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Tight world corn supplies
USDA released its March "Crop Production" and World
Agriculture Supply and Demand Estimates Friday morning. In the big picture
the report held only a few minor surprises. Those included a 2 MMT increase
for Brazil corn production on top of last mths 4 MMT increase, a 2.5 MMT
drop for S Africa corn production to a new level of 7 MMT. In all, world
corn stocks are now estimated at 88 MMT, the lowest on record dating back
to 1980. This is a persistent reminder of the tightness and main reason why
prices continue to hold firm, at least until the world responds with the
2007 northern hemisphere spring planting campaign.
Stocks to Use: Domestic end stocks to use of 6.4% vs last years 17.5% are
the second lowest on record dating back to 1980. In 1995 the end stocks to
use were the tightest at 5%. From 1995 to 1996 domestic stocks did more
than double to a level of 883 million bushels. World end stocks to use are
10.7% vs last years 15.9% and are the smallest dating back to 1980. World
stocks did increase 25% from 1995 to 1996 and more recently in 2003 to 2004
by 27%. Allendale does suggest world stocks to increase similarly as they
did during the two periods mentioned above. A 26% increase in world stocks
suggest 111 million metric tonnes which compares to the most recent five yr
ave of 125.6 MMT.
Season Average Farm Price: USDA did not revise the season average farm
price from the Feb to March report and uses a $3.10 to $3.50/bushel or
$3.30 average estimate vs last years $2/ bu ave and the previous years
La Nina: Thursday the NOAA announced a shift to cooler temperatures in
the equatorial Pacific Ocean waters. This signals an end to El Nino and
suggest a very quick transition to La Nina conditions during March-May
2007. The NOAA went on to point out developing La Nina conditions can
point to a more active Atlantic hurricane season. El Nino, an unusual
warming of ocean temperatures, contributed to a unseasonable warm weather
in the Northeast U.S. early this winter, NOAA said. Now conditions are
becoming favorable for La Nina to develop. Typically, during the U.S.
spring and summer months, La Nina conditions don't significantly impact
overall inland temperature and precipitation patterns; however, La Nina
episodes often do have an effect on Atlantic and Pacific hurricane
activity. Very interesting for NOAA to point out the potential lack of
impact on inland temperatures and precipitation. The question is will the
CBOT trade care, likely not. Two other La Nina discussions developed on
Thursday. One from a Midwest Land Grant college which ultimately suggested
at this point and time, weather events may produce greater odds of sub 148
bu per acre corn yields. The other report from the private sector suggest
La Nina to be weak in the early spring and not intensify until late in the
summer. This particular private forecaster does remind us there are many
other weather making influences which may temper or strengthen La Nina but
also is in unison with the NOAA that just because its a La Nina it does not
necessarily suggest hot and dry conditions.
Ethanol Futures: Since the beginning of Jan 2007, April ethanol futures
have rallied from $1.80 per gallon to todays level of $2.28 or 26.6% in
just two months. April ethanol futures jumped 10.5 cents higher per gallon
on Wednesday, 5 cents Thursday before speculative trade trimmed futures by
9 cents on Friday! Allendale suggest the strength in the ethanol is demand
driven. It is this time of year when blenders are doing their best to
gather ethanol product from processor to the blending facilities both east
and gulf coast. Our long term experience has this movement very strong into
the first quarter of the calendar year, in front of peak summer driving
season, then levels off. Technical based resistance is $2.35 with support
of $2.17 per gallon. The trend is clearly up.
New Crop Corn Hedges: We used the recent break in futures to cover new crop
corn hedges of 60% and 30% more with Dec 390-450 bull call spreads. This
call spread is intended to cover a total of 90% of your anticipated 2007
corn production. Please see our Hedge Advice page for the next Dec futures
level in which to hedge 10% more corn. We anticipate the short world corn
stock could keep bullish enthusiasm intact until pollination then look for
a 80 cent to $1 correction lower. We will use the timing mentioned above to
decide whether to park the bull call spreads past pollination or
potentially take profits before pollination. The weekly crop conditions and
progress reports as well as 6-10 day forecast will assist in out decision.
