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Market already reacting to weather predictions

In a word, La Nina. The NOAA has released data which
suggest a La Nina as early as April with an adverse impact US summer crops.
World Weather Inc (our Weather Watch provider) suggests caution before
buying into making key financial decisions. If the NOAA model is repeated
within a wk or two, more confidence may be placed in a developing La Nina.

ETHANOL

First, the very obvious, the entire world investment community is
enamored with prospects of alternative fuels. More directly to the
agriculture community is the prospects of increased demand, more strain
placed on an already tight stocked corn inventory. Held within USDA's 15
year baseline projections, call for a 49% increased in corn use for ethanol
in the 2007-2008 marketing year. For 2006-07, USDA forecast corn use for
ethanol at 2.15 bil bu (up 34% over 2005-06) and have not increased it's
demand estimates even though an ave of 2-4 new plants coming on line each
month. There may be a good reason why. According to the Energy Information
Administration (report ethanol production and stocks levels) for the first
three months of the marketing year, production is not keeping pace with
USDA and Dept of Energy's target. As mentioned this year's corn use is
projected 34% higher than the year before 1.603 bil bu. For the month of
Sept, corn use was only 27% higher, Oct 24% higher and Nov 24% higher. As
you can see because of the lag in reporting by the EIA, USDA has no reason
to revise corn usage off the 2.15 bil bu. It was during these 1st three
months, corn futures were rallying while crude oil was dropping. Very
likely ethanol plants scaled back on operating efficiency as profit margins
came off of $7 net per bushel highs in the summer of 2006 to recent lows of
$1 per bushel.

CORN PRODUCTION AND STOCKS

At 10.3 million barrels of ethanol produced for the
months of Nov and Oct of 2006, they represent record production. Oct's 10.3
million barrels is 2 million barrels more than Oct of 2005. The same is
true for the month of Nov. Interestingly at the same time ethanol
production was clipping higher by 2 million barrels per month, we need to
look at stocks levels to see how its barometer is operating. For the month
of Sept 2006, ethanol stocks were 4.4 million barrels more than Sept of
2005, Oct 2006 stocks of 9.8 million barrels were 4.2 million barrels
higher than Oct of 2005 and in Nov of 2006, stocks were 3.5 million barrels
more than yr earlier levels. Two observations, #1 is how the stocks of
ethanol are building at a faster rate than production. #2 is if there is a
glimmer of positive news is how from the Sept and Oct levels, Nov stocks
did at least drop showing signs of usage.

ETHANOL PICTURE

As the stocks out pace production it is important
to know, just how much ethanol needs to be produced for 2007 consumption.
This is where Allendale's research relies upon official Dept of Energy
records. After using 141 billion gallons of gasoline in 2006, the DOE
anticipates (and this is extremely current data) the 2007 gasoline use to
be 142 billion gallons. This suggest 5.6 billion gallons of ethanol will be
needed to blend for total gasoline and ethanol usage for 2007 of 147.9
billion gallons. To leave present ethanol stocks unchanged, this 5.6
billion gallons of ethanol could require 2.07 billion bushels of corn when
using a conversion factor of 2.7 gallons of ethanol from one bushel of
corn. With 107 ethanol plants currently on line and operating, its
production capacity is 5.789 billion gallons, surpassing the 5.6 billion
gallon ethanol target, and still would be able to add a few stocks. As long
as all 107 operating plants remain on line, its capacity could require
2.144 billion bushels of corn. Now do you see how USDA may be stuck on its
2.15 billion bushels of corn use? By 2010, the DOE is estimating 10.6
billion gallons of ethanol will be required to blend with the 146 billion
gallons of gasoline to be used. 10.6 billion gallons of ethanol will
require 3.93 billion bushels of corn IF all ethanol at the time is made
strictly from corn. We look at Thursday's 15 year baseline projections
released by the USDA and its suggest corn use for ethanol will be 4 billion
bushels of corn. Once again, it may become more apparent where USDA is
pulling its corn use estimates for ethanol from. There are approximately 67
plants under construction or in expansion phase. These 67 plants have the
capacity to produce 5.136 billion gallons of ethanol. Add in the 107 plants
currently operating and we have total production capacity of 10.9 billion
gallons which can meet the 2010 target. One last scenario to work on. By
2017 the DOE suggest 11.5 billion gallons of ethanol will be needed to
blend with 161 billion gallons of gasoline. This 11.6 billion gallons of
ethanol will require 4.3 billion bushels of corn if all ethanol is to be
derived from corn. Presently there are 88 ethanol plants in the process of
obtaining building permits and another 71 ethanol plants in the planning
phase. The combined operating, new construction-expansion, permitted and
planned plants would have the capacity to produce 26.294 billion gallons of
ethanol which would require 9.75 billion bushels of corn. USDA's 15 yr
baseline projections suggest 4.35 billion bushels of corn needed for the
2016/17 marketing year. There are several points to ponder in the end. Some
of those questions could be, what could the real value be of the planned
and a portion of the permitted plants if production could far exceed
demand. Could it be the US will need to mandate for all states a specific
ethanol requirement to be blended as production out paces demand? Does the
proposed $1.6 billion dollars of budgeted monies for cellulosic research
temper the ethanol future plants plans?

