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Inflated China talk?-Rich Nelson

Fundamental Support: Rumors circulated around the corn market yesterday that China had come in and bought 1 million tonnes. The claim was that it was to be split between old and new crop. By this morning, that rumor had been expanded to 4 million tonnes. When USDA announced new exports this morning they said that 271,000 tonnes of new crop corn was sold to “unknown”. Once again this market had set itself up for disappointment by claiming extremely large numbers that were very unlikely. Many were left hanging on rumors like this in the past and only one proved to be true. What may have been more important today was the dollar was breaking resistance levels. That could show a turnaround. Recent comments from Europe are causing the Euro to be sold and in turn, our dollar to be bought. We all know when funds are heavily invested in corn; a turn in the dollar always holds the chance for liquidation. Taking this whole week into consideration, here is what we are looking at: 1) New crop supply side fundamentals are bullish. Yield will be lowered again and acres will be lowered by the end of June. 2) Old crop demand side fundamentals are bearish. Ethanol production and exports have slowed recently. 3) Funds are a wild card but a significant bounce in the dollar as seen lately would suggest a bearish influence as well. For now, no one is arguing against lower yield and lower acres, it is just that the bearish factors are outweighing those still uncertain bullish factors.

 

Direction: There is still room for a short term bounce but the bearish factors are outweighing the bullish ones right now. Monday trade will see a planting progress which may also weigh on the bullish factors…Ryan Ettner

Chinese Buying: The chart above shows that imported corn generally is higher priced than that traded on the Dalian Commodity Exchange. When the premium fell under 500 yuan per tonne the, Chinese government bought US corn in mid-March. The deal was officially announced on March 25th. We are 100% convinced about China buying this time. Though the premium has fallen below 500 yuan, it is not near the same low level as seen in March…Rich Nelson 

 

Working trades:

 

(5/4) Sold December corn 800 call 32, risk 42, objective 19. Closed 21.

 

 

 

Closing Cattle Commentary

Live Cattle: After seeing yesterday’s good export numbers, it may be a little disappointing to see June futures close at the lowest close of this downtrend. That same feat was done on Monday. So the story for the week is an attempted rebound has not held. We did see a little Memorial Day buying but it was not enough to improve beef prices. Choice was down $2.31 while select was up 45 cents. Cash cattle mirrored that trend with active $112 sales compared with $115 last week. Good news for the week was wholesale beef.

Futures Pricing: The simple goal of summer futures is to guess how low cash cattle will be at the end of June and the end of August. June futures are implying $108/109 while August is implying $110.

Smaller Supplies: In the past two to three weeks we have heard feedlots tell the trade market ready numbers are tighter than expected. To be frank, we did not believe that talk simply because cash cattle has been falling like a rock. A review of recent slaughter totals confirms their talk. The last four weeks have averaged 3% fewer slaughters than last year. We should be running from +1% to -1% right now. This is good news. The bad news is what this means to demand. If supplies came in smaller than expected, and price fell as we originally expected, than demand has taken a good sized hit.

Double Bottom: On the charts, it can be noted last Friday and yesterday’s lows were near similar prices. That would suggest a “double bottom” which looks like an upside down U. If a rally takes out the middle part of that U, at 110.27, we could have a chart based buy. A breakout of those two low prices would simply reconfirm the downtrend.

Direction: So far, we cannot find a reason to change our negative viewpoint. Though supplies are tighter than expected right now, we cannot say the same can be said when we will be hit with those December placements coming out of the feedlot. We will hold our very bearish opinion for summer futures. Our long term viewpoint, for the fourth quarter of this year through 2012, remains incredibly bullish. To give you an idea of that, we are holding a $127 objective for February 2012 futures. When this cattle market bottoms this summer, and February is around $116, we will start a long term buying position…Rich Nelson

 

Working Trade:

·       (03/01) Bought December/sold June 5.17, risk 8.15, objective 12.17. Closed 8.80.

·       (03/29) Bought August 116 put/sold 122 call/sold 106 put -1.42, risk +2.25, objective +6.50. Closed +4.60.

·       (04/07) Bought December/sold June 5.70, risk to 8.15, objective 12.17. Closed 8.80.

·       (04/14) Sold 118 June call 2.00, risk to .80, objective 0. Closed .12.

 

There is a risk of loss when trading futures and options contracts. 

 

 

 

Rich Nelson

Director of Research

Allendale Inc.

4506 Prime Parkway

McHenry, IL 60050

815-578-6161

 

Hypothetical performance results have many inherent limitations, some of which are described below.  No representation is being made that any account will achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.  One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.  In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading.  For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results.  There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

 

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