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Rich Nelson: Will China resume purchases and price support?

07/18/2010 @ 11:00pm

Soybeans: Most of the day traders appeared very uncertain just what to do when the large spec money took a day off. With outside markets providing little guidance and spec buyers taking a day off the beans attempted both sides of unchanged early this morning. Bulls can feel good that the bounce this morning did mean highs that were above yesterday which still paints a bullish picture. Through the rest of the day it was evident that traders didn’t really know what they wanted to do with this market. That makes sense seeing as how the weather was flipped once again by reducing the high pressure ridge for late next week. Previously, we have been seeing a reliable forecast all year. The last four days have changed that trend. From putting the high pressure in and out twice there are more people being left unsure where we will be on heat next week. This forecast is going to apply for late next week so this high pressure is not far from affecting areas of the Midwest if it is put back in on Monday. In the end the trade decided to side with what has worked all week and that is buying into the close. Why sell off hard on a Friday when the forecast could change again by Monday? Next week leaves us with a lot of questions. Will the funds come back in with more buying? Will the high pressure ridge be put back in? Will China come back in with more small purchases to hold support if all else fails? At least two of those questions will be answered first thing Monday morning so we will not have to wait long to decide the market direction for the week. There is little surprise to see little change by the close with so much left uncertain going into the weekend. Should we see bullish weather to start the week, we will be able to place hedges at slightly above today’s highs. If the dollar is lower and funds are buying again we will hold off and wait for our time to step in. Lastly, if all turns bearish we will always be able to sell without feeling we missed the move. Eventually when this whole run is over we do look for a longer term setback so we feel it is better to wait and miss the high than to margin ourselves out of early sales.

Direction: With so much left uncertain going into the weekend it will be hard to call next week’s direction. Bullish weather or China buying may offer small support. Fund buying will continue the latest run on a much larger scale. If none of this occurs we look for a beginning to a large setback. Either way we have no issues with taking the sidelines until Monday morning. At least two of the three questions listed above will be answered five minutes into trade to start the week…Ryan Ettner

Price Outlook Released: This morning we released revised price outlooks for the November soybean contract. The moderately tight old crop scenario, and sensitivity to yield changes, helps the model give a price target of 1059 for the November this summer. While that does seem high we can certainly agree on the harvest low price target of 831…Rich Nelson

Working Trades:
·      (07/16) Sold September 970 put 24 5/8, risk to 36 5/8, objective at 8. Closed 24 5/8.

***Disclaimer*** the commentary and trades below are derived from technical indicators provided in our Allendale Advanced Charts pages and may not correspond with the fundamental commentary above.

Advanced Charts Direction: Bean tested 62% retracement at 9.94 today, but settled below the April high of 987. The current uptrend remains very steep, leaving it vulnerable to a sharp sell-off at any moment. We will stand aside…Monica Moehring



Closing Hogs Commentary

Lean Hogs: Though we do not have any illusions about US consumer or export demand changing, the market has found reason enough to finish the week on a high night. August futures ended up 1.72 this week. The driver today was weather, or at least forecast for it. Most areas in the Midwest are currently forecast to see highs into the mid 90’s next week.

Short Term Weather Effect: Hogs from all sizes can see some lower weight gains. We could see producers market hogs at lighter weights. Instead of waiting for them to get ideals targets, there are typically future deliveries scheduled of new batches into the finishing barn. Heat by itself, if it stays with us for another week or two, could take 1% off weekly pork production by itself.

Long Term Weather Effect: Large swine of over 300 lbs do not take to heat very well. The breeding herd normally sees reduced production during the summer. Productivity rates typically decline by 5% to 8%. Producers typically add in a bunch of extra gilts during this time to help offset some of this effect. As noted this morning, typically when temps push into the 90’s the numbers get even worse. You may remember us saying that the very mild 2009 summer gave the hog industry higher productivity than expected. This year may take a moderate hit. Keep in mind this is not a “devastating” heat wave. We have had temps run 97 to 100 a few days in a row in previous years. Another issue with heat is it can screw up the breeding herd for up to six weeks later. For right now, we are taking a wait and see approach before sounding the alarm on the breeding herd. Any impacts now could affect production 10 months later.

July Expiration: With USDA’s release of Thursday’s cash hog trading data, we compute the lean hog index will be 77.96 for settlement against the July futures contract. That’s within 14 cents of our expected 77.85 expiration. Close enough for government work.

Lean Hog Direction: Our summer expectation is for an $80 to $83 trading range through early August on the August futures. For producers we are hedged from 25% to 75% of expected production through April 2011…Rich Nelson

Working Trades:
·      (06/04) Sold August 80 put 2.75, risk 2.75, objective 0. Closed 1.02.

***Disclaimer*** the commentary and trades below are derived from technical indicators provided in our Allendale Advanced Charts pages and may not correspond with the fundamental commentary above.

Advanced Charts Direction: Although hogs traded above the 20 & 40 day moving averages today, they settled just below them. This was still above Wednesday's high at 81.65. Therefore, we could see more strength next week. We remain long from 79.75.…Monica Moehring



Rich Nelson
Director of Research
Allendale, Inc
4506 Prime Parkway
McHenry, IL 60050
800-262-7538

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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