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Corn downtrend remains in place

It was a bit surprising to hear clients ask why grain prices rallied today. It seems as though we have become so programmed into daily losses that any rebound is seen as just plain offensive. There is nothing wrong with Friday's rebound. The forecast changed a little, as noted on the morning Kick Start page, and the markets reacted.

Pollination: Since plantings, weather has been pretty compliant. We have become programmed into the 'weather is bearish' mantra. As of last Sunday the 12th, the nation was 16% silking. We would imagine that as of Sunday the 19th, USDA will report that number around 36% or so. In other words, the last two weeks of this month are an important yield setting time. The market will be interested in any change in the weather during this time. Into this morning, forecasters took some rain out of the early next week system. In other words, weather went from a very bearish factor to a moderately bearish factor. The 6-10 and 8-14 day forecasts are currently showing below normal temps for the entire Corn Belt and a mixed precip forecast. The central and southwest Corn Belt will see normal to above normal precip while the northern areas are in the below normal precip range. So far, given good subsoil moisture levels and a moderate two week forecast we see no weather threat during pollination.

Allendale's Corn Yields: Last Friday, in this wrap up commentary, we made the point that this market is not trading USDA's 153.4 bushel yield. During Monday's broker meeting, which is available to you as an Allendale subscriber, Joe noted the current talk was that traders were thinking yields were 158 to 162 or so. This week we restarted our crop condition based yield model. It revealed, using Monday's crop ratings, a nationwide yield of 157.6 bushels per acre. USDA's numbers for yield, production, and ending stocks are 153.4, 12.290 billion, and 1.550 billion respectively. Our numbers, for comparison, would run 157.6, 12.622 billion, and 1.755 billion. At this time of year most of the yield estimates you hear from analysts are made from a plain guess. The few top tier groups, like us, will use a statistical model of some sort. There are a few weather groups, which have popped up in recent years which use sophisticated satellite modeling. They offer their services to top tier commodity analysts, corporations like John Deere, ADM, and the crop insurance companies, and also to the newer 'outside money' groups. Around three to five years ago we were first approached by the satellite modeling guys. A look at their yield guesses at that time revealed their approach was no better and in fact less accurate, than ours. Last year they approached us again and the results were the same. If they did a better job, we would happily use them. While our statistic based model is not perfect…it is the best thing we know of right now. Until we can start the closely watched Allendale Annual Yield Survey next month, the true farmer-based survey, it is what we have to work with.

Direction: There is nothing wrong with a short term pause in prices here. We have pollination directly in front of us and traders may not want to push the bear cause too much here. Let's keep things in perspective. December corn lost 6 1/2 cents. It just hit new lows for this downtrend yesterday. Markets, even bear markets, do not go down 15 cents every day. We are currently using the idea a 1.5 billion bushel end stock equates to a 310 value area for December corn. If the end stocks are eventually revised up to 1.7 billion bushels then 290/300 is a target. Trading orders should still be selling based. Producers should hold hedges. Buyers of grain (livestock/ethanol) should be thinking about a long hedge program. We are not buying yet but as we near this 300 mark it begins to make sense. We'd be happy to talk over some plans for trading, producer hedging, or buyer based hedging. As Bill mentioned last night, we don’t bite. 800 551 4626.

Trade Idea(s):
(07/17) Sell Dec 343, risk 357, objective 3100.
Option Strategy(s):
(01/23) Bought Dec 410 put @ 51, objective 86 filled for $1,750.

***Disclaimer*** The commentary and trades below are derived from technical indicators provided in our Allendale Advanced Charts pages and may not correspond with the fundamental commentary above.

Corn Technical Commentary: Corn tested yesterday's low at 324 1/2 today, but held it, and then rallied into the close. This was a small victory for the bulls, but doesn't mean we are forming a bottom. The downtrend is still firmly in place.

Vital Technical Indicator: the next projected major turn day is July 22.

Closing Cattle Commentary

Cattle: On the wall near the screen on this desk is a piece of paper with a phrase heard from the floor years ago. It reads, "…when the circus is in town, you gotta sell peanuts." It's a nice way of reminding us that when the market is making big moves that go against your viewpoint, sometimes your best trade is to welcome the market move and go with it in the short term. This is one of those times. If you wanted to find a bullish stance on cattle you would center on 1) low placements into feedlots = low supplies 2) seasonal bottom in cash cattle or 3) outside money buying. On the placement issue, May placements were down sharply. Next week we will learn that June placements fell again. It is a nice story but working it out, those feeders will not finish out until the fourth quarter. In the near term, our placement models still point to the same 4% lower slaughter level from steers and heifers that we’ve been at for some time. They do not show a sudden drop in slaughter levels. On the seasonal issue, we will freely point out that yes, cash cattle typically bottom in July, and sometimes in August. The best case for being bullish is point 3) outside money. Index funds have been buying, pretty moderately, for eight weeks in a row now. It was the sudden influx of trading fund buying in the past four weeks which has changed the picture. Today's commitment of traders report confirmed that. The simple fact is, outside money is buying futures and cash cattle is responding. This afternoon cash cattle sold for $2 higher than last week at $84! If a person was a bear, their retaliation is the simple question…"what has changed?" Really nothing has. The wholesale beef market is not concerned about supplies at all. There is also no new demand right now. In fact, while cash cattle just rallied $2 this week, wholesale beef actually FELL this week. Choice dropped 82 cents and select dropped $1.64. Overall, we have been through these 'outside money' periods before and we will not stand in front of them. For the trading position, we will hold our long December call as a good base position (remember, we are long term bullish). The short August call is simply a way to pay for some of the initial December call premium.

Trade Ideas(s):
(07/17) Stand aside.
Option Strategy(s):
(07/16) Bought 1 Dec 90 call/sell 1 Aug 85 call 1.80, risk to 1.00, objective 4.25. Closed 1.45.

***Disclaimer*** The commentary and trades below are derived from technical indicators provided in our Allendale Advanced Charts pages and may not correspond with the fundamental commentary above.

Cattle Technical Commentary: Cattle finished strong today as they posted a close above resistance at 86.35. This now becomes new support for the market on Monday. The next upside target is the gap from January of this year at 87.60.

Vital Technical Indicator: Next projected major turn day for live cattle is Monday and for feeders is July 22.

Rich Nelson
Director of Research
Allendale, Inc
4506 Prime Parkway
McHenry, IL 60050
800-262-7538

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

It was a bit surprising to hear clients ask why grain prices rallied today. It seems as though we have become so programmed into daily losses that any rebound is seen as just plain offensive. There is nothing wrong with Friday's rebound. The forecast changed a little, as noted on the morning Kick Start page, and the markets reacted.

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