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Weather is the driver
Weather remains the dominate driver for corn and soybean futures new crop
contracts. Weather forecast during the months of July and August are next
to impossible to forecast much beyond 3 to 5 days. The futures trade has
adjusted to present levels based on high heat through at least Monday in
the west and Tuesday in the east cornbelt and the potential for 70-80%
coverage of .25 to 1.50 inch rains for the cornbelt beginning late next
The 6 to 10 day forecast suggests that moisture is working its way
into the west Corn Belt, up from the Gulf of Mexico. There is no large area
of extreme heat in either of the two separate forecast.
And Why Weather Matters: The five year ave for corn reproduction for Monday has been 84%, and percent dough at 23%. Last Monday % silk was 78%
and percent dough at 13%. We anticipate less risk for the silk but
increasing risk for the dough stage. It will be key for systematic rainfall
through kernel fill as the crop moves forward. The trend has been for these
weak ridges in the west to buckle and provide relief for at least 85% of
the major cornbelt with the west relying on irrigation to help the crop
from slipping too far backward.
Soybeans Gaining Center Stage: Both corn and soybeans are of great
attention to the global trade, but it is the soybeans actually in front of
corn when it comes to the importance as pods bloom and then set pods. For Monday, the five-year ave for soybeans blooming has been 82%, as of
last Monday 76%. The percent setting pods five year ave 44% with last
Monday's rating at 32%. It is this last number which is of key importance.
It is necessary for beans to receive moisture in the form of falling precip
or from soil reserves to help swell pods once set. According to the most
recent 5 foot soil profile maps, from western Iowa into southern MN, ND, SD
and NE are abnormally to excessively dry. Points east better off.
Crop Conditions: From here to just before harvest the five-yr ave crop
conditions, the good to excellent category for corn drops on ave 7% from
this week to just before harvest. Present conditions suggest a crop which
could find corn conditions closer to 52% good to excellent just as harvest
begins. Dating back to 2000 there have been three distinctive groupings for
corn conditions just before harvest; 2002 and 2003 had good to excellent
ratings of 42 and 44, 2001 and 2005 had ratings of 56 and 52% while 2000
and 2004 had rating of 64 and 69%.
Select 2001 and 2005: Because five-yr ave projections suggest crop ratings
could drop an ave of 7% and place conditions at 52%, lets see just where
USDA had Aug yield vs the Sept yield. In 2001 the Aug yield was 133.9 and
by Sept had adjusted yield down to 133.5 bu per acre. In 2005 Aug yield was
139.2 and adjusted yield upward to 143.2. In 2001 crop conditions had
dropped 4% from just in front of the Aug WASDE to the Sept WASDE, while in
2005, conditions were left unchanged at 52%. Given present weather outlooks
for a more typical summer weather pattern, conditions may be content to
hold very near unchanged. And yet there is recent evidence even with
unchanged conditions, the yield per acre could experience growth of 4 bu
per acre for a 2.8% increase. Use the same 2.8% increase on USDA's present
149 bpa and yield could climb to 153.12 bpa and place production at 11.042
billion bu and projected end stocks of 1.344 bil bu vs USDA present 1.077
2003 and 2006: There has been some growing discussion about the possibility
of 2006 turning into 2003. Remember it was 2003 which had condition at the
dough stage drop from 72% good to excellent to 42% just before harvest. We
ran yet another study Friday and learned two things. Number one is when
crop condition are closer to the mid to upper 50% good to excellent rating
from dough into harvest there is only a slight pull on crop condition
ratings. Those crops with rating closer to the mid 40% at dough actually
have found ways to increase good to excellent rating just before harvest
and it is those crops which have the highest of rating which may the
ability to sharply drop off in ratings just before harvest.
Number two is
when we viewed the relative greenness map the last full week of July of
2003, maps were much weaker than where they are as of this past Thursday.
Essentially a stronger crop may be able to endure bouts of heat than those
which do not have the stamina available to compete with the dog days of
August. It is yet another reason why Allendale suggest the potential for
stocks of 1.344 bil bu vs the 1.077 USDA is presently using.
Technicals: On Friday, Dec corn futures closed at 2542 vs a week ago at 2534.
Allendale's key custom short term Moving Average values are 2560, 2600, and
2650. Want to turn bears to bulls, at least two closes above 2650 may be
required. Nov soybean futures close is 5950 vs a week agoFriday's close of 5980.
