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Corn prices to work higher into March-April
Corn Fundamentals: USDA's season ave price projections may be a good
indicator of just how many 2007 corn acres could be planted. Dating back to
1970, we have identified four previous marketing years when the percent
increase of the season average farm price has responded similar to the
projection for the 2006-07 mkting yr, as well as other common dynamics.
USDA is projecting 2006-07 season ave farm price at $2.60/bu vs last
yrs $2.00/bu or 30% higher. When comparing this known fact to the other
four years identified on the graph, the following years plantings have
increased in a range from a minimum of 2.3% to a maximum of 10.8%.
Allendale's research suggests corn acres to increase by an amount of 5.3
million in 2007 over 2006 plantings. This suggest total planted acres to be
83.86 million acres. You would have to venture back to 1985 to find
remotely similar planted acres of 83.398 million but below 1981's 84.097
million acres and record acres of 1976's 84.588 when using 1970 as our
The first and foremost question on your mind could be "what if USDA
increases the season average farm price in subsequent monthly WASDE
reports". Good question and our research suggest IF USDA ventures higher
with its SAFP to a level of $2.80/bu then acres added over 2006's 78.561
mil acres, could be 6.7 million or 85.261 million. IF USDA were to use a
$3.20 SAFP, then Allendale's research suggest acres added could be 9.6 mil
for a total 2007 corn planted acreage level of 88.161 million acres.
Weekly Export Sales: As of the most recent official USDA export sales data,
697 mil bushels of corn has been sold (likely front loaded) vs last years
463 mil bu and most recent three year ave level of 503 mil bu. Domestic corn stocks are estimated at 996 mil bu vs 1.971 bil
last yr and 958 mil bu in 2003. World stocks of corn are 90 MMT vs 89 MMT
in 1983 and 125 MMT last year. USDA projects end stocks to use at 8.4% vs 17.5%
last year, 9.4% in 2003 and 5% in 1995. Globally end stocks to use are
estimated at 11.1% vs 16.1% in 2005 vs 14.3% in 2003. World end stocks to
use have not been this tight dating back to 1980.
Weekly Export Sales: Of the three main grains, corn was the only one to
have slipped in the amount needed per week for the balance of the marketing
year in order to meet USDA's target of 2.250 bil bu. It is apparent the
aggressive beginning to this marketing, foreign buyers front loaded corn
purchases in anticipation of higher prices this winter. Our number one
world export competitor of Argentina will be harvesting its crop in March
of 2007 and depending on its success or lack thereof, is expected to be a
factor to price levels. S Korea the past 48 hours has bought 317 K tonnes
of China corn.
90-10 Odds: From the Oct USDA crop report to the Nov WASDE report, odds are
90% favoring an ave increase in production of 110 mil bu. Those odds sink
to 70% from Oct to the Jan annual with an ave increase of 131 mil bu.
Six to Ten Day and Two Week Forecast: after five consecutive days of
forecast calling for below ave precip and temps for both it is tonights
6-10 day which forecast above normal precip but the two week forecast is
calling for normal precip. Look for a good start to next weeks harvest but
potential interruptions in the northwest cornbelt by the end of the week.
Harvest has been very active this week in the west with delays in the east
Five Year Ave Cash Price: The five year ave cash price for corn for the
month of month of Oct $2.05, month of Dec $2.11. Fall delivered corn price
for this year is quoted at an ave of $2.95.
Broiler Hatchery Report: Both eggs set and chicks placed are up slightly vs
year ago levels and is viewed as support to corn and soybean meal prices.
Remember, it is the poultry sector which uses 50% of all meal demand and is
the number two consumer of corn, 6.5% behind beef's 33.7% usage.
DDG vs Corn and Meal: There may be plans in the works for USDA to adjust
how much corn is displaced by distillers dried grain (a by-product of
ethanol production). USDA could revise the amount of corn replaced by DDG
by as much as 40% and decrease the amount of meal displaced by DDG by as
much as 60%. Rather than estimate 50% of corn and 50% of meal replaced when
a pound of DDG is fed, the new ratio could wind up closer to 70% corn and
30% soybean meal. The impact of this new ratio could be discovered by the
January annual crop production, supply-demand report. The bottom line is
USDA could be willing to increase corn stocks and decrease soybean meal
Cash Corn: The Dec Mar corn spread is at 12 cents carry. At $2.95 spot cash
prices, the cost of carry is 3.2 cts per bu per mth or 9.6 cents. Anything
less than 9.6 is a warning flag to move cash corn. As you work through your
harvest, you might have a much better idea if there is sufficient storage
on farm. If not, we would strongly advise to sell surplus bushels into the
cash market when the spread strengthens to 9.6 or more. We fully anticipate
futures and cash to work higher into the March-April time frame.
Corn Technicals: Dec futures close is 3126 vs last Friday's 3144. Our key
custom Moving Averages are 3140, 3040 and uses a 2620 bull to bear pivot
point. March futures close is 3246 vs last Friday's 3240. Our key custom
Moving Averages are 3240, 3150 and a 2720 bull to bear pivot point.
