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$7.22 corn price eyed -Rich Nelson

Friday featured what appeared to be light volume trade but actually was moderate to good volume. In the end, corn ended right where it started. This relatively smooth trade gave us time to research USDA reports and we found some interesting facts. Our first question was: when yield is dropped in August, what happens on the following September report? When looking into that, what we found in 5 out of the last 8 years when yield was lowered in August, it was also lowered in September. That led us to our next question: when August sees a large drop in yield, as we saw yesterday, what happened on the following September report? As it turns out, when yield was dropped 3% or more, 3 of the last 4 September reports saw an increase in yield. That gives us a few things to look at for the next report and makes the included chart worth printing off. What we are looking at next is: when August sees a drop in yield, what happens to final yield? Once we look into that, we will write about it on Monday. As for short term direction next week we will have to see if corn can take out the contract high of 722 3/4. While that was unlikely to happen today just ahead of the weekend, it very well could be put to the test first thing Monday. It can be said that with each passing day that it is not taken out, the chances for it occurring fall. Taiwan passed on a tender last night due to the high price of corn. Hearing that, gives the USDA more credibility in dropping demand along with dropping supply yesterday. This is an example of why a rally is great but we stop short of expecting extreme prices from here…Ryan Ettner

Yields: USDA on Thursday dropped yield from 158.7 to 153.0. This is right next to Allendale’s current 153.6 estimate for “true” yield. For now, we will not revise our estimate lower…Rich Nelson


Working Trade:

·       (8/12) Sold December corn 718, risk 725, objective 700 1/2. Closed 714 1/2.

Today marked the expiration of the August lean hog index. As always happens at this time of year, traders will now look to the October and suggest the big discount of 17% ($18) is simply too much. There is no way prices can decline that much right? Wrong. As you can see here cash hog prices, measured by the lean hog index, can fall even more than that from August 12 to October 12. It is no coincidence that the worst decliner, 2008, was also the big China pork purchase year. China buys pork in the summer of select years and pumps up summer prices. In those years they do not buy for fall or winter as their domestic supply rises (just like ours). Prices therefore fall hard. 2011 is a big China buy year just like 2008. Though traders may buy October futures on Monday or Tuesday “…because of the discount” don’t buy into it. That discount is there for a reason. In the big picture, it is actually not large enough…Rich Nelson


Working Trade:

·       (07/20) Sold August 95 put 1.07, expired at 0 on 08/12 for +$430.

·       (08/08) Bought April/sell December 4.45, risk 2.25, objective 8.20. Closed 4.80.



Rich Nelson

Director of Research

Allendale Inc.

4506 Prime Parkway

McHenry, IL 60050



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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