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New crop corn stocks remain normal

Originally written on Friday

Corn: Everyone knows new crop numbers should be swinging around wildly right now. During summer we have the June 30 Acreage report plus dramatic swings in yields shifting supplies. Also, keep in mind demand numbers will be making big swings. USDA and everyone else are guessing demand from September 1, 2009 through August 31. That has not even started yet. So yes, we should expect big swings both up and down in new crop stocks.

Old Crop Numbers Should be Nailed Down: The hardest numbers to take this morning were the changes to the old crop balance sheet. We knew it would come eventually because the June 30 quarterly Grain Stocks report showed corn stocks as of June 1 were larger than expected. Two nights ago we detailed some preliminary estimates of how this fourth quarter (June – August) corn usage could work out. The commentary noted that if industrial (which includes ethanol) +8%, feed -4%, and exports -3% compared with last year's fourth quarter then you have a usage of 2.463 billion. Taken off the June 1 stocks level we noted the marketing year stocks could hit 1.803 billion bushels. USDA came relatively close and estimated old crop stocks would rise from 1.600 to 1.770 billion. In case you are confused about the dates here, keep in mind the old crop year goes from September 1 to August 31. The old crop numbers that are reported each month are USDA's guess for what stocks will be on August 31.

New Crop Stocks Are Normal: September 1 starts the official new crop year. With extra acres from the Acreage report and a little more carry-in from old crop, USDA estimated old crop stocks would go from 1.090 to 1.550 billion.

Weather and Yields: One thing USDA did not touch this morning was their June 10 yield estimate of 153.4 bushels per acre. That surprised some who were arguing great crop conditions warranted an increase in yields. We have had relatively mild temps in the early portion of summer and regular rains. While that has been a problem for Illinois, Indiana, and Missouri is has been very beneficial for Iowa and Nebraska. Also, the forecast is still great. Over the next three weeks we will go through the big yield setting pollination time. There is absolutely nothing in the forecast which shows a reason for concern through pollination. Next week we will start up our yield forecasting model to get an idea of what the crop condition ratings are implying about yields. Our model uses all of the crop condition categories, not just good and excellent, and makes separate yield estimates for all the states.

Direction: One thing we have to keep in mind here is the market is not trading this morning's numbers. It is past that. The market is trying to correctly price in an increase in yields right now. Are yields running 2 bushels higher or 5 bushels higher than USDA used this morning? That is why you have some arguing corn futures may touch below 300. The new crop numbers we now have at 1.550 billion are very similar to what the old crop was running at the start of this year. From November 10 to February 10 old crop stocks increased from 1.124 to 1.790 billion. Crude oil prices were in the $30's and $40's. During that timeframe March 2009 corn futures hit a low of 305 1/2. In other words, when fundamentals were more bearish than they are right now, nearby corn futures hit 305 1/2. Our view of the corn market is that prices have hit our downside objective and is currently past it. If weather changes we would likely be buying right now. Producers are encouraged to hold all hedges. End-users are encouraged to continue hand to mouth.

Trade Idea(s):
(07/10) Sell Dec 354 1/2, risk 367, objective 330.
Option Strategy(s):
(01/23) Bought Dec 410 put @ 51, risk 60, objective 86. Closed 81 7/8.

Corn Technical Commentary: Corn posted an outside bar on the char today, but closed right in the middle of the range. This leaves us scratching our heads for Monday's trade. We did an option spread in the Sep to test the long side today.

Vital Technical Indicator: the next projected major turn day is July 22.

Closing Cattle Commentary
Cattle: This morning's supply/demand report noted a drop in USDA's 2009 beef production forecast. They recognized placements will be down and carcass weights are getting more under control. This placement issue is becoming a problem. A conversation with one feeder cattle shipper out of Kentucky (ships feeders in Kentucky and Tennessee out to the plains feedlots) showed he feels the custom feedlots are about done now. Those unfamiliar with feedlots should know feedlots buy cattle themselves to feed out in their own lots and at the same time feed out customer cattle. The general mix in those lots is somewhere along a 40%-60% split. Some smaller lots do not want the risk of owning cattle and simply feed out customer cattle. Their traditional customers have lost a tone of money in the past year or two and are simply not buying filling the holes anymore. Essentially, we do feel slaughter levels will be a little too tight after summer. In the near term though, we cannot say a bottom is in place. Cash cattle traded back down to $82 today. That is the same price they stayed at for four weeks in a row earlier. Futures, with a normal basis applied, are implying cash cattle hit down to $81 in the third week of July then finish August at $82/$83. We may need to take that August down by $1 more. However, we are not big bears here. After summer, we will put on our rally caps.

Dairy Herd Buyout: Announced today, was news the dairy industry is planning ANOTHER herd reduction program. You may remember earlier this year dairy producers, not the government, announced a planned 103,000 cow liquidation program and ended with 101,000 approved entries. Those dairy cows are being culled right now. From mid May to present, dairy cow slaughter has ran from 16% to 41% more than last year. The dairy organization has seen almost NO bump in prices. With that in mind, it was announced today another herd reduction program is being planned. We thank Patty Davis, Allendale's Colorado branch office who specializes in dairy, for alerting us. If you have any questions about hedging or trading in dairy futures/options, we strongly encourage you to give her a call at 970-674-0793.

Trade Ideas(s):
(07/10) Sell Aug 84.20, risk 85.60, objective 82.40.
Option Strategy(s):
(06/30) Stand aside.
Cattle Technical Commentary: Looking at some retracement levels today, cattle dipped just below 50% and the 20 day MA. There is a gap near 62%, so we'll place a buy order near this area of support in case there is more downside next week.

Vital Technical Indicator: Next projected major turn day for live cattle is July 20 and for feeders is July 22.

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.

Originally written on Friday

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