First you sell the grain (released on Thursday USDA weekly export sales and
shipments report), then you inspect the grain (released on Monday's) and
then you ship the grain (released on Thursday USDA weekly export sales and
shipments report). Inspections do not have to mirror sales. It's more than
obvious the futures trade like to judge the actual results to the pre
release estimates. You can not fight it, its the nature of the archaic
beast. We prefer to see if progress is being made with the actual sales. We
suggest it is more important to have sales exceed the amount needed on a
per week basis in order to meet USDA's final target. If sales are slipping
for even a short period of time it can help better regulate how much and
when grain inventory needs to be moved. These sales results not only have
an impact on the futures bu the basis as well and can be used as a good
risk management tool.

The trade likes to use the weekly export sales as a barometer of demand
when other key fresh fundamentals are lacking. The table above does show
how corn export sales from Feb through May have remained historically
strong enough to meet the minimum needed on a per week basis to meet this
years final export estimate. The same is true for wheat until we hit the
month of May and a reason why it will be important to move old crop off
farm before the month of May and April for soybeans.

TECHNICALS

For the short term trader, Allendale uses its own unique custom
Moving Averages to monitor price momentum, define key support and
resistance levels as well as advise where key pivot points are located when
bulls may turn bearish and bears to turn bullish. We also include last
weeks closing price for the weekly chartist as we draw closer to the end of
the week to anticipate the possibility for futures to have a positive
weekly close or if weakness is ensuing.

Observation: Healthy for all is the futures ability to close above last
weeks closing price and maintain a close above the 1st and 2nd key MA.
Positive is how old crop CBOT and MGEX wheat were able to hold above the
key pivot point at weeks end. Allendale is aware of the importance and
timing for the grains technicals and fundamentals. It is why Allendale
makes available to you.

Acreage: Allendale is in the midst of conducting its 18th annual farmer
driven acreage survey and the first week of the two week survey response
has been exceptionally active. The realistic range of estimates is for corn
acres to increase over last years plantings by 6 to 12 million acres.

Allendale Inc released its outlook for 2007 crop supply and demand on Jan
20th, the Congressional Budget Office released its 2007-08 estimates
compared to the 2006-07 marketing year on January 26th, USDA Budget
estimates on 2/7/07 which are the same as the 15 year Baseline Projections
for corn but it is not the case for soybeans. At least two more USDA
projections are expected to be digested by the trade. The next series is
anticipated from USDA's Outlook Forum on March 1-2 and then USDA's World
Outlook Board will release its first official estimates for the 2007-08
marketing year on May 11th.

CORN OBSERVATIONS

The CBO season ave farm price is $3 for corn with 870 mil bu
of projected corn end stocks. USDA Budget is 210 mil bu less and only
raises the SAFP by 50 cents and only 30 cents more than USDA present end
stocks estimate of 752 million bu with nearly 100 million bushels less end
stocks projected for 2007-08. Of the three 2007-08 estimates both the USDA
Budget and Allendale projections suggest soybean end stocks to be larger
than the corn end stocks! This has not occurred ever dating back to 1980.
End stocks for corn in 1995 at 426 mil bu and a SAFP of $3.24 and 883 mil
bu end stocks in 1996 with a SAFP of $2.71 and yet with 660 mil bu
projected for 2007-08 a SAFP of $3.50. Both the CBO and Allendale have
soybean carry in stocks in the mid 500 mil bu level, USDA is a whopping 300
million bu more! And further projects 2007-08 end stocks 386 mil bu more
than the CBO and 227 mil bu more than Allendale's estimates but yet comes
up with the most significant SAFP of $6.95/bu. And of course on a more
unique topic is how can the 15 year baseline projections be content with
using the mirror image of last Wednesday's Budget estimates for corn but
cut the soybean end stocks in half in today's 15 yr projections? Even more
unbelievable is after such a large cut in end stocks, the 15 year baseline
projections suggest the seasonal average farm price is only worth a nickel
more at $7.00 per bushels vs last weeks $6.95 SAFB. It really makes the
mind work in overdrive and ask, is the USDA grounded by reflecting a true
economic value based on supply and demand or are their branches within the
USDA 15 Year Baseline Projection committee which use a special "Dart
Board"!

