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Sell only enough old crop for new crop space
Results of the 17th annual Allendale Crop-Yield Survey; suggests a
projected US corn crop of 10.887 billion bushels and a bean crop of 3.109
billion bushels. This estimate was based on producer calculated yields in
19 states and was conducted from August 14 until August 25, 2006.
Corn Fundamentals: Strong demand and projected tight global stocks are met
with large old crop USA stocks and expectations of a large new crop harvest
just around the corner.
Historical Price Trend: The odds swings from
next week out four weeks is huge for the corn and soybeans and just as
impressive odds for the cattle and hogs.
Weekly Export Sales and Shipments: USDA nailed it! Very refreshing to see
how USDA did not waiver month to month on its export sales projection for
2005-06 marketing year. With one week remaining in the marketing year,
exports sales have reached 2.228 bil bu, 19% higher than last year and 22%
higher than the most recent 3 yr ave.
Most importantly is how shipments
have reached 2.091 billion bu, just 9 million bu away with a week left.
Recent weekly shipments have been in the range of 40 to 55 mil bu, looks as
though USDA may have to raise actual shipments for 2005-06 by 40 mil bu to
a adjusted target of 2.129 bil bu. We estimate demand to be very robust for
2006-07 for at least the first two quarters of 2006-07 as major buyers grab
their fair share before the competition does.
Corn End Stocks to Use: Projected end stocks to use now at 10.4% vs 9.4% in
2003 for the domestic situation. Globally a level of 11.6% vs 2003's 14.3%.
Projected world end stocks for 2006-07 now 93 MMT vs 103 in 2003! Lets go
back to 1983 to find smaller stocks of 89 MMT!
Corn Marketing: Only move enough old crop to make room for new crop
supplies, as old crop basis is weak and expected to remain weak into the end
of the year. Our new crop hedges were rolled to the July to pay for storage
on farm and added an additional 9 cents to our storage revenue for the 2006
corn crop. May 2700 calls to cover a third of the hedges were bought
08-15-06 and are doing well to remove margin pressure.
If you do not have
new crop hedges placed, you may want to consider our anticipation of March
futures rallying 80 cents into the first quarter of 2007 to a level of
3400. We advise to not wait for a top, but rather scale up hedge into the
last 40 cent of the move and be certain to cover with at the money May call
options. We advise to anticipate cash prices peaking in the Feb-Mar-April
2007 time frame. Call if you have questions about your own particular farm
From Aug to Sept: On average, USDA is 50/50 when adjusting corn yield from the
Aug to Sept crop report. When they do raise production its been by an ave
of 1.7 bu per acre (range of .2 bpa to 4 bpa) or 147 mil bu. When the
adjustment is lower the yield on ave has dropped .9 bu per acre (range of
.1 bpa to 2.5 bpa) or minus 63 mil bu. USDA's most recent new crop
production estimate is 10.976 bil bu.
Five Year Ave Cash Price: The five year ave cash price for corn for the
month of August $2.14, month of Sept $2.13, month of Oct $2.05, month of
Corn Technicals: Sept futures close is 2300 vs last Friday's 2250, up 2%
for the week and down 3.8% for the month of August. Our key custom Moving
Averages are 2270, 2250 and uses a 2450 bear to bull pivot point. Dec
futures close is 2456 vs last Friday's 2416, up 1.6% for the week and down
4% for the month of August. Our key custom Moving Averages are 2430, 2420
and a 2580 bear to bull pivot point.
Trade Position: Thursday was a good day for our long futures position for
both Sept and Dec, as we reached our objectives as outlined within our Grain
Trading Strategies page. We will keep the powder dry through the Labor Day
weekend. Much of corn's strength has been from its cousin the wheat
futures. If weather forecast for both Australia and Argentina wheat should
happen to do a 180 degree turn over the weekend, corn futures could feel
Soybean Fundamentals: Heavy old crop stocks and beneficial, timely rains
for 2006 soybean production are bearish to new crop futures. Demand for
soybeans has been melancholy. Soybean oil has been the legs under the
beans. Soyoil's attachment to crude oil has come under pressure as well as
the demand for cheaper Palm oil and these contributors makes it difficult
to stage much of a corrective fundamental based rally.
Soybean End Stocks to Use: Projected end stocks to use now at 15% vs 18.2%
last year and 7.6% from 2000-2004 ave. Globally a level of 17.3% vs 18.8%
last yr and 15.3% from 2000 to 2004 ave.
From Aug to Sept: On average, USDA is 30 (increase)/60 when adjusting yield from
the Aug to Sept crop report. When they do raise production it's been by an
ave of .8 bu per acre (range of .5 bpa to 1.1 bpa) or 45 mil bu. When the
adjustment is lower the yield on ave has dropped 1.2 bu per acre (range of
.5 bpa to 3 bpa) or minus 84 mil bu. USDA's most recent new crop production
estimate is 2.928 bil bu.
