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Corn demand supports prices
Corn Fundamentals: Bullish to corn futures is the day-to-day foreign demand
for USA corn (never more evident as four of the five days last week, S
Korea was a buyer of optional origin corn) and prospects for the Dec corn
production report to come in smaller than the Nov USDA report as Michigan's
harvest is 14% behind normal with Ohio's harvest 8% behind normal. S Africa
corn country remains suspect as weather has been more uncooperative than
Also bullish to corn is how the basis levels continue to be
supported allowing for cash values to remain relatively close to the
futures drive higher. Bearish to corn futures is signs of domestic price
rationing, most evident in the feeder cattle futures and chick and egg data
( see most recent chick and egg data), as well as huge number of combined
futures and options longs held by the non commercials.
Ethanol Data: The Energy Information Administration has finally
released its findings for the month of Sept ethanol production and end
stocks. It really should not come as a surprise how production was mildly
less in Sept vs the previous month, as it is more common than most realize.
USDA is presently estimating corn used for the production of ethanol at 2.15 billion bu. Based on our research as a result of the first month of
the marketing yr release today, USDA needs to raise its estimate to 2.155
bil bu. The ethanol stocks are at a level of 9.7 million barrels, up
500,000 from the previous month. Stocks are estimated at 9.7 million
barrels vs yr earlier levels of 5.3 million barrels. Those with access to
our "Special Reports" section of our internet site (first timers are always
welcome to access an immediate 2 day trial) will be able to view both
production and stocks data.
Corn Exports: Are stronger than typical export pace, 39% above year ago
levels and at 991 mil bu, 30% higher than the most recent three year ave of
765 million bu. Weekly export sales of 40.2 million bu are below the five
week ave of 45.5 mil bu and below the ten week ave of 50.5 million bu.
Something to consider, if China follows through with its plans to cancel
sales made at much lower prices to S Korea for Dec delivery to only re sell
them at higher values for a later shipment date, look for S Korea to have
to come to the USA as it remains the only store in the world which has
immediate access to freshly harvested supplies. Demand from ethanol
continues to compete with other domestic use as well as exporters creating
steady to firming basis levels (Dec Delivery at the Gulf hit a yearly high
for this time of year at 68 cents over Dec futures very early this week),
in part because of corn going to storage and not across the scale.
World End Stocks to Use: As of the Nov WASDE, world end stocks to use are
11.1% vs year earlier levels of 16.0% and are the tightest on record dating
back to 1970. Even more bullish for is how world end stocks for wheat are
16.4% vs year earlier levels of 19.9% and the tightest on hand dating back
to 1970. Argentina will be next in line to harvest its corn crop in March
and India, its wheat crop also in the month of March. Barring adverse
weather, both countries are expected to relieve some bullishness from
Preparing for the Month of Dec: On Monday of this week we went into great
detail how based on similar season average farm prices and comparing them
to projections for 2006/07, odds are 66% that the March futures in the
month of Dec could take out the March futures month of November high and
not breech the low. Month of November, March futures high 3934, low 3344.
Of the two higher high years, one was 11 cents higher while the other by
more than 30 cents.
Broiler Egg Set: this next section is becoming a problem for corn and
soybean meal use. Broiler egg set was down 3% vs year ago levels
for the same week of the year. Over the last six weeks, egg set has been
down 3%, down 3%, down 2%, down 3%, down 3% and this latest 3% downward
move. Why is that important? Because poultry is the largest consumer of
soybean meal and 2nd largest user of corn when analyzing the feed use
sector of the monthly WASDE reports. Eggs in incubators for broilers are
now 209,492,000 vs 215,393,000 one year ago for this week of the calendar
year. Broiler chicks placed are now 161,965,000 vs yr earlier levels of
Cash Corn: The Mar-May corn spread is at 4.2 cents carry and continues to
channel narrower or become stronger. At $3.61 spot cash prices, the cost of
carry is 4.4 cts per bu per mth or 8.8 cents. Anything less than 8.8 cents
is a warning flag to move cash corn. As long as you are hedged in the March
futures you have paid to store your corn on farm. If you are not hedged in
the futures you need to look at your local cash bids to see if the local
cash markets are paying you to store month to month at a minimum of 4.4
cents per month. If the local cash market has gone to an extreme and is
inverted, where the spot month cash price is higher than the following
month then you may sell cash inventory but replace the moved inventory with
a long futures and or options. We fully anticipate futures and cash to work
higher into the March-April time frame.