ACREAGE RESEARCH:

Allendale research is able to
statistically estimate additional corn acres planted in 2007 over 2006
levels based on the season average farm price. Dating back to 1970, we are
able to identify four years in a block of time between 1987 to 1995 which
correlate well with the projected increase in SAFP from 2006 to 2007. More
importantly in order to arrive at an acreage estimate, we need to, and have
projected the annual season average farm price with seven months remaining
in the 2006-07 marketing year. Allendale's season average farm price
estimate is $3.11/bu. Based on the Allendale SAFP projection it suggest
additional corn acres 8.9 million more or 87.2 million. The difference
between our 87.2 mil acre estimate and our official 87 mil acre estimate
used in the supply demand above is remember the 8.9 million increased is
based on statistics and a block of history where as the 87 million acre
estimate in the S & D table above is using all filters when deriving
estimates.

YOUR CORN THOUGHTS

What are your own thoughts as to how many more
corn acres could be planted in 2007 over 2006? What do you see in your
surrounding area? Are you able to secure the seed you need? Will moisture
conditions permit you to plant corn or does it look like another year of
low water intense crop? If you have not yet had the opportunity to
participate in our annual survey, please do.
Seasonal Tendency for Old Crop Corn Sales: special research Allendale
performed suggest with more normal average end stocks amounts we focused on
the old crop July futures 3 and 5 year average seasonal tendencies as well
as the ave national cash price and have to remind ourselves it is the late
March, very early April time frame when peaks have been reached for corn
prices. In stock years, in 1996 the national cash corn price peaked at
$4.43/bu in the month of July and in 2004 the national cash corn price
peaked in April at $2.89/bu. Our conclusion would be we continue to stick
with a program to begin to move 2006 cash corn in the month of March and
with the newest data above conclude in short stocked years July corn calls
could be bought as a form of reownership but be prepared to exit in April.
For those willing to be more aggressive in the month of Feb you could buy
July corn futures and hold into the month of July but be prepared for
increased risk. Let us know your thoughts about the above data. It's time
to take action with regards to your 2006 cash corn crop in the form of
reownership and in the month of March to be prepared to move corn.

SOYBEAN SEASONAL TENDANCY

Just a day after we had presented the special
report on the timing of old crop corn sales we present a similar study for
soybeans. the five year average July soybean futures, find a nearby peak
between the months of April and May. They then correct by 25 cents down
into June but rebound in July by 15 cents over the peak of the month of
May. This gives us a better sense of timing on the futures that it is the
April-May time frame when we need to prepare to utilize the strength in the
futures. In short stock years, in 1996, 1997 and 2004 the cash price has
been significantly better than in average stock years. These three years on
average find its peak in the May June time frame before falling in the
month of July.
Allendale July 2007 Price Projection: our July price projection released
Jan 20th of this year does suggest July soybean to reach $8 before the
March 30th planting intention report, correct by 50 to 75 cents as we enter
the fields and make one last push to $8.50 before correcting one last time
into futures expiration by nearly a dollar. The conclusion for old crop
soybeans based on the cash price history suggest the month of May into June
is attractive and based on our price projections would coincide with the
same time period. If you would like to discuss the cash marketing
alternatives for your specific operation, please feel free to contact your
Allendale Representative. Old and New crop price projections are held
within our website. All subscribers to the Allendale Advisory Report, which
may not have access to the web site are able to ask us to e mail, fax or
U.S. mail them these price projection reports.

WHEAT FUNDAMENTALS

Consider the following, last years TX, KS and OK hard
red winter wheat crop was mainly of poor conditions per the USDA weekly
crop condition reports at harvest time. Export sales of USA wheat at 722
million bushel vs a three yr ave of 885 mil bu with 15 weeks remaining in
the marketing year. At least 3.5 million more acres of winter wheat planted
for the 2007 harvest. It's time for those holding last years wheat crop to
begin to move old out of the bin and prepare for new crop. There is a rumor
a well know Texas feedlot operator is switching from corn to wheat in its
rations. The feedlot is viewed as the 2nd largest feedlot system in the US.
They have 9 feedlots with 7 in Texas and 2 in Kansas for a total capacity
of 520,000 head. Over a year that means they could feed approximately 1.0
to 1.3 million head of cattle. This year's kill from feedlots will total 28
million head. Our estimates suggest the feedlots use 50 million bushels of
corn in a year (in a range of 40 to 80 mil bu). Wheat's energy value is
similar to corn but it has a higher protein level. Cattle feeders can
switch to wheat when it is priced less than 110% to 115% of corn's price.
Most feedlots in Texas are concentrated within 150 miles of Amarillo (Texas
Panhandle). Thursday's corn price in that area was $4.32 while wheat was
$4.51. This suggest wheat becomes a value in feeding when it is priced
$4.75 to $4.97 which right now it is less than. How much wheat can be fed?
Generally it should be limited to only 30% to 50% of the total ration. Corn
normally makes up 70% to 80% of feedlot rations depending on the area. This
year USDA expects 5.975 billion bushels of corn to fed. Corn coming out of
ethanol use will total another 710 million bushels. Total wheat expected to
be fed 145 million bushels. Perhaps we could see USDA recognize some
switching in the next few monthly WASDE reports and eventually drop corn
feeding by 100 million and pushed into wheat feeding. That could push corn
stocks from 710 to 810 mil bu.

