Bill Biedermann, Senior Vice President at Allendale, Inc.
Corn Condition: NASS estimates the July 13 conditions at 64% at "good" or "excellent" vs. last week's 62% and year earlier levels of 64%, and a five-year average of 66%. Allendale suggest crop conditions to improve throughout most of this week, based on private and public weather forecast calling for beneficial weather and an absence of any extreme heat during pollination. Cumulative pollination as of July 13 is estimated at 13% vs. 50% a year earlier and a five-year average of 36%. The lag in the reproductive phase suggests the majority of this year's crop to pollinate in the second half of July and places the 2008 crop to pollinate during the hottest portion of the year. Look for the trade to focus on extended weather forecast for any signs of building heat. Allendale views Monday release as neutral for December corn futures.
Corn Fundamentals: Bearish to corn is beneficial weather for the major Midwest for at least this next week. Continued improving crop conditions headed into next Monday's report are expected. Also bearish to corn is the increasing substitution of feedwheat vs. corn. International buyers not only consider the feed values economics but are also reducing import expenses by securing supplies closer to home base. Bullish to corn is 2008/09 projected end stocks to use to be the second tightest, dating back to 1980 for the U.S. and the tightest world corn stocks to use at 11.9%, dating back to 1980. Also bullish to corn is the lag in growth progress, potentially placing this year's crop at risk by pollinating during the hottest week of the year.
Technically: December corn futures closed below the 50-day Moving Average (MA) on Monday. This has happened before with interesting results. On March 20, December futures closed below the 50-day MA, after holding a solid uptrend. One day later December corn futures closed above the 50-day MA and held until May 29. Once again, one day later, December corn futures closed back above the 50-day MA and held until July 14.
Old Crop Marketing: 6140 cash corn requires 4¢/bu. per month to store on farm. The present futures and cash market continues to offer adequate carry month to month. The present spread between September and December futures is offering 6¢/bu. per month and will cover your cost to carry if hedged in the December futures. Allendale has 30% of its 2007 production not priced to the cash market and will alert when to begin moving to the cash markets.
Trade Posture: Fundamentally, Allendale remains bullish to corn on tight stocks to use. Allendale respects improving crop conditions, however crops conditions at the present stage of growth is not likely a true indicator of impending yield. Technically, Allendale is bearish. Allendale is a willing buyer of December corn futures just above the recent double top of 7150.
Soybean Condition: NASS estimates the July 13 "good" to "excellent" conditions at 59% vs. last weeks 59%, year earlier levels of 62% and a five-year average of 62%. Allendale views Monday's releases as neutral/bullish to November soybean futures.
Soybeans Fundamentals: Bullish to soybean futures is the ongoing Argentina farm strike. A key vote by the Argentina Senate was scheduled for yesterday. The strike has been beneficial for greater than typical weekly export sales of U.S. soybeans. Also bullish to soybeans is the lag in crop maturity and may place soybean pod fill later in the month of August. Precipitation amounts more towards the mid and mid to late August are likely to be key. Bearish to spot month soybeans is a weaker than anticipated NOPA soybean crush report released Monday morning and perceived weekly soybean export inspections.
Soybean Spread: Declining old crop stocks, as a result of the ongoing Argentina farm strike, has soybean futures inverted. The August/November spread is presently at 23.4¢ premium. The August spread has technical based support at 10¢ and immediate resistance at 30¢. It was nearly one year ago when the spread was trading a very similar pattern to present day. A breakout above 30¢ premium, the August in July of 2007 allowed the spread to immediately race to 49 to 55¢.
Old Crop Marketing: $15.52 cash soybeans requires 9.3¢ of carry per month. If not hedged, make certain your local cash markets are offering you sufficient carry. The present August/September futures spread is at 13.6¢ inverse, suggesting it costs more to store the beans than to carry them.
