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Rich Nelson: World weather problems


Fundamental Support

Wheat closed on a high note
for the week, closing 14 1/2 higher on the day and 55 1/4 higher for the week.
The 55 1/4 cent rally was enough to erase last week’s entire sell off. Last
week, going home it looked liked the bears were in control. With today’s close
it looks like the bulls are going home in control of the wheat market. The
market is putting weather premium into the Kansas City, Minneapolis and the
Chicago market but for different reasons. The hard red wheat (KC) is pricing in
production losses due to the severe drought hitting that region of the country.
The spring wheat (MW) is continuing to get too much rain and snow. This is
preventing the planting of this year’s crop. The soft wheat (Chicago) is
pricing in damage due to the flooding rains that have hit the Ohio River valley
in the past few days. There are more heavy rains predicted for this part of the
country over the weekend. The U.S. is not the only part of the world having
weather problems. Canada is dealing with too much moisture and can not get
planted while England, France and Germany are dealing with too dry conditions
for their crop. The weaker U.S. dollar was also being viewed supportive to the
market. The weaker dollar will hopefully help wheat exports. They were a little
anemic this week. The trade was looking for sales to come in between 400,000
and 800,000 tonnes. They came in at a disappointing 303,000 tonnes.
 
Direction

With the weather concerns
for the spring and hard wheat areas mounting, the wheat market should be well
supported. This will keep us friendly to this market. There could be a head and
shoulder bottom forming on all the exchanges’ wheat charts. We will need to
take out the April highs to confirm this chart pattern. We look for the market
to trade in a sideways to higher range and will be buyers on market dips.

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Wheat Cheap Enough?

In previous weeks, we
reported wheat, with a 15% better feed value than corn, was underpriced for
cattle feeding. USDA thinks it will be hog feeders, and to lesser extent
poultry feeders, who switch to wheat from June through August. This chart shows
how wheat stacks up for hog feeding, with its 5% better feed value, for the
eastern cornbelt. It is not yet cheap enough. Next week, we will show how it stacks
up for the southeast US.
 
Live Cattle

For the week, June futures
closed down 57 cents. The trade attempted a moderate rally but was not able to
break the 50% retracement level of 118.05. Cash traded steady at $119 and
wholesale beef ended mixed. For the short term, we are in a pausing period in a
newly-forming bear market.
 
Cattle on Feed:

At first glance, this
afternoon’s Cattle on Feed report is bullish. Marketings, the number of cattle
leaving feedlots, were 4.5% higher than last year. The trade was only expecting
a 3.1% higher number. More cattle leaving the front end supply is clearly a
bullish issue for the short term environment. Placements, at 3.3% larger than
last year, were under the trade’s 4.0% expectation. Fewer new feeders going in,
to be marketed from August to October, is supportive to the deferred supply
picture. The kicker about the Placement number was heavyweight +800 lb feeders
were 22% higher than last year. Those numbers will be marketed in July and
August. That is bearish for the August contract. It adds to the summer supply picture. The medium and lighter weight
Placements were from 2% to 4% lower than last year. This lightens the
post-summer picture. We would call prices 25 cents higher on Monday morning.
 
Summer Supply Picture:

We have a ton of cattle that
will be marketed from May through July. It is our normal highest supply time of
the year in the first place. On top of that, extra placements this past
fall/winter, will add to that tonnage. The good Marketings in today’s report
was good to see. It means we took a few extra out of the picture in March which
is therefore good for April cash cattle prices. That does not mean too much for
our concern about May through July though. In fact, the heavyweight section of
Placements, noted above will add to number in July. We remain very concerned about cash cattle prices for summer (May –
July).
Our $106 price target is clearly intact.
 
Fall/Winter Supply Picture:

Placements will start
falling sharply this spring and summer. That sets up a very tight supply
picture for October through first half 2012. As our chart of available feeder
cattle showed last night, it will not be surprising to see Placements fall as
much as 6% lower than last year. Be
bullish October futures and beyond with special bullishness for December and
February
.
 
Working Trade:

  • (03/01) Bought December/sold
    June 5.17, risk 3.17, objective 10.17. Closed 7.65.
  • (03/29) Bought August 116
    put/sold 122 call/sold 106 put -1.42, risk -3.82, objective +6.50. Closed .67.
  • (04/07) Bought December/sold
    June 5.70, risk 3.70, objective 10.17. Closed 7.65.
  • (04/14) Sold 118 June call
    2.00, risk 3.20, objective 0. Closed 1.52.

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