging from 170-341 million bushels. Taking these figures into consideration, recent demand releases continue to show relatively strong domestic consumption rates, and basis levels aren't all that weak, so we can't rule out that old crop stock levels are lower than the USDA's current projection. If that is the case then we could be faced with lower carry-in supplies, which along with inclement weather in southern growing regions could leave soybean production in question along with the future of the new crop carryout. This has led the speculative community to be rather apprehensive of holding onto any short positions going into Friday's report, and even drawn some fresh speculative buying interest. For Thursday we must review the export sales release to gauge ongoing demand for US supplies, but regardless we may be in for a choppy trade as more position squaring may take place ahead of Friday's USDA release. That said, participants must keep tabs on fresh weather outlook updates with regard to any possible precipitation events showing up in Southern growing regions, which would certainly weigh on prices if realized.
Technicals:
November soybeans were higher on Wednesday. The high-range close above the pivot point suggests a bullish bias for Thursday's trade. The gains pushed up above resistance of the 50, 40, and 20-day moving averages in the 865-870 area. Directionals are trending higher to favor the buy side. This looks like a breakout above the recent consolidation range, suggesting a 30 point move to a target of about 900. 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.
Speculative Positions:
7-31-07: Bought 2 Nov Soybean at 858.25 - risk a close under 862.75
Hedge Positions:
3-9-07: Bought November Soybean $7.80 Put / Sold November $10.40 Call @ ~$.35
Wheat:
Fundamental:
CBOT Dec wheat burst to fresh 11-year highs of $7.04 per bushel Thursday as strong positive technical momentum combined with the already bullish tone of the market to steer prices sharply higher. At one point the Dec contract was 21.5 cents higher on the day, before settling up 18.5 cents. Dec futures on both the Kansas City and Minneapolis exchanges also scored double-digit gains on the day. The recent dominant theme of strong demand met by apparently declining output served as the backbone to the rally, and that generally supportive backdrop will continue to offer a solid undercurrent to the market for the foreseeable future. Adding muscle to this bullish mood has been positioning ahead of Friday's USDA release, which is expected to provide an update on the market's main statistics, including a revised US winter wheat harvested acreage total amended from prior releases to account for flood damaged crops in Kansas and Oklahoma. Reports of fresh demand out of Egypt (88,000 tons of Russian/US whet, to add to the 140,000 or so tons that country bought from Russia Tuesday) added further fuel to the rally Thursday, and the market will be on the lookout for any additional signs of consumer demand over the rest of the week. The next major release detailing such demand is tomorrow's weekly export sales report, which traders are expecting to reveal sales in the region of 600,000 to 1.05 million metric tons. Overall, this market's main focus is generally on what effect continued strong demand matched by only limited production expansion will have on global inventories. Friday's USDA release will provide a clue, and trader estimates for US carryout average around 402 million bushels. Considering the strength of demand of late, Iowa Grain would be not be surprised if we slipped below that key 400 million level to the 375 million area, which would accentuate the current strong tone of the market. Look out for our separate USDA report preview released earlier for a fuller breakdown of our expectations for the report.
Technicals:
December wheat was sharply higher on Wednesday. A new contract high was pegged above the 700 mark. This 700 area is likely to offer psychological resistance. Today's gains negated yesterday's reversals, making that the fourth time that a reversal signal didn't work on the current rally. Directionals are trending higher to favor the buy side, but are showing an overbought condition that could attract selling if given a signal. Resistance is expected on any higher level due to top pickers. Support should be the July high of 678. An uptrend line drawn off the April-June highs has some bulls shooting for a test of that line which for the end of the week is the 720-725 area. The breakout above the top of the June-July consolidation range has achieved its objective of 690.
Recommendations:
NONE
Speculative:
NONE
Livestock:
Live cattle futures were lower on Wednesday. That was a switch from mostly higher in the morning. Weak cash fundamentals prompted the sell pressure. Beef prices were lower with relatively light movement for a Wednesday. Cash cattle prices were reported a dollar lower yesterday at $91, with packer bids dropping to $90, suggesting they didn't want any more cattle unless it was for lower money. October fell through support of its 100-day and 50-day moving averages. The session low came within 20 points of the 95.15 gap objective talked about yesterday. The low-range close below the pivot point favors a bearish bias, but there is apt to be buying on ideas that the recent losses are overdone. For the most part, October has made a 62% retracement of late-June-July rally. If there is some positive cash fundamental news, the buying could return quickly. I am inclined to believe that a neutral to bearish bias may stay ingrained until after next Friday's Cattle on Feed report as beef demand should stay sluggish until that next week and that report should show larger placements.
Feeder cattle futures were slightly lower, trying both sides of unchanged with out much follow through to push very far in either direction. The higher corn prices and the lower live cattle futures offered reasons to sell. Losses were limited, even finding mostly buying early, due to ideas that yesterday's sell off was overdone. Further consolidation seems likely for tomorrow as traders await input from Friday morning's USDA production and supply/demand reports. Support for the September contract looks to the May high of 113.85. Resistance looks to be the previous gap above today's high of 115.05.
Lean hog futures were mixed on Wednesday. August and October were lower. The deferred contracts were higher. October was pressured and February supported due to the unwinding of spreads. The April and June 2008 contracts posted triple digit gains on ideas that the higher grain prices would mean lower pork production. The October chart found some early buying, bouncing on ideas that the recent sell off was overdone. But it finished weak as the spreading lowered it below technical support areas. Fundamentally, October and December could be sharply lower. Many cash hog prices are in the lower $60s for the fourth quarter. These price forecasts were before seeing the larger-than-expected hog slaughter. If hog numbers are up 3-5% rather than the up 1-2%, then this would seem to a bigger downside risk than the China buying is an upside potential. Today's hog slaughter was large at 402,000 head, putting the week-to-date slaughter at 3.6% higher than last year. The IA/MN hog weights were up 0.6 pounds from the previous week and up 2.5 pounds from last year. This seems to be bearish news considering that there was hope that the active marketing's would mean lower weights and that the hot temperatures would have hurt weight gains.
Milk futures were lower. Cheese and butter prices were lower to attract selling. The fourth quarter contracts saw higher action before closing weak. The reversal tops may attract additional sell pressure, especially with the charts showing an overbought condition.
Positions:
8-07-07: Sold 1 December Live Cattle on a close below 98.72. Risk a close above 99.25