Trade Position: Fundamentals have caught up with technicals and paint a
bullish scenario into the winter of 2006-07. World end stocks to use are in
a unique class and have very close company with the "other starch", wheat.
Our long range obj on July 2007 corn futures remain unchanged from our
August release of 3400-3600. Without out any major surprises in the March
2007 time frame, we are expected to be busy moving all 2005-2006 cash crops
and hedged aggressively our anticipated 2007 corn production.
oybean Fundamentals: Like corn, soybeans are experiencing strong domestic
and export demand. Of the three main grains, it is the soybeans which
clearly have the most complete bearish fundamentals. However, the
speculative interest is very bullish soybean oil as a source for bio diesel
and found a grain by-product which had less downside potential than upside.
Export Sales: Six weeks into the 2006-07 marketing year and sales of
soybeans to foreign buyers have reached 440 mil bu vs last years 266 mil bu
and three yr ave of 359 mil bu.
60-40 Odds: From the Oct USDA crop report to the Nov WASDE report, odds are
60% favoring an ave increase in production of 40 mil bu. Those odds sink to
50% from Oct to the Jan annual with an ave increase of 54 mil bu.
Soybean End Stocks: 2006-07 domestic end stocks are est at 555 mil bu vs
449 mil bu last yr. Prior to 2006, five yr ave end stocks of 241 mil bu.
World stks of soybeans for 2006-07 are estimated at 55 MMT vs 52 MMT last
year. The five yr ave has been 42.2 MMT. World end stocks of soybeans have
increased 77% since the year 2000. Projected domestic end stocks to use are now 18%
vs 15.6% last year and 8.4%, 2001-2005 ave. Globally, a level of 18.9% vs
18.7% last yr and 16.3% from 2001 to 2005 ave.
Five Year Ave Cash Price: The five year ave cash price for soybean for the
month of Oct $5.53, month of Dec $5.61. Fall delivered soybeans are
presently quoted at an ave of $5.82 per bushel.
Cash Soybeans: The Nov-Mar futures spread is 21 cents. With the spot cash
market at $5.82 per bu, cost of carry per mth is 4.8 cts/bu/mt or 19.2
cents. If the spread were to fall back below 19 cents, then its an
indicator that it cost more to store soybeans than to sell to the cash
market. Use this present rally to sell any small overages which will not
fit into your on farm storage.
Soybean Technicals: Nov futures close is 6064 vs last Friday's 5914. Our
key custom Moving Averages are 5820, 5750, and has bull to bear pivot point
of 5990. January futures close is 6202 vs last Friday's 6054. Our key
custom MA's are 6110, 6020 and bull to bear pivot point of 6080.
Trade Position: Fundamentally, we remain bearish to soybeans and the Oct
WASDE report only reaffirmed our conviction. Technically we are cautiously
approaching more of a bullish stance. We have written new speculative trade
recommendations within our Grain Trading Strategies page. Our long soybean
oil futures position did reach its objective Tuesday and then went short
soybean oil futures anticipating a correction. We have resting orders to
buy the soybean meal but on a considerable pullback.
Wheat: Bullish to wheat is tight world stocks and the speculative driven
futures rally. Corn, beans and wheat exports all came in considerably less than the previous week and previous
four week averages, is this a early warning sign of price rationing? Russia
indicates attractive world prices could increase its export campaign in
2006-07. Also of interest is the Chicago exporter possibly anticipating
large SRWW delivers when first notice day for the Dec futures rolls around
on Nov 30th as they have requested an additional 1 mil bu of storage space.
Cash Wheat: spreads have widened back to full carry for MGEX spring wheat,
KCBT HRWW and the CBOT SRWW. The spreads did narrow enough to allow us to
move a third of our wheat inventory on Tuesday before the open on Wed.
Apparently domestic and foreign demand has been satisfied for the month.
Given the tightness in domestic and world stocks Allendale's research
suggest the peak for the cash market for wheat could arrive in late March
early April 2007. However there is a second time frame which has also shown
strength and that is Oct-Nov. Allendale officially recommended to move the
15% of unhedged wheat from the 2006 crop to the cash market and the first
20% of its hedged wheat at the end of trade on Tuesday, before the open
Wheat Technicals: DECEMBER CBOT SRWW futures close is 5050 vs last Friday's
5254. This is the first weekly close below the previous week since this
recent rally began on 9/26/06. Our key custom Moving Averages are 5150,
5200 and 4800. DECEMBER KCBT HRWW futures close is 5310 vs last Friday's
5430. Our key custom Moving Averages are 5290, 5320 (new resistance) and
5120. DECEMBER MGEX spring wheat futures close is 5096 vs last Friday's
5216. Our key custom Moving Averages are 5080, 5010 and 4940.
Odds from Oct to Jan: odds are 1 in 10 that the Jan annual report may have
larger wheat production and 50% odds of an ave of 11 mil bu less.