Nov Soybean Five Year Ave: The most recent five yr historical ave suggest
Nov futures begin to drive higher into the middle of Sept with an ave gain
of 20 cents. From the middle of Sept futures fall into early Oct by 15 to
Soybean Marketing: Only move enough old crop to make room for new crop
supplies as old crop basis is weak and expected to remain weak into the end
of the year. Our new crop hedges were rolled to the July to pay for storage
on farm. Long range projections suggest when the March 31st Planting
intentions report is released, more corn and wheat acres to be planted at
the expense of fewer soybean acres and thus friendly to futures and cash.
End users and spec longs are advised to be long into the glut of the 2006
soybean harvest and keep an ear open to S American planting progress.
Five Year Ave Cash Price: The five year ave cash price for soybean for the
month of August $5.81, month of Sept $5.52, month of Oct $5.53, month of
End Stocks to Use: Projected 2005-06 end stocks are 81% higher than the
previous four year ave. Projected 2006-07 end stocks are 48% higher than
that same four year ave.
Soybean Technicals: Sept futures close is 5384 vs last Friday's 5430, down
1% for the week and down 8% for the month of August. Our key custom Moving
Averages are 5390, 5440, and bear to bull pivot point at 5990. Nov futures
close is 5514 vs last Friday's 5570, down 1% for the week and down 8% for
the month of August. Our key custom MA's are 5590, 5610 and bear to bull
pivot point at 6090.
Trade Position: We are short new crop soybeans on increasing yield and
heavy old crop stocks. We are willing buyers of Jan 2007 futures based on
the need for a technical correction from oversold conditions.
Wheat Fundamentals: Yes it remains dry in the key growing regions of
Argentina (be aware the prospects for rains in Argentina did increase in
the most recent 24 hour period, be ready to react Monday night E-CBOT
futures traders) and anticipated demand looks good for North American
supplies. Please read the section below regarding Australia. Projected
world end stocks are 128 MMT vs 132 MMT in the bull run of 2003 leading
into 2004 where stocks corrected to 151 MMT. Anything less than 128 MMT,
you have to venture back to 1981's 113 MMT.
Weekly Export Sales as Demand: Wheat export sales are running 19% behind
year ago levels and 24% below the most recent 3 year ave. Shipments are
running 13% behind last year and 20% below the most recent three year ave.
As global stocks to use are projected tighter for 2006-07 than in 2003-04,
what did history say when futures bottomed and rallied?
March 2004 Futures: because of extremely tight end stocks to use for corn
and wheat from 2003 entering 2004, we look to how the March 2004 futures
reacted to those series of events. Interesting how the futures rallied in
August by nearly 40 cents, dropped by 50 cents into Sept, corrected nearly
50 cents just before Oct, dropped to the fall lows to 3300 as the corn
harvest was fully underway and winter wheat plantings were beginning.
However, by early Dec 2004, the March wheat futures rallied 90 cents to 4200
only to work lower into expiration of 3570. Allendale does not rule out a
similar pattern the balance of 2006 and early 2007. Use the key custom
Moving Average technical indicators which we update for all three exchanges
Dec wheat contracts as a early risk indicator.
Perception vs Reality: Be aware the media has passed along thoughts that
Australia remains under a great deal of weather stress. It is true there is
weather stress in Australia wheat country, but not near the magnitude it had
about one month ago. As conditions are showing signs of improvement in
Australia, we now have to contend with conditions eroding in Argentina.
Both of the countries service north African nations as well as the Middle
East. If forecast continue to provide dry conditions for Argentina, it is
then we would anticipate the United States to begin to capture the world
headlines as a source of milling quality wheat and provide solid legs
underneath the futures.
Wheat Technicals: Wednesday's huge surge was based on technicals rather
than fundamentals. It could well be the same technicals which could destroy
what has been built the last 72 hours. DECEMBER CBOT SRWW futures close is
4194 vs last Friday's 3832, up 9% for the week and up 1% for the month of
August. Our key custom Moving Averages are 4150, 4030 and 4000. DECEMBER
KCBT HRWW futures close is 4850 vs last Friday's 4666, up 3.9% for the week
and down 4.1% for the month of August. Our key custom Moving Averages are
4840, 4770 and 4760. DECEMBER MGEX spring wheat futures close is 4704 vs
last Friday's 4590, up 2.5% for the week and down 5% for the month of
August. Our key custom Moving Averages are 4610, 4610 and 4660.
Trade Positions: Long CBOT SRWW futures position based on the fundamentals
and technical events this week.
