Evening Report -- July 25, 2012

July 25, 2012 10:03 AM

Fundamentals are still very strong for the corn and soybean markets, but basis has peaked and futures are signaling tops may be in place. With old-crop cash prices at historic levels, it's time to sweep the bin of remaining 2011-crop supplies. For corn, hedgers and cash-only marketers should make the final 10% cash sale to get to 100% sold on old-crop. For soybeans, hedgers should make a 10% cash sale and cash-only marketers a 15% sale to get to 100% sold.

Note: If you need remaining old-crop bushels to fulfill new-crop cash sales commitments, don't make these sales.



NWS: HEAT SHIFTS A LITTLE TO THE WEST... The National Weather Service (NWS) forecast for July 31-Aug. 4 indicates above-normal temps will continue across most of the country. But Wisconsin, northeastern Illinois, most of Indiana and Ohio are expected to see normal temps during the period. The precip outlook calls for above-normal rains across all of the eastern Corn Belt except southwestern Illinois. East-central and northeastern Iowa and all but far southwestern Minnesota are also expected to see above-normal precip. Normal precip is forecast across the rest of Iowa and the eastern Dakotas. Below-normal precip is likely across the southwestern Corn Belt. Click here to view the maps.



ETHANOL OUTPUT AGAIN DROPS TO A NEW LOW... U.S. ethanol production dropped for a sixth straight week as tight supplies and surging prices squeezed producers' margins. The Energy Information Administration (EIA) reports ethanol production declined by 6,000 barrels per day (bpd) to 796,000 bpd for the week ended July 20. That's the lowest weekly total since EIA started releasing the weekly production data in June 2010. Meanwhile, ethanol stocks declined by 551,000 barrels to 19.01 million barrels.



DROUGHT'S IMPACT ON FOOD PRICES... USDA's Economic Research Service (ERS) today said food costs were generally flat the first half of this year, and it left its retail food price inflation forecast unchanged at 2.5% to 3.5% for 2012. ERs sees food prices increasing 3% to 4% in 2013. In its summary, ERs noted the severe Midwest drought will impact retail food prices and said consumers can expect to see some increase in food prices this fall but that most of the impact will be seen in 2013.

Inflation is expected to remain strong for animal-based food products as a result of high feed costs, according to ERs Over the short-term ERs expects producers to increase culling due to high feed costs, increasing near-term meat supplies while decreasing prices. But this would have the opposite effect over the long-term.

ERs also pointed out, "as an overall commodity price index increases, about 14% to 15% of that increase is passed on to retail prices for products that use that commodity as an ingredient." More specifically, if corn prices increase 50%, retail food prices would increase by 0.5% to 1%. Click here for more details.



WEATHER EXTREMES JEOPARDIZE EUROPEAN CROPS... Meteorologist Gail Martell of MartellCropProjections.com says weather extremes are taking a toll on European crops, too. She says northern Europe has been extremely wet, which is damaging the quality of wheat and barley with harvest underway. On the other hand, extreme heat and dryness in southern Europe is reducing corn yield potential as it coincided with pollination. She notes this occurred following USDA's July 1-based adjustment to its balance sheet. Therefore, she says USDA's corn production projection for Europe "needs to be revised sharply lower." Martell also notes that poor rapeseed planting conditions and crop establishment last fall due to drought followed by freeze damage in winter and now a heat wave have caused "devastating losses ... in Hungary, Romania, Slovakia and Poland." Read more global weather highlights.




CORN: As of today, hedgers and cash-only marketers are 100% sold on 2011-crop in the cash market. Hedgers are 35% sold on expected 2012-crop production via cash forward contracts -- 25% for harvest delivery; 10% for March 2013 delivery -- with another 40% of expected production hedged with Dec. $6.50 put options purchased for 31 1/2 cents. Be prepared to advance new-crop cash sales when the market shows signs of topping. Cash-only marketers are also 35% priced on expected new-crop production via forward contract -- 10% for harvest delivery; 10% for March 2013 delivery; and 15% for May 2013 delivery. Hedgers and cash-only marketers should get current with advised sales levels.

BEANS: As of today, hedgers and cash-only marketers are 100% sold on 2011-crop in the cash market. Hedgers are 50% sold on expected 2012-crop production via cash forward contract for harvest delivery with another 25% of expected production hedged with Nov. $14.00 put options purchased for 42 3/8 cents. Get current with recommended sales and be prepared to increase cash sales on signs of a top. Cash-only marketers have 50% of expected 2012-crop forward sold for harvest delivery. Be prepared to increase new-crop sales.

WHEAT: Hedgers and cash-only marketers have 75% of 2012-crop sold in the cash market. Be prepared to increase new-crop cash sales on signs of a top. Hedgers may also add hedge coverage to protect downside price risk when the rally runs out of steam as wheat will lose its support once the corn market tops.

COTTON: Hedgers and cash-only marketers have 50% of expected 2012-crop production sold for harvest delivery. Be prepared to advance new-crop sales on an extended price bounce as long-term fundamentals are negative. Hedgers and cash-only marketers are 100% sold on 2011-crop in the cash market.

CATTLE: Fed cattle producers should carry all risk in the cash market for now. While there's near-term downside risk if demand concerns build, the boxed beef market is showing signs of a short-term low and tight market-ready supplies limit the downside. Feeder cattle buyers and sellers should also carry risk in the cash market.

HOGS: The big discount summer-month futures hold to the cash market limits our desire to add hedge coverage, especially given tight market-ready supplies. But anticipation of a seasonal rise in kill numbers and pork production will keep traders comfortable with futures at a discount to the cash market.

FEED: We are not interested in locking in current, historically high prices for an extended period. But be prepared to extend coverage on a sharp price pullback as supplies will be tight through the 2012-13 marketing year.

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