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Consider selling cash wheat

Wheat Fundamentals: The Wheat Quality Council tour of spring wheat suggests yields are fine at 37.3 versus a five year average tour estimate of 35.1 bushels per acre. The trade is instead looking at problems with world production and the continued purchases of US wheat still continuing. Thursday's sales report indicated last week was the biggest one week buy in over 10 years. Friday, Iraq jumped in with 200,000 and South Korea and Taiwan added small purchases to the mix.

Weekly Export Sales: Excluding last week's sales number, the first six week's of this new marketing year saw wheat sales 52% higher than last year. With last week's sales included they are now a large 79% higher. We will certainly agree this pace won't last forever. However, it is clear to say USDA's 2007/08 export figure of 1.050 billion bushels is too small of an increase over last year's 910 million figure.

The Technical: Trend is up, breaking up and out of its recent trade range of 6500 to 6000. Key immediate support is 6320. A breach of the levels is expected to push Sept futures back down to the 6200 and then potentially 6000. Overhead resistance is derived from the monthly charts and suggest 6900 from May of 1996. If penetrated then we need to prepare for a move to 7170 made April of 1996.

Marketings: For cash marketings, typically the Oct-Nov time frame is when cash wheat prices peak. We recommended to sell into the cash market in the October time frame. However, do not ignore present firm cash prices for wheat to sell into. Call your Allendale Representative for your specific cash marketing needs.

New Crop 2008: The July 2008 CBOT wheat futures are locked in a range of 5600 to 5900. There is plenty of bullish enthusiasm for world wheat and we are on the upper end of the trade range. We recommended to hedge a minimum of 15% of new crop 2008 wheat futures against anticipated production Wednesday morning and were filled at 5760.

Trade Position: Though wheat may be getting a bit overvalued we cannot stand in front of this market will straight sales. Instead we would sell only on a stop (when prices push lower and break support). The long term trend remains very much up. As long as continued strong demand rides higher with world production problems, the weight of the spring harvest is expected to be kept to a minimum.

Corn Fundamentals: So far, these extended forecasts of hotter and drier conditions forecasters have posted in the past two weeks have not turned up. They were trying it again as of this morning. The trade has become skeptical of these forecasts and now would like to be shown the actual weather before getting excited.

Weekly Export Sales: As noted last night corn sales, so far, will not meet USDA's expectation. There is a little more active booking of new crop corn going on though.

The Technical: trend for Sept corn futures is down but potentially developing a near term bottom. Key immediate support is 3064 with resistance of 3374. Please note the very small upward trend for Dec corn futures which began on 7/23.

New Crop Marketing: Based on our most recent price projections, Dec corn futures are in a downward correction and estimated to find a bottom near the 3200-3300 level. With the present price of 3330 and recent low of 3244 made on 7/23/07, Dec corn has met our downside correction. We do not recommend forward contracting at present levels. Before Dec corn expiration futures are expected to work back towards 3700-3800 level. End users and producers, use the preceding information for your individual marketing needs.

Old Crop Marketing: A move to 3650-3700 vs the Sept futures is projected to complete old crop marketings. Midwest cash average price is $2.83 per bushel. Cost of carry on farm is estimated at 3.2 cents per bushel per month. Unless your cash market is willing to pay you to store the crop, signals suggest it does not pay to store the old crop inventory. Allendale sold its cash corn crop on May, 31, 2007 and was fortunate not to suffer basis weakness.

Trade Position: Corrective rallies based on emerging technicals and fundamentals are now anticipated to be sold with one eye focused on weather and the other on building demand for both corn and more specifically wheat.

Soybean Fundamentals: As with the corn the trade is looking only at current conditions rather than forecasts. Adding on to that bearish factor is word China canceling 6 cargos of soybeans destined for shipment in July and August. Poor crush margins as soybean meal weakens demand because of the country's pig disease problem could find this talk continue into the month of August for September shipments. China officials suggest its pig inventory may not recover until the second half of 2008.

Weekly Export Sales: We noted last night it appears USDA's export expectation is running 10 to 30 million bushels too large.

Old Crop Soybeans: Allendale has and continues to recommend unhedged soybeans to be sold to the cash market unless adequate month to month carry is offered by your buyer. Provided we are approaching the late July, first half August time frame when soybean pod fill is critical to make or break production, be aware of Allendale price projections have suggested futures may endure a $2 to $2.50 price correction lower. In a period of just last week, futures slid 71 cents on old crop or lost 7.7% of value. Sept and Nov soybean futures need to penetrate the #2 MA before we suggest the funds may be motivated to turn bears to bulls. The potential to move lower is very much real. Allendale sold its 2006 soybean inventory on May 18th.

2008 Soybeans: Allendale officially hedged it first portion of 2008 anticipated production on July 5th and has written orders to add as outlined in our Hedge Advice page. Allendale had resting orders to hedge 10% more new crop 2007 at 9200 filled Thursday, July 12.

Trade Position: We are not in soybeans but are trying to sell oil and meal.