Old Crop Marketing: Our plans to move 2006 corn production are unwaivered.
Our plan continues to monitor the cash and futures spread first and
foremost waiting for the signal which suggest it no longer pays to store
corn. Our second and equally important signal is the late March-early April
time period when cash corn historically reaches its peak. Highly dependent
if we would recommend to replace inventory with long futures and or options
will be highly dependent on timing and technicals.
Trade Position: We remain long the July futures. Technically the daily old
crop and new crop charts continue to suggest the long term trend remains up
and until that particular trend is broken, Allendale will buy dips or buy
into futures if key resistance is broken. After the March 30th USDA
planting intention report, 6-10 day and 8-14 day forecast are expected to
take center stage as we enter spring planting and help set direction.
Soybean Fundamentals: In the big picture the report did not contain any
major surprises. USDA did increase Brazil soybean production by 1 MMT to a
new level of 57 MMT. Add in Argentina's 44 MMT production for a combined
level of 101 MMT. This compares to last years record production of 95.5 MMT
soybean production. In all, world stocks are now estimated at a record 58
MMT. Brazil weather is expected to remain favorable for a good run on its
harvest. The same may not be said of Argentine suggest heavy rains on the
way which may impeded crop maturity. Most at risk with the heavy rains is
the country's cotton crop.
Stocks to Use: Domestic end stocks to use of 19.5% vs last years 15.6%. You
would have to venture back to 1986 to find higher end stocks to use of
21.3%. World end stocks to use are 19.6% vs last years 18.8%. Allendale
does suggest world stocks to decrease for the 2007/08 market year as a
result of 9 million fewer acres of soybeans to be planted vs year earlier
levels. The catch 22 is if soybean production does nosedive within the USA.
Pre harvest prices expected to approach $9 vs Nov futures may likely entice
S American farmers to produce another record soybean crop.
Season Average Farm Price: USDA did revise the low end of the season
average farm price range vs the Feb report and now uses a $6.10 to
$6.50/bushel or $6.30 average estimate vs last years $5.66/ bu ave and the
previous years $5.74/bushel estimate.
Old Crop Soybean Sales: Based on the carry in the soybean futures and
restricted level of deliveries of the March futures delivery process we are
in no hurry to sell cash soybeans. Our calendar target suggest late
April-early May, may be the prudent time to move out old crop and then
based on weather dynamics, we may replace inventory with at the money call
options. Seasonally futures may not be ready to fully break until the first
half of August once we are closer to pod fill.
New Crop Soybean Hedges: Allendale will prepare to cover 90% of anticipated
2007 production when Brazil and Argentina's soybean harvest is fully
underway. According to our new crop soybean futures price projections, our
timing could be the late May-June time frame.
Trade Position: We have a short new crop soybean and soybean oil futures
position on because of the bearish S American crop and recent technical
weakness. We are willing sellers of soybean meal. Soybeans reattachment to
the energy futures could complicate shorts.
Wheat Fundamentals: In the big picture the report held only one minor
surprise. USDA did increase India's wheat production by 1.35 MMT to a new
level of 69.35 MMT. An even bigger surprise is how India's own Minister of
Ag suggest the crop size is closer to 72-73 MMT but USDA is unwilling to
take such a large step. With USDA latest India revision, the country's end
stocks were increased from 3 MMT to 3.55 MMT vs yr earlier levels of 2 MMT.
Closer to home is what appears to be a very healthy wheat crop in the
southern Plains with the exception of Oklahoma which announced three prime
counties may need to destroy poor performing wheat and plant to sorghum.
More about the Kansas wheat crop once the snow cover melts and exposes the
health of the 2007 crop.
Stocks to Use: Domestic end stocks to use of 23.3% vs last years 26.5%
compare to the most recent five year ave of 28.92%. In 1996 the end stocks
were 444 mil bu vs the present est of 472 mil bu. One year later in 1997
end stocks increased to 722 mil bu or 63%. World end stocks to use are
16.7% vs last years 19.9% and are the smallest dating back to 1980. World
stocks did increase 19.8% from 1996 to 1997 and more recently in 2003 to
2004 by 14%. Allendale does suggest world stocks to increase similarly as
they did during the two periods mentioned above. A 17% increase in world
stocks suggest 141.57 million metric tonnes which compares to the present
projected level of 121 MMT and most recent five yr ave of 171.2 MMT.