End Stocks: 2006-07 projected end stocks of 418 mil bu compare to last
years 571 mil bu and 491 mil bu in 2003. In 1995 domestic end stocks were
377 mil bushels. World end stocks are estimated at 119 MMT vs 147 MMT last
year. Want to find world stocks tighter than 2006-07 projections? Fall all
the way back to 1981's 113 MMT. But present projected end stocks to use
have a much different view than in 1981. Projected 2006-07 world end stocks to use are 16.5% vs
last years 19.9% and 2003's 18.9%. In 1981 end stocks to use were 20.8%. As
covered in the corn section, starch stocks are at record tight stks to use
levels dating back to 1980.
Export Sales Are Hurting: 2006-07 export sales are now 20% behind last
years pace and at only 428 mil bu, pale in comparison to the previous three
yr average of 563 mil bu. First quarter marketing year wheat exports are
down 21% and since 1987-88 had one other year which began as weak, only to
wind up 15% below the USDA target. 15% below USDA's present target of 925
mil bu is 786 mil bu.
Trade Position: We remain long CBOT and KCBT and have written new orders
for MGEX wheat after successfully reaching long objectives at all three
exchanges just recently.
Allendale Lean Hogs: Today's Cold Storage report indicated 10.250 million
lbs of bellies had been moved out of warehouses last month. That was on the
high end of estimates which ranged from our 5.302 to 11.0 million lbs. It
indicates a measly 1.7 million lbs of pork bellies had been brought out of
warehouses from the previous month. That is the lowest out movement in 30
years. The total pork count, which could impact lean hog futures, was also
bearish. 464 million lbs of pork were in warehouses at the end of
That is the second largest pork number for that time. Only 2002
was worse at 480 million lbs. It was also surprising to see the stock
increase totaled 60 million lbs. That is the largest increase for that
month! We wonder if some of these stocks were expected to be exported but
are still here due to a drop in export demand. In the short term trade this
week's kill was 2.2 million head. While it is only 1% higher than last
year it is the largest of the year so far. Cash hogs were down $1 today and
are seen the same into early next week. New lows were reached in this
downtrend on the December contract this week and pressure typically lasts
into the end of the month. We are fully hedged on marketings through the
rest of the year using the December contract and would recommend shorts on
the speculative side.
Allendale Live Cattle: This week's cattle kill came in 3% higher than last
year. Since the beginning of September it has been very predictable at 2%
to 4% higher. Contrary to market expectations, we feel it will remain very
manageable through the rest of this year. In fact don't be surprised to see
feedlot slaughter (steer and heifers) to actually decline compared with
year ago levels at some point between now and December 31. Our placement
models suggest increased slaughter rates won't be seen until 2007 rolls
In the big picture the industry is asking if expansion is still
happening. This drought has pushed beef cow slaughter up 17% this year
compared with last. The question is are producers holding back enough
heifers to offset that big slaughter? The answer has now changed to no. On
Tuesday I was at an industry meeting where a cattle market speaker
suggested enough heifers were being held back. Today we say it is not. Back
on July 1 heifers in feedlots were 5.2% larger than last year.
Friday's Cattle on Feed report showed heifers in feedlots are now 16.0% larger than
last year as of October 1. We have confirmation cow/calf producers have
been pushing cows as well as heifers off pastures and into feedlots.
Expansion has officially stalled until solid moisture returns to the
plains. In other news Cattle on Feed can be construed as neutral. During
the month of September cattle feeders placed 94.8% of last year's total.
That was a little lighter than the average guess of 97.1% Our estimate was
close to the actual at 96.3%.
The Marketing total was weaker than last year
as well at 97.2%. That was a little bearish compared with estimates of
98.3% but about on our guess of 97.7%. The net result is total Cattle on
Feed as of October 1 was surveyed at 11.385 million head which is 108.6% of
last October 1. It was almost on the 108.9% surveyed and very close to our
108.8% estimate as well. The net result is this report is generally
neutral. You could argue the weaker marketing total could be a little
bearish the December while the lighter placement could support the February
and beyond contracts.
Of interest in recent months is the placement weight
breakdown. Placements of 800 lb and heavier, 700-799 lb, and 600-699 lb feeders were
down 12%, 18%, and 18% respectively. The only category showing an increase
was the 600 lb or less calves which were up 28%. This simply confirms what we
have known for some time. There is a low supply of medium and heavyweight
feeders as numbers on grass have been moved to feedlots earlier. In
upcoming reports the question will be on how corn prices impact placements.
Next months report, which covers activity during October, could show
placements down 10% to 25%. Back on Sep 25 December corn settled at $2.54
3/4. The same day Oklahoma City traded 725 lb steers at $119.95. This past
Monday December corn settled at $3.16 3/4 and those same steers ran
$107.88. Yes, there is a direct relationship here.
The main point here is the market still has not
priced in the impact of this large corn rally. It is likely we have a
little window in time before feedlots start seeing those feed bills
balloon. Perhaps at that time they will fully start discounting calves and
feeders. Main point cow/calf and backgrounders is do not hold unto unhedged
animals for too long this year.
Corn Fundamentals: USDA's season ave price projections may be a good indicator of just how many 2007 corn acres could be planted. Dating back to 1970, we have identified four previous marketing years when the percent increase of the season average farm price has responded similar to the projection for the 2006-07 mkting yr, as well as other common dynamics.