Corn Technicals: March futures close is 3870 vs last Friday's 3860 and up
16.7% for the month of Nov. Our key custom Moving Averages are 3860,
3820 and uses a 2870 bull to bear pivot point. July futures close is 3946
vs last Friday's 3944 and up 14% in value for the month of Nov. Our key
custom Moving Averages are 3940, 3900 and a 3000 bull to bear pivot point.
Trade Position: we are willing buyers of corn futures but on a pull back.
Tight world stocks, no next new supply of corn until Argentina harvest in
March 2007 and dry weather conditions in S Africa. We remain aware of the
fact of early warning signs of economic rationing as outlined in the
poultry section above, weak feeder cattle futures and a very remote
possibility the USA could become the next country to place quotas and or
limits on corn exports.
Ethanol: technically ethanol is immediately trending higher. Key technical
resistance is 2.25 per gallon for Jan futures while key support is 2.10 per
gallon, tonight's close 2.225. Fundamentals are bullish if you are
processing ethanol as there remains positive profit margins, even with
$3.60 per bushel feedstock input and $125 per tonne DDG byproduct feed. The
fact that Crude Oil has broken up out of its two month sideways trade range
is viewed as bullish to ethanol futures. Don't forget, USDA's Chief
Economist suggest at $40-$45 per barrel crude oil brings ethanol processing
to a breakeven. Interestingly enough, Friday morning, OPEC suggested $50
per barrel crude oil seems to be working just fine!
Corn Acres In 2007: Next year's corn acreage is one of the big questions
everyone has been talking about. For the past few weeks we have been using
estimates not publicly released suggesting a 6 million acre increase is in
store. Based on 84.6 million planted acres, 76.8 harvested, and a 150 trend
yield it would appear 2007/08 ending stocks would total 277 million
bushels. That is much tighter than the 935 estimate USDA implied for old
crop 2006/07. Based on our trend yield estimate and demand numbers it is
clear those are not enough acres. In a previous Allendale "Wrap Up" we
brought up a study comparing the change in price in one year with the
change in planted acres the following year. At that time USDA was using a
$2.60 forecast average farm price (cash, not futures) for corn. Based on
$2.60 our acreage model implied a jump in acres for 2007 of 5.3 million
acres. On the November supply/demand report USDA raised that up to $3.00.
We previously mentioned $3.00 average cash price could equal 8.2 million
more acres. Let's be realistic though, will cash corn average just $3.00
this year? It's hard to see that. It is important to realize all futures
contracts through the rest of the marketing year (August 30, 2007) are
ranging from $3.70 to $3.94.
Corn What If: With that in mind we made our own model to forecast a season
average price. We already have three months of the marketing year finished
off. Based on five year average marketing patterns we will assume 32% of
the crop has been sold from September through November. For December
through August marketings we forecast a cash price for each month. Futures
prices were subtracted from the five year national average basis level for
each month. In addition basis has been 15 cents wider than those averages
so far this year. With this in mind we kept that 15 cent wider than usual
basis on our projections. We also applied a weight to each month to track
average farmer selling patterns. 32% of the crop is usually sold by the end
of November. By the end of January, the biggest sales month of the
marketing year, farmers are typically 54% sold. The bottom line is our
model suggests, at current prices, the average cash corn price will be
$3.33. That is a bit more than the $3.00 total USDA is currently using. The
big question now is what effect could this have on next year's acres?
