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Rich Nelson: Little USDA changes seen

Fundamental Support: Corn this week rose 20 1/2 cents. Big support came from the rocketing wheat market, further talk that China needs to import corn next year, and partially from Argentine corn concerns. Looking ahead to next week, we do not look for a major change to USDA’s balance sheet. They traditionally wait until January to adjust production numbers. That leaves us arguing about ethanol and exports. We will release our numbers on Monday.

Life After the Ethanol Subsidy: This morning we were asked by Reuters newswire a question regarding the subsidy. “What price impact would be seen if ethanol subsidies were not renewed?” Unless Congress takes action, the 45 cent per gallon blender credit and 54 cent per gallon import tariff will end. We told the reporter it would imply a 15 cent per gallon drop in ethanol and a 35 cent impact on corn prices. That equates to a 7% loss in ethanol and a 6% decline in corn. The story also quoted one university based economist, not one of the well known ones, as saying there would be a 6% drop in ethanol and a 7% loss in corn. It is no coincidence that our number was close to his. This individual is one of the few in the industry to actually do the work in mapping out ethanol’s effort on corn pricing. His early work was instrumental in fine tuning our pricing models. What was interesting here is regular corn market analysts told the reporter they were looking for a 10% to 20% drop in corn. Off today’s close that would imply a 57 to 115 cent decline! So you have people who have done the work suggesting a 6% or 7% decline versus industry expectations of 10% to 20%. There will be an impact on production but not as much as you would think.

Realistic Impact: Though much of the grain analyst community discusses a large 10% to 15% drop in ethanol production if subsidies were not enacted we cannot join that thought. The Department of Energy is expecting 2011 ethanol production at 14.2 billion gallons. That forecast was made assuming subsidies. We cannot argue with those numbers. That represents a 13% increase over the minimum Federal Mandate level of 12.0. In essence the grain analyst community believes we will fall directly down to the minimum mandate level? The university source we noted above believes a 5% loss would happen. We will be close to that with a 7% lower expectation. 7% lower would represent 931 million gallons. There is still some confusion over how much corn goes into ethanol production. USDA’s ERS group suggests nationwide efficiency from June through August was 2.73 gallons per bushel. Using that level, which is pretty darn conservative, implies a 341 million bushel swing in corn for ethanol in calendar 2011. This is a big number but is only one of the many drivers for price. Did you know beginning stocks for 2011 will be 880 million smaller than 2010? 

Direction: We still suggest the current balance sheet is tight enough to warrant 650 futures in calendar 2011. Questions that need answers in the next four months deal with acreage, the ethanol subsidy, China buying, energy prices (crude and ethanol), and wheat yields. With these in mind we look for a slow rally that will be plagued with setbacks…Rich Nelson


Working Trade:

·       (12/01) Bought March Corn 566 1/4, risk 554 1/4, objective 596 1/4. Closed 573 1/2.



Closing Cattle Commentary

Fundamental Support: As expected, futures had some moderate trouble this morning from the less than stellar employment numbers. Two other factors kept prices close to unchanged. There is talk the Free Trade pact with South Korea has cleared a couple hurdles and will be put under review by both the US and South Korean presidents. This is an important factor for us. As we showed in one of the charts this week, we are only sending South Korea half of the volume of beef as we did in pre-BSE days. With this in mind, and packers leaving out bids for $104 cattle, this week was a success.

Direction: We have been bullish on this move, had our upside targets hit, and are still bullish. If this South Korean deal can get done earlier than we expected (we do not look for it until 2011) then it is simply more frosting on our bullish cake....Rich Nelson


Working Trade:

·       (08/19) Sold December 95 put 1.35, risk 1.60, objective 0. Closed .02.

·       (11/24) Bought February 105.50, risk 104.40, objective 107.10. Closed 106.37.



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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