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Watch out for China -- Rich Nelson

It is generally thought that the December report does not make much of a wave in the markets. For once, things turned out as expected. 

USDA raised corn carryout slightly to 832 million bushels. This is 5 million bushels more than the number they put out in November. Of all places, this increase to carryout came from raising corn imports 5 million bushels. That takes a very small number on the balance sheet and increases it slightly. Imports were 10 million in the last report and are now 15. 

All other numbers were left alone. With the large amount of traders still bullish this market, it was able to come back from a lower start to actually finish in the green. Obviously, the next main factor to watch out for will be China, over the weekend. But, today showed that beans and wheat are more affected by China than corn looks to be. That makes good sense when you look at the graph below showing how much corn China buys from the US over the last 15 years. As it shows, last year they bought 1.5 million tonnes which is about 60 million bushels. 

In the grand scale, that is not an overly impressive number and is also the most we have seen in over 10 years. Keep this in mind when talk about China’s economy is circulated.

It may affect other markets greatly. But, the largest affect on corn would simply be to follow other markets and not be a significant change to the corn carryout. This helps to explain corn strength today when other markets were weak and will continue to function this way through additional China talk.

Direction: A good strong close on a somewhat bearish report shows that corn can continue its slightly higher trend. There may be some reaction to China’s raising interest rates but it would most likely come from following beans rather than any changes in the underlying bullish carryout number. We should look for the recent trend to continue with a couple speed bumps along the way…Ryan Ettner


Trade Recommendation:

·       (12/10) Stand aside.

Fundamental Support: Thursday night, a chart of forecasted low temps was posted. It was done to put a visual of the conditions producers are looking at on Sunday and Monday. Often at very cold temperatures producers will not want to turn the hog barn into an icehouse during loading. Another issue is the basic action of fighting hogs out the open door and up into the loading chute. Along with cold temps there will be snow. Five to ten inches will fall in the far northern Corn Belt. Heavy snows, on unplowed country roads, are an issue not just with hog deliveries but for packing plant employees.

One inch of rain = 10 inches of average moisture snowfall. It can range from only 5 inches of wet snow on up to 15 inches of dry.

Why Slaughter Disruptions Are Bearish: If marketings are delayed during summer, when supplies are low, we get a sharp reaction higher in prices. Here in winter, when we are in an oversupply environment, the initial price rally in cash hogs is more muted. In addition, next week is the last full kill week before January. There simply is not capacity to take care of a large carryover in market ready numbers. Delayed marketings right before the Christmas week are bearish, not bullish.

Direction: It is easy to be a little disappointed with the past two weeks of sloppy/lower trading. Keep in mind this is more of a short term problem. While USDA did throw a little more production and fewer exports into the picture in this morning’s supply/demand report, as we discussed in the AM comments, we still have less supply in store for 2011 than 2010…Rich Nelson


Working Trade:

·       (11/12) Sold February 70 put 1.82, risk to 2.80, objective 0. Closed 1.07.




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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