Wheat Marketing: Projected domestic end stocks to use are 21.3% vs 2005-06
26.3% and five year ave levels of 26.94%. Projected global stocks to use
are 17.7% vs 19.7% the previous year and five year ave of 22.44% and most
importantly smaller than 2003's 18.9% which caused futures to rally. Based
on this data timing is expected to be extremely important to move 2006
wheat production in the March-April 2007 time frame. 2006 Dec wheat futures
hedges were rolled to the July 2007 futures to cover storage cost. Spring
wheat farmers may want to seriously consider moving wheat into cash sales
as futures spreads do not coverage storage cost (tonights close is 11 cents
or 3.66 cents per bu per month). You will have to decide for your own
individual operation. At 4950 cash value, storage and interest are likely
to run a minimum of 4.7 cents per bu per month. Cash sales are to be
replaced with March futures or options or bull call spreads or combination
of all as we anticipate a similar rally in futures from Oct 2006 to March
of 2007. From Oct 2003 into March of 2004 futures rallied nearly 90 cents
Five Year Ave Cash Price: The five year ave cash price for SRWW for the
month of August $3.25, month of Sept $3.43, month of Oct $3.51, month of
Allendale Lean Hogs: Though cash hogs fell all week we cannot say the same
for wholesale pork. With a big $1.84 gain today in the pork cutout prices
of $76.59/cwt are ending the week. Last Friday ended only a fraction higher
at $76.81. The net result is cash hogs fell all week and packers are in a
better situation for next week's kill. On the packing side 2.045 million
hogs will be killed this week which is 1.7% more than last year. Supplies
came in as they were forecast too last week and now this week. Overall hog
numbers should continue to build and lower prices for pork and cash hogs
should take hold. We still feel nearby futures may be unaffected by these
lower prices as the discount in October is too large. Typically the late
August based futures move continues higher into mid to late September.
Allendale Live Cattle: Big gains in cash cattle prices were seen once
again. Prices started at $90 and finished the day at $92.50. Last week
prices were $87 to $88.50. Packer kill lines are running under break even
right now. Finished cattle numbers normally decline at this time of year
and prices normally appreciate. The recent jump in the past five weeks was
boosted as Japan has come back into the market for US beef. This morning
Hong Kong announced they will restart buying of US beef. Keep in mind this
is just for the city of Hong Kong which acts generally independent of
mainland China. It was also noted this morning five more supermarket chains
(unknown number of locations) will start buying US beef next week to offer
their customers. On the cow/calf side we turn our attention to calf prices.
Most producers are making plans for weaning in the next couple of months
and monitoring sale barn prices. Our focus turns to the closely watched
Oklahoma City auction where the average price on Monday and Tuesday's
auction for 525 lb steers was $132.16. This is just a little lower than
last year in the same week when the average price was $137.34. Keep in mind
this year's calf crop will be the first one to show the expansion. The
expansion part of the cattle cycle started in 2004 when that year's heifer
calves were held back for development into the cow herd. Those calves were
bred in 2005 and will be having their first calves this year. In 2006 we
have a few more calves than last year. One good thing for producers is the
lack of medium and heavy weight feeders. The prolonged drought in the
plains forced many feeders off grass and into the feedlot. 725 lb feeder
steers were going for $118.22 last year. This week's Oklahoma City sale
averaged $119.30. Though recent rains have renewed some interest in running
feeders on late season grass it is clear the drop in available numbers is
keeping prices firm.
At this point, most cow/calf producers are evaluating
current grass conditions. If there is grass available in their area they
will continue their expansion plans and build cow numbers. We continue to
advise producers to do the opposite. While everyone would like to expand
right now (if grass is available) we would advocate not holding back extra
heifers. Instead all calves should be sold in these high price years. It
takes four years for a heifer to pay back her potential sale as a calf.
Though the drought this year could delay some expansion, it is clear by the
time 2010 and 2011 comes around prices will be much lower than they
currently are. Just as that heifer is paid for she will be producing calves
clearly below break even levels. Selling all available calves when prices
are high and buying discounted breeding herd genetics when prices are low
(2010 and 2011) would be a better route to follow.
We still feel it is time
to get bullish for a longer term move higher. If there is one thing which
is confusing it is the lack of premium in the deferreds. Normally cash
cattle prices are just getting off their summer lows and deferred futures
show a premium which implies cash cattle will peak around late November or
early December. This week's trade will average around $91.75 or so.
Futures, with normal basis levels applied to each individual week, are
implying cash cattle will trade sideways in September, push to $94 in mid
October, then trade down to $91 by the end of the year. Our target for
February futures is to reach $94. There is no reason to add to the limited
hedges already in place at this time.
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.
Results of the 17th annual Allendale Crop-Yield Survey; suggests a projected US corn crop of 10.887 billion bushels and a bean crop of 3.109 billion bushels. This estimate was based on producer calculated yields in 19 states and was conducted from August 14 until August 25, 2006.