Trade Posture: Allendale remains bullish to soybeans as ending stocks are estimated at 140 million bushels and has a projected end stocks to use of 4.7% vs. old crop stocks to use of a record low 4.1%. Allendale is aware of the potential bearish ramifications of an end to the Argentina farm strike and potential CFTC action on speculation but until those events happen, further rationing will be required.
Spring Wheat Conditions: USDA estimates spring wheat at: 61% "good" or "excellent," compared to 69% for the previous week and 76% in 2007. Allendale views this spring wheat crop condition report as bullish to September MGEX futures.
Winter Wheat Harvest: The 18 states are estimated to have 62% of the 2008 winter wheat crop harvested vs. 52% a week earlier, 67% a year earlier and 70% for its five-year average. The wheat trade was well aware of the Southern Plain's frequent rains that created harvest delays.
Wheat: Bearish to wheat futures is a large world wheat crop expected to increase world stocks by as much as 17 million tonnes over year-ago levels. However, projected world wheat stocks to use are estimated to be 17.3%, second lowest only to 2007/08 levels. Bullish to wheat is renewed export demand for milling purposes as news surfaces that Iraq and the U.S. are very close to signing a deal for 300,000 tonnes of U.S. wheat and that Egypt is once again in the world market for wheat. Australia is estimated between 22-24 mmmt versus the April estimate of 25 million tonnes.
Wheat Crop Marketing: Allendale recently rolled its July hedges directly to the December to cover the cost of carry and added the remaining balance to its merchandizing ledger. We see no reason to hedge new crop above the 65% level we have on for now.
Cash Peak: Dating back to 2000, odds favor a national cash wheat peak for the month of December. Of the most recent eight years, dating back to the year 2000, the national cash peaked has hit in December 50% of the time, with various other months such as October, November, April and May.
Trade Posture: Technicals have turned from neutral.
Lean Hogs: Two pieces of interesting fundamental information were released in the past few days.
- Due to COOL (Country of Origin Labeling), U.S. packers and U.S. hog finishers do not want to use Canadian hogs. Last week's imports of Canadian hogs were down 46% of last year's level. In the two weeks before, they were down 16% and down 23% respectively. Bottom line is fewer Canadian hogs mean packers are bidding just a little more for U.S. hogs. This keeps us neutral to bullish on cash hogs and August lean hog futures. It also keeps us liking the August/October spread.
- U.S. pork exports in May were up 98% over May 2007. In the two previous months they were up 37% and 96% respectively. This is no surprise. Pork exports will be great all summer. The question is what happens to Chinese buys after the Olympics in August. Our downside target for December is $65. We remain 100% hedged through the end of the year and are happy with that position. We are not being aggressive on hedging 2009 contracts as liquidation going on now is a big variable. Now that corn has dropped $1 in the past few days is sow slaughter still big?
Live Cattle: We noted that crude oil was our main focus for cattle pricing from March through June. Corn prices peaked, and concerns about the economy increased, in late June. We are now going back to traditional supply and demand fundamentals in our live cattle pricing. Will placements fall as much as expected with December corn at $6.80 as it would have at almost $8? That is a bearish factor. We are also noting concerns about the economy are still here, if not getting worse. From January through June nonfarm payrolls fell from 62,000 to 88,000 head. This is not the 100,000 head losses economists start to get concerned about. However, will U.S. consumers be eager to buy beef at x% higher than last year when they are concerned about the economy? Let's be realistic here. CME futures were implying something like a 20% increase over last year. Higher prices are due, as we have noted before, but futures have been fundamentally overvalued. We started hedges on the October and December today at 25% of expected marketings.
Bill Biederman is Senior Vice President at Allendale, Inc. You can email him at email@example.com.
This article appeared in the July 17 issue of Top Producer's Moneywise eNewsletter. To sign up for a free subscription, click here.
The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Commodity trading may not be suitable for recipients of this publication. This is not a solicitation of the purchase or sale of any commodities. Those acting on this information are responsible for their own actions. Any republication, or other use of this information and thoughts expressed herein without the written permission of Allendale, Inc., is strictly prohibited. Allendale Inc. c2008