DOMESTIC END STOCKS

The 472 mil bu of projected 2006-07 are unchanged from
the Jan WASDE and are 100 mil bu less than yr ago levels. You would
have to venture back to 2001 to find close levels of 491 mil bu.

WORLD STOCKS

At 120 million metric tonnes, they are 1 MMT less than the
Jan estimate. Only in 1980 and 1981 would you find fewer stocks of 113 MMT.
One yr ago, world end stocks were 147 MMT. Both world and domestic stocks
may have little discussed last Friday when USDA released its findings.
However the trade would be smart in using the data as stray voltage to keep
wheat futures supported just in case the wheat does not make it from the
field to the bin in 2007 for major northern hemisphere countries.

TRADE POSITION:

Allendale remains bullish to new crop wheat futures on the
need for world end stocks to correct and to maintain a reasonable
divergence between corn and wheat so as to not give up too many spring
wheat planted acres to corn.

ALLENDALE LEAN HOGS:

Cash hogs ended a little higher this week but the
situation may change in the next few days. Monday will be a reduced kill
day due to the holiday and marketings should be higher due to the warmer
weather. Also, keep in mind the Smithfield plant in Sioux City Iowa will
stop the second shift kill starting next week. Near term the trend is up.
As we noted earlier in the commentary it could change soon. For trading the
June/April spread is still something we recommend. On the hedging side we
are 75% covered on the April contract and only have moderate coverage on
the further out contracts.

LIVE CATTLE

This week continued the uptrend which has been going
on since December. At this time we are still waiting for cash cattle to
trade in Kansas through Texas on the live end. The latest bids are $90
against $92 asking prices and most are expecting $92 to be the price. That
would be up $1. Dressed prices were mostly $147 which was up $3 from last
week. We noted this morning Japan banned imports from the Tyson plant in
Lexington Nebraska. Two boxes of rib meat were included in the shipment
that were not on the import documents. In other news it is no surprise
negotiations with South Korean officials this week did not yield any
progress in expanding beef trade. If you are not aware the US and South
Korea have been in talks for a free trade agreement. We have told them the
entire agreement could be trashed unless this beef issue is resolved and
they have not budged. Some interesting statistics were released this week.
Yesterday we reported carcass weights for steers were 8 lbs under last year
while heifer carcasses were seen 10 lbs under last year. Weights continue
to fall as storm damaged cattle are being marketed. On the other hand the
number of cattle being offered has rebounded higher. In the two previous
weeks slaughter ran 7% and 8% higher. This week's kill was up 15%. Feedlots
are recognizing it's better to simply dump those cattle which should have
been marketed a couple weeks ago and take the loss. They are being replaced
by feeders the actually make money at current prices. Also of interest
today we released our estimates for next Friday's Cattle on Feed report.
During early January many sale barns were either closed or running on
reduced numbers due to the problematic weather. We project January
placements to be only 79.3% of last year. Marketings however were a
different story. Feedlots got serious about moving many of the cattle which
should have been shipped out in December. Therefore we project marketings
to be 104.6% of last year's level. With a sharp drop in placements and a
good jump in marketings the total number of cattle on feed fell. On January
1 cattle on feed was 101.4% of previous year levels. We project the
February 1 numbers to be 97.0% of last year. This is the first below last
year number in 16 months!. Now, the key here is when those numbers will
show up. We still feel numbers will be more than adequate through spring.
Slaughters will tighten up and shift to below last year levels around late
May or June. Keep in mind placements have been under last year for five
months in a row. The summer and fall periods are looking bullish right now.
For price direction is we are done with the storms in the plains then we
feel the market will try to take some of this weather premium back. We have
75% of marketings for March and April covered using the April contract. No
hedges have been placed, or orders entered, for marketings after
that.

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.
Allendale released its Free E Snapshot newsletter Tuesday morning. Please
check you e mail for this time sensitive information data. If you would
like access to this free service please access
http://www.allendale-inc.com/rc_free/esnapshot.aspx

In a word, La Nina. The NOAA has released data which suggest a La Nina as early as April with an adverse impact US summer crops. World Weather Inc (our Weather Watch provider) suggests caution before buying into making key financial decisions. If the NOAA model is repeated within a wk or two, more confidence may be placed in a developing La Nina.

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