Originally we have been using a 6 million acre increase and only a 277
million ending stock. If we use our acreage model, which suggests at $3.00
we will pick up 8.2 million acres, we would forecast ending stocks at 476
million bushels. At $3.20 we will pick up 9.6 million acres. If average
prices actually are $3.33 we will pick up 10.5 million acres. We would
calculate a 640 million bushel ending stock.
Corn Summary: There are some points we want to make here. 1) Do not be
surprised if 2007 corn plantings jump by 10 million acres. It can certainly
happen. 2) For now we have to assume the 2007 grown crop will have even
tighter ending stocks than this year. Overall we will assume 2006 through
2008 grown crops will have tight ending stocks and high prices. By 2009
there is a chance acreage growth and annual yield growth will start to
change the picture. 3) Having said this bullish news and talking of this
2006 through 2008 sweet spot' we can have a down year. If we attract 10
million acres next year and we get that great 160 yield which was just
posted two years ago we would forecast a 1.4 billion bushel ending stock.
That would mean an average cash price of around $2.50.
Wheat Acres in 2007: With acreage studies on corn complete we now focus on
wheat. Why not soybeans? The reason is producers generally make
their planting decisions based on wheat and corn expectations first then
add or subtract soybean plantings from there. Additionally oftentimes
soybean acres are dependent on how well corn planting progresses. From an
economist standpoint big increases in old crop corn and wheat prices have a
strong correlation to next year's plantings. Big increases in old crop
soybean prices do not have the same effect on next year's acreage. Over on
the wheat side USDA is plugging in $4.35 for an average farm price for all
wheat varieties. That is 27% larger than last year. While we feel USDA's
corn price projection could be low its wheat price may be accurate. With
that large of a price rally this year we all know planted acres for hard
red and soft red winter plantings could certainly be up. Keep in mind
though soft red plantings in some areas were/are delayed they will
only mute the size of the increase in plantings. One model we have
developed to help our long term projections suggests a 27% increase in old
crop prices will imply a 3.8 million acre increase the next year (fall 06
planted winter wheat and 2007 spring wheat).
Wheat What If: 3.8 million more planted acres and our in-house assumptions
on other factors in the balance sheet could imply ending stock jump from
USDA's 418 million bushel total for old crop wheat up to around 500 million
bushels. That could imply something around $4.15 or so for an average
price. It is interesting to note current futures for Chicago, Kansas City,
or Minneapolis wheat from July 2007 are priced at clear premiums to this.
Also keep in mind other countries around the world will/are already
planning a big comeback in wheat production/exports next year. IE, Friday's
announcement by India the 2007 wheat harvest is est at 75-80 MMT vs the
previous years 69.4 MMT! And the likelihood it will not be an importer of
wheat for 2007 after recently buying 5.5 MMT.
Soybean Fundamentals: anticipated S American soybean production is estimate
to be 4% higher than year ago levels and at 3.9 billion bushels well above
USA production. The majority of the headlines focus on soybean oil for fuel
and food use. USDA suggest a close break-even to use soybean oil for
bio diesel is 30 to 31 cents (cash market) and or $2 at the pump price for
diesel fuel. S American weather is said to be mainly favorable.
Soybean Exports: are stronger than typical export pace, 46% above year ago
levels and at 597 mil bu, 6.7% higher than the most recent three year ave
of 559 million bu. Weekly export sales of 26.8 million bu are marginally
above the five week ave of 26.7 mil bu and below the ten week ave of 30.4
US Census Bureau Crush Data: released Thursday morning at 162 million
bushels it is 2.5% higher than year ago levels of 158 million bu. The
target pace needed for today's release was 160 mil bu. If a similar pace
were to continue, USDA will need to adjust upward its crush demand by 57
mil bu. Typically the amount of soybeans crush drops the next two months.
The target pace needed for the next report is 154 mil bu and then 151
million bu the next month.
