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Corn prices not low enough

Corn Commentary

Despite the low expectations for exports and the falling price of corn, today’s export report was still disappointing. Today’s sales show that a March corn price down near 700 still is not low enough to find any active buying. While trade was looking for 150,000 – 300,000 tonnes, we were given 104,300. Once again, this raises the question of just how low corn must go to meet expectations, much less exceed them. Ethanol offered only fractionally better news with a report showing production rising to 834,000 barrels a day. A reason why this was not very positive is that a seasonal increase does occur around this time of year. Compared to last year, ethanol production remains 13% behind last year, which on a percentage basis is the same as last week. Just having corn spend the day in positive territory is good news for bulls in that it buys another day closer to the new year without going lower. Bulls are very much looking forward to higher trade leading into the January 11 report. While it is the best guess for the next bounce, we will remain cautious until seeing it happen. Full market attention will be on the "fiscal cliff" when Monday comes around, which could keep corn trade calm for at least one more day. Starting the new year, some fast decisions will need to be made. Either a bounce will begin to start the year, which should keep sellers on the sideline until the January report, or this market will continue grinding lower, and quick sales need to be made to go along with the slide. Bulls can look to buy Monday ahead of this promised bounce but need to react quickly if it does not start developing on Wednesday.

Working trades:

  • Bought March/Sold December corn at 94, risk to 81, objective 120

Lean Hog Commentary

It is not often that analysts get a surprise on these quarterly Hogs and Pigs reports. Typically everyone gets the direction of supply changes correct, expansion or contraction, and we are just arguing whether there was a 0.1% change or a 0.4% change. Today’s report was a surprise. We know from hard numbers that slaughter of U.S. sows, from September through November, was 1% higher than last year. However, USDA just reported that the breeding herd went from 99.7% on September 1 (-0.3%) up to 100.2% on December 1 (+0.2%). So sow slaughter was down, and yet the breeding herd grew. To make the numbers work, that means you would have added 4.2% more gilts than last year in that period. Putting the story into text…when producers were losing $20 to $50 per head on outgoing hogs in that time they were planning an expansion. Now it is true that deferrred hog contracts (summer and fall 2013) were implying a return to profit, we find these numbers a little hard to believe. That is point #1 we disagree with. Point #2 deals with breeding herd performance. The September – November pigs per litter, at a record 10.15 pigs, was 1.3% bigger than last year. These are sows that were bred between May 10 and August 8. You may remember we had the hottest summer of Allendale’s record this past year (weather data going back over 30 years). In December, we heard clear discussion from clients that recent farrowings had been a disappointment. Though we will agree that today’s barns are a heck of a lot better ventilated than years ago, this number sticks out a little. Yesterday we told you our pork production estimates implied about 1% lower slaughters between now and August (with periods of 2% lower). If you take USDA’s numbers as clear fact, then slaughter rates will be very close to 2012 next year. We will call all 2013 hog contracts down 40 cents on Monday and will note they would be even lower if it were a normal day (not in front of NY). Deferreds would also need to take a $2 decline. Being clear here: Today’s report was a disappointment, and the market will react. USDA has the biggest survey of anyone in the pork industry and their numbers are THE numbers. However, we suspect in the coming months there will be slight shortfall. Our bias would be to buy a respectable break.

Working Trades:

  • (12/03) Sold Feb 87 call 1.90, risk to 3.10, objective 0.25. Closed 1.67. 
  • (11/20) Sold June 96 put 2.35, risk 4.10, objective 0. Closed 2.22. 
  • (11/20) Bought June/sold October 12.85, risk 11.35, objective 15.85. Closed 12.30.

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