Lean Hogs: In the past two weeks we have pointed out the disconnect between what is actually happening right now and what outside investors believe will happen in the future. In the right now time frame supplies of market ready hogs are coming off their lows for the summer and beginning to increase until their peak in the fall/winter. This week we produced 392 million lbs of pork. The peak week will hit sometime between October at around 445 million lbs. We project Monday's lean hog index (a measure of cash hog prices for Monday to be $73.36. Current futures prices are suggesting cash hogs will $72.77 on August 14, $72.55 on October 14, and $69.80 on December 14. In other words futures are suggesting cash hog prices will fall only $1 between now and the big supply run up. From this week's pork production to the October production high we project a 14% increase in supplies. This is entirely normal. During that supply run up cash hog prices typically fall. The way futures are set up right now they are implying demand will rise just as much as supply and take all that additional pork. Is that even possible? China was our sixth largest pork buyer last year with 114 million lbs of total purchases. From January through May of this year (the latest data available) their buys are up 51%. That includes the month of May where they were up 165%. This is all fact and is not disputed by anyone.

Chinese Potential: As you know over the past three years we have been doing regular consultations with investment banks and hedge fund players relating to their investments in commodity companies. On Wednesday we completed one with a well known New York firm that believes China would have a 50 million metric ton deficit they would need to fill from the US. That sounds pretty darn exciting and equates to 55 million lbs. Let's not stop there though. Let's say that 165% increase in May just keeps climbing. Let's say from June to December it climbs from 200% higher to 300% higher. That should fill any bull's wildest dreams. The net effect would be 175 million lbs of additional pork.

So, bulls believe we will ship them anywhere from 55 to 175 million lbs. That sounds fantastic. Oh yeah, we also have to note exports to our #2 buyer Mexico are down sharply. Have you read a single thing about that in the news wires? No you haven't. In the most recent three months of data exports to Mexico were down 28%, 39%, and 47% from 2006 levels. From now through the end of the year we estimate we will lose 101 million lbs from last year's business to Mexico. A 101 million lb loss either takes care of all or most of the increase in China. If we are using the high end of China's potential remaining buy (175 million lbs) the net increase will be 74 million lbs (175-101=74). That still sounds bullish doesn't it? Now let's look at WHAT China will be buying? Will they be buying high buck offerings? No, they buy low buck cuts and discounted byproducts (organs etc). That 74 million lb net increase could be around 50 million lbs in value equivalent conservatively. By the way, USDA is still expecting a 4 million lb DROP in exports from July through December on their balance sheets. If you're still bullish after looking at our most bullish scenario let's put this fact out. This week's $73 cash hog market was done on 392 million lbs production. Weekly kills rise from here on out. If you subtract 392 million from each of the remaining weeks of production you have an additional 643 million lbs of pork to run through. We just laid out the most bullish China situation we could think of and found a net increase in total exports of around 50 million (after accounting for China's lower value buys and a drop in exports to Mexico). Will 50 million lbs stand up against 643 million lbs of increased pork above this week's production level? If we are wrong we will be the first ones to say it. Going through the numbers we cannot find any solid justification for these prices.

Plan of Action: We recommended the August/October spread earlier this week and our very moderate 75 cent risk was hit. That's no problem. In the short term these investment money bulls are running the show and proved it. Keep in mind unlike grains and beef there are no weekly reports for pork exports. No one has a solid idea of just how large or small these purchases are. The next export update comes on August 11 or 12 and will cover June exports. Keeping that in mind could the October contract go back and try for $75 or even $76 again? Sure. However, can they keep this market at such inflated values through the October 14 expiration of the October contract? Probably not. With that in mind we still strongly urge all pork producers to get hedges on for 100% of expected marketings through the end of this year. This mispricing opportunity doesn't come around very often. So yes, we are bearish hog futures at these prices.

Live Cattle: Active cash cattle trading occurred at $91 and $91.50 on a dressed basis and $142 and $143 dressed out. Those prices were higher than the $90 and $140-141 posted last week. It also puts cash cattle prices back against the high end of the $86 to $91 range posted since the low in prices from late June. We are near term bearish CME cattle and cash cattle right now. However, in the big picture a good $2 price break or so may be an opportunity to buy the Feb 2008 contract for a long term move to $100.

At the close of the Friday open outcry CBOT trade session, floor trade estimates suggest fund positions were unchanged on wheat, bought 2,500 corn, sold 3,000 contracts of soybeans, sold 2,500 soybean meal, and bought 500 contracts of soybean oil.

Wheat Fundamentals: The Wheat Quality Council tour of spring wheat suggests yields are fine at 37.3 versus a five year average tour estimate of 35.1 bushels per acre. The trade is instead looking at problems with world production and the continued purchases of US wheat still continuing. Thursday's sales report indicated last week was the biggest one week buy in over 10 years. Friday, Iraq jumped in with 200,000 and South Korea and Taiwan added small purchases to the mix.

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