Cash Soybeans: The Jan-Mar futures spread is 15 cents. With the spot cash
market at $6.54 per bu, cost of carry per mth is 6.7 cts/bu/mt or 13.5
cents. If the spread is less than the cost of carry, its time to move cash
soybeans. At least for today, the market is paying you to store soybeans.
However as long as corn futures continue to trend higher and pull soybeans
higher we will hold off to announce when to sell the 2006 soybean cash
Soybean Hedges: As an alert, we did hedge our first 20% of 2007 soybean
production last week. Please see our Hedge Advice page for details.
Soybean Technicals: Jan futures close is 6770 vs last Friday's 6842, up
6.4% for the month of Nov. Our key custom Moving Averages are 6750, 6720,
and has bull to bear pivot point of 6140. March futures close is 6920 vs
last Friday's 6966 and finished up 7% for the month of Nov. Our key custom
MA's are 6880, 6850 and bull to bear pivot point of 6230.
Trade Position: we are willing buyers of soybeans on a technical pullback
and as long as corn futures continue to stay in its up trend. We are at
present long both the Jan and March soybean futures as well as the soybean
meal with risk and objectives outlined within our Grain Trading Strategies
page. We have written new trade recommendations for higher trending Jan
soybeans oil futures.
Wheat Fundamentals: as you may have read, the Australian Wheat Board is
going to spin off its wheat marketing division. Australia announced it will
be they which decides if the likes of Cargill and ADM can enter Australia
as grain merchandisers. Thursday its was the Canadian Wheat Board which is
making noise. The Minister of Agriculture wants the present CEO of the CWB
to clarify his position on the Conservative government's plan to dissolve
the CWB single desk marketing monopoly by Dec 14th or be asked to resign.
Look for the resignation to be sooner than Dec 14th. Allendale suggest it
will be private business which will end up competing for world export sales
and not government marketing and or policy. And of course when the likes of
the ADM's, Cargill's and Bunge's of the world end up plastering its
infrastructure throughout the world, guess who ends up on the top end of
the stick and guess who gets the short end? Simply said, advantage global
grain giants, disadvantage, those who supply the grain.
Wheat Hedges: as an alert, we did hedge another 10% of 2007 wheat
production late last week. Please see our Hedge Advice page for details.
Wheat Exports: weekly export sales were solid at 20.1 million bu which is
marginally below the five week ave of 20.2 million bushels and better than
the ten week ave of 18.8 million bushels. Marketing year sales thus far are
poor but did pick up 2% over last weeks 19% behind yr ago levels. Sales are
ow running 17% behind last years pace and at 546 million bushels
accumulated, compare to the three yr ave of 695 million bushels or 22%
below. When looking at our export sales special report within our web site
you can clearly see how after the month of February, sales begin to erode
quickly. If wheat sales were to maintain a similar pace as to what it has
already established for the first 26 weeks, our final export sales could
come in at 644 million bushels vs USDA's target of 925 million bushel and
add 281 million bu to the present end stocks level of 418 million bushel
for a total of 699 million bu. You would only have to fall back to 2001's
777 million bu to find higher levels.
Cash Wheat: The Mar-May CBOT spread is at 4.4 cents carry. At $4.50 spot
cash prices, the cost of carry is 5 cts per bu per mth or 10 cents.
Anything less than 10 is a warning flag to move cash soft wheat. Similar to
what we have spelled out in the corn section, as long as you are hedged out
in the March, you have already paid yourself to store the wheat. If you are
not hedged then its costing you more to store than what the market is
willing to pay and you need to check your local cash markets to see if
there is adequate carry or not. Mar-May KCBT spread is at even money and
clearly signaling end users it wants the wheat now. At $4.75 spot cash
prices, the cost of carry is 5.3 cts per bu per mth or 10.6 cents. The
Mar-May MGEX spread is at 7 cents carry. At $5.60 spot cash prices, the
cost of carry is 6 cts per bu per mth or 12 cents for the time period.