Key short term MA's at 6030, 6070 and 6160. Want to turn bears to bulls,
then at least two closes above 6200 may be required. Sept CBOT wheat
futures close is 3876 vs a week ago Friday's close of 4072. Key MA's are 3910,
3960 and 4000.
Marketings: Our position on marketing is unchanged. You have or are in the
process of moving just enough old crop or placing in temporary storage to
make room for the new crop coming in. Projected tighter 2006-07 than
2003-04 global end stocks to use for corn and wheat, and wheat getting
tighter day by day as Australia's key production region is burning up as
well as Germany, France and Italy, add in the USA and Argentina is by no
means out of the woods with its dry weather. Allendale suggest as the USA
corn harvest gets underway, very well could react very similar to the 2003
fall time and have futures explode and take out its previous summer highs.
However we need to focus on any old crop 2005 corn, 2006 wheat and corn and
hedge 2007 potential production.
Our time line may only allow us until
March of 2007 to take advantage of the higher prices before the global
competition does as they did in 2004 by increasing global corn stocks by
26% and wheat by 14%! Yes, that quickly.
Even world stocks of soybeans
corrected 26% but as a result of unusually tight stocks which is not the
case at present. However because of the huge strain ethanol is placing on
corn production in the US and bio diesel gaining attention in the US but
much more so in Europe and Asia, we visualize soybean acres being switched
to corn and wheat in the US because of the high futures prices and steady
to increasing demand. The US is likely to give up soybean acres to S
America and not necessarily Brazil but potentially more so Argentina. This
could actually support soybeans prices as we enter 2007 well into the
summer of 2007. Most importantly it will be a combination of spread
narrowing, basis rallying along with the futures to provide the key signal
to move old crop in the bins and in the temporary storage piles and then
more of a timing matter to take care of 2007 new crop business.
Short Term: We remain more bearish than bullish to corn and wheat on
declining daily chart price values and fundamentals focused on weather
which for the immediate suggest no large serious threat to the greater
Midwest corn and soybean crops. We remain neutral to soybeans and continue
to trade the range. Longer term Allendale is bullish to wheat and corn on
very tight global end stocks to use levels and projected strong demand for
the corn with little to no wiggle room. Soybeans long term are expected to
find steady demand and the biggest surprise next spring when fewer acres
are expected to be found for soybeans, not just in the USA and larger acres
for wheat and corn, similar to leaving 2003 and entering 2004.
Lean Hogs: Higher trade once again in the Lean hogs. Cash hogs were mostly
steady, and this helped reduce the negative psychology. There was a lot of
buying during the day related to the upcoming hot weekend. As mentioned
this morning we feel the best fundamental play in this situation id the
long August short October hog spread. It traded down most of the day,
which allowed some to get in, and then close positive on the day. We will
know next week weather or not this was a good play. If a marketing hole
were to occur, we would think by Thursday of next week it would have
appeared. One bearish note is October lean hog futures lost over 60 cents
in the last 10 minutes of trading. It was a pretty wild session near the
Live Cattle: As we expected cash cattle beginning to let loose in the north
at prices no better then steady to begin with. Opening rounds of cash
trade started at 126 on a dressed basis and at 80.00 live. This is steady
to just a shade higher then last week. Futures broke early on this news,
and actually recovered to trade higher on the day and challenge yesterdays
highs. October cattle had somewhat of a bullish close closing above the 20
day moving average. I think it might take another close above this and/or
trade above yesterdays highs to cause some shorter term shorts to bail out.
As of right now we still feel this market has established a nice down
trending channel and we are nothing more then in the higher portion of its
range. Spread trades we have been recommending this week too some
pressure, but this is nothing to be concerned about in our opinion. The
way the board is set up, we still feel October futures are the most
overprices compared with the spot August and the deferred December and
February. We did feel the market traded extremely well given the poor cash
trade in the North. This market just had a hard time going down after the big
drop we saw, and although we are still bearish, we may let the market run
its course before we look to sell. Right now, the play we would recommend
would be the spreads.
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.
Weather remains the dominate driver for corn and soybean futures new crop contracts. Weather forecast during the months of July and August are next to impossible to forecast much beyond 3 to 5 days. The futures trade has adjusted to present levels based on high heat through at least Monday in the west and Tuesday in the east cornbelt and the potential for 70-80% coverage of .25 to 1.50 inch rains for the cornbelt beginning late next Tuesday.