Season Average Farm Price: USDA did not revise the season average farm
price from the Feb to March report and uses a $4.20 to $4.30/bushel or
$4.20 average estimate vs last years $3.42/bu ave and the previous years
2006 Wheat Production: 68% of our old crop wheat production has been
converted to cash with an average level of more than $4 per bushel. We
respect our long range price projections which suggest July futures may be
able to push to 5250-5500 before expiration and the remaining 32.5% hedged
to be sold in the April-May time period. See our Hedge Advice page for
New Crop Wheat Sales: Allendale has 50% of its 2007 anticipated wheat
production hedged. Timing suggest 2007 wheat production could be tied
directly to the April-May time frame. Because of the projected spread
between the July and Dec futures, Allendale anticipated and resumed hedging
the 2007 wheat production in the Dec 2007 futures and plans more in the
April to May time period. The price target vs the Dec futures was the 5250
level and scale up hedge as we monitor crop conditions as the wheat comes
out of dormancy.
Trade Position: Don't panic over the sell recommendations we have made for
new crop wheat futures within our Grain Trading Strategies page. We have
not turned long term bearish, only short term. Each exchange has left a
chart gap from a week ago and it is our intent to sell into these gaps and
then use long term trend line support as our objective. With world stocks
as tight as they are, we remain bullish into March-April.
Allendale Lean Hogs: Last week's kill was down 5.7% due to the weather.
This week's will end 5.9% higher. The net result is they will balance each
other out. There will be a few extra hogs left over into next week but
overall the trade feels it has been priced in. One thing of interest is the
premium April futures have over cash hog prices. We project Monday's lean
hog index at $63.88. April futures are suggesting cash hogs will rally $4
from current levels in the next five weeks. It's not out of reach but is
pretty tough to do in a generally weak demand period such as spring. On the
charts we will note there are gaps left from yesterday's stronger open.
That could represent a clear downside target if we receive some bad news in
the next few days. On the April that runs from $65.90 to $66.35. Our
recommended June/April spread, that we are trying to exit at $11, closed at
$10.80 today. Typically that spread peaks around March 10. We still remain
bullish on summer contracts.
Allendale Live Cattle: This week's cattle kill came in 2.5% higher than
last year. Given the lower weights the week's beef production figure was is
.6% higher. Though numbers are coming in about as expected the market is
still stuck in the bullish mode. Today across the newswires the general
media watches was a story explaining how higher corn prices meant higher
meat prices. It is interesting to see how the general investment community
is pricing that in right now when beef supplies are just fine rather than
waiting until the summer and fall when things will actually tighten up. For
the week cash cattle traded $98 and $155 for live and dressed cattle
respectively. Based on current April futures, and including a wider than
normal basis, the market is actually suggesting this week's cash cattle
could be $100 and by mid April $101. It could be easy to call this week's
CME trade a blowoff top on the charts. We simply cannot join in that
bearish call as the CME volume and open interest numbers on the big days up
were very bullish. Instead we would have to suggest a move lower to fill
the gap left tomorrow morning could be a buying opportunity with limited
risk of course. If this market can ever confirm a top it would ideal for
bear spreads such as August/April or October/June. For hedging we are
covered for March and April marketings but will continue to hold from
anything during the better fundamentals for the summer and fall
USDA released its March "Crop Production" and World Agriculture Supply and Demand Estimates Friday morning. In the big picture the report held only a few minor surprises. Those included a 2 MMT increase for Brazil corn production on top of last mths 4 MMT increase, a 2.5 MMT drop for S Africa corn production to a new level of 7 MMT. In all, world corn stocks are now estimated at 88 MMT, the lowest on record dating back to 1980. This is a persistent reminder of the tightness and main reason why prices continue to hold firm, at least until the world responds with the 2007 northern hemisphere spring planting campaign.