Anything less than 12 is a warning flag to move cash spring wheat.
Wheat Technicals: March CBOT SRWW futures close is 5206 vs last Friday's
5190 and up 3.5% for the month of Nov. Our key custom Moving Averages
are 5150, 5110 and 4430 bull to bear pivot point. March KCBT HRWW futures
close is 5454 vs last Friday's 5376 and up 3.7% for the month of Nov. Our
key custom Moving Averages are 5430, 5370 and 4930 bull to bear pivot
point. March MGEX spring wheat futures close is 5284 vs last Friday's 5234
and up 4% for the month of Nov. Our key custom Moving Averages are 5250,
5200 and uses a 4800 bull to bear pivot point.
Trade Position: we reached our objective on our long MGEX July wheat
futures position as outlined within our Grain Trading Strategies page.
After reaching our long objective in the CBOT and KCBT July wheat futures
late last week, we have prescribed new trade ideas for both within our
Grain Trading Strategies page. Tight world stocks, shrinking Australia crop
and no new supplies until India begins to harvest next March are all
bullish to wheat futures. New crop July wheat futures are expected to
sensitive to winter kill stories throughout the world in the coming
Allendale Lean Hogs: Snow hampered hog kills in at two instances today.
However, as the system finished by around noon for most of the affected
areas packers are expected to make up for it tomorrow. We don't anticipate
many marketings will spill over into next week. For today cash hogs traded
steady to firm. Talk for next week is to expect more of a steady tone. The
main point here is the industry is looking for cash hogs to post their
seasonal low. We feel December futures are priced about right for their
expiration on the 14th. Sideways price action in all contracts could be
seen through the rest of this year. For long term price direction the
industry is still looking for something like a 3% increase in pork
production for 2007. Export growth next year will be very moderate
especially when compared with the last few years. Our models suggest
domestic pork demand fell 4% in 2005 and another 5% this year. There is no
indication 2007 will post any demand rebound. With that in mind we have
more pork and at best stable demand for 2007, a bearish scenario. However,
current CME prices are close to 2006 levels. Is this a time to be making
hedges? While we are generally bearish for long term price direction we do
not expect much of a price break anytime soon. Last half 2007 could post a
significant multi year price low if expansion plans stay the same. Much of
the industry right now is guessing some producers are stopping those plans.
Sow slaughter in the past few weeks has averaged around 4%. The big
question right now is gilt retention, of which there is no good indicator.
For 2007 hedges we are only lightly covered and will hold off until a
better idea of expansion plans is seen.
Allendale Live Cattle: As of this writing active trade was seen today in
Nebraska at $135 on a dressed basis. That was down from last week's $138 to
$139 action. Bids of $85 were seen today in the live based trading areas
but it wasn't until afternoon that action started at $86. That was
generally in line with expectations posted this morning. Last night we also
noted CME December futures have this priced in. In fact, at current levels,
and normal basis levels December futures are implying cash cattle will
trade down to $84 or so by the end of this month. On the weather side the
snow last week in feedlot country was too light to cause a problem. If cold
temps would last longer than currently forecast we could have an issue
there. Though much of the trade is in a bearish mind set our prime trade
right now is only doing bear spreads such as selling the February and
buying August. That spread could work through most of the month of December
before seasonals reverse it in early January.
Allendale is registered with the CFTC and NFA and is a member of the NIBA.
The bottom line is we are a regulated firm which can be extremely important
in this day and age.
Corn Fundamentals: Bullish to corn futures is the day-to-day foreign demand for USA corn (never more evident as four of the five days last week, S Korea was a buyer of optional origin corn) and prospects for the Dec corn production report to come in smaller than the Nov USDA report as Michigan's harvest is 14% behind normal with Ohio's harvest 8% behind normal. S Africa corn country remains suspect as weather has been more uncooperative than usual.