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Rich Nelson: Closing corn and hog commentary

Closing Corn Commentary

Fundamental Support: Yesterday the
corn longs had taken their profits making this market less subject to the
selling seen in other grains today. Japan bought 101,000 tonnes of US corn this
morning helping to keep this market higher through most of the day. Late
session buying came in that may have been more expected on Monday rather than
late today. Rumors circulated around about China buying from 3 to 9 million
tonnes of corn from the US once again but that was not the cause of the rally.
These rumors have been circulating for weeks now so until we actually see a
purchase made by China, these will simply remain guesses. Buying by “unknown”
will not be enough either. Granted, if you do see even one purchase from China
themselves, this market is likely to see a strong bounce. Technically this
market doesn’t need to see a Chinese purchase to get up to 700 March levels.
There is still nothing on the chart to cause corn to stumble on its way to the
round number resistance of 700. Next week will give us new supply/demand
numbers on Wednesday where there is a good chance at seeing corn stocks fall
once again. For now there are plenty of reasons to be bullish, just keep the
China buying excitement at bay for now until we actually see a purchase from them. Being bullish for the reasons at hand
will be good enough, let’s just make sure not to chase some of these rumors.

Direction: Buying that may have been
expected next week was instead found today. There is likely to be a
continuation of that buying Monday before trade slows on Tuesday ahead of the
supply/demand report. It is unlikely that large scale selling would come in
before a USDA report, as recent reports have been on the bulls side. Ryan

Panic Supply Levels Yet?: Last
night’s discussion of stocks/use brought some good questions from clients. We
showed how we expect ending stocks to tighten next week. Stocks/use, the best
measure of tightness of supply, will decline from 5.5% to 5.2%. Other sources
in the industry suggest we are getting close to 5.0% 1995/96 levels. Technically
that is correct. It must be noted that 5.0% number is the final estimate. Those
high prices in 95/96 were actually made on tighter numbers. As the chart shows,
we are now estimating 2010/11 stocks/use to be lower than the entire 2008 grain
rally. We are not at the tightest point seen in the 1995/96 rally though. We
are not yet at panic levels. That would also imply this wide basis will not
narrow in that quickly. Rich Nelson

Trade Recommendation(s):

(2/2) Sell December corn 570 STOP, risk 10 cents from entry,
objective 30 from entry.

Working Trades:

(2/3) Bought March corn 667 1/4, risk to 639, objective 698.
Closed 678 1/2.

(2/1) Bought December/sold March corn 69 3/4, risk 75 filled
02/04 for -$262.50.

Lean Hogs Commentary

Lean Hogs: With a strong 238,000
head kill planned for Saturday, this week’s shortfall in hog slaughter will run
about 115,000 head. That will be spread out over next week and weekend. The
better quotes reported for cash hog trading today were a sign to everyone that packers
do not feel they are drowning in available hogs. Instead, they are suggesting
they can find a home for everyone. In other words, demand is there. Some
suggest perhaps the storm problem was not as large as USDA’s slaughter numbers
implied. Either way, price action is telling us there is no problem. Helping to
support that idea was the strong profits reported for Tyson’s pork segment this
morning. They did not see signs of pushback against high prices in the previous

Direction: Even with the recent
setback to prices, this market is clearly in an uptrend. South Korea news in
recent weeks has re-invigorated bulls, corn just put in new highs for its
uptrend, and we are looking at a meat deficit in the second half of this
year…Rich Nelson

Tyson Foods Reports Profits: The
nation’s largest diversified meat company reported record quarterly profits in
the October - December period. As you may remember, the fourth quarter last
year was characterized by surprising production levels for proteins. Volume
levels, versus October – December period, were 8.4% higher for chicken, +0.7%
for beef, and up 5.8% for pork. At the same time an abnormally large increase
in per unit sales price was seen. Sales prices were -0.4% for chicken, +16.4%
for beef, and +23.5% for pork. Exports were seen for the bulk of the increase.
The US consumer was seen as a moderate factor for the increase. Hedges on
rising grain prices benefited the chicken segment by $51 million. The company
expects more normalized profits for 2011.

We note that during this quarter the company did not experience end
user/consumer push back against higher prices. Allendale is likely the largest
commodity based consultant to the equity industry on meat companies. Further
information on our 2011 projections for the company can be made available to
equity analysts, mutual funds, hedge funds, and individual speculators through
our upper tier consultation structure.

Trade Recommendation:

(02/03) Buy April 87.85, risk 85.90, objective 94.20.

Working Trade:

(11/12) Sold February 70 put 1.82, risk 2.30, objective 0.
Closed .05.

(12/30) Sold June 86 put 2.25, risk 2.60, objective 0.
Closed .70.

Rich Nelson

Director of Research 

Allendale, Inc 

4506 Prime Parkway 

McHenry, IL 60050 


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