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Wide trading ranges to continue

The soybean market closed at the lowest price in four weeks, after a massive round of risk-off trading pressured the grains, metals, and energy complex today. It looks like some market participants are moving to the sidelines as the odds of a government shutdown increased dramatically in the past 24 hours. 

With the Republican-controlled house passing a bill to keep the government funded if Obamacare is defunded set the stage for a big political battle. The odds the Democrat-controlled Senate passing the same bill are zero. Even if they did, what are the chances the President scraps his biggest accomplishment?  Zero. This means if one side does not blink by October 1, the government will be shut down. No one is certain what effect the shutdown will have on the economy, so going to the sidelines may be the safest place to be. 

If Washington can get past this self-made crisis, the next one is right around the corner; the U.S. will hit its self-imposed credit limit by the mid-October. If Congress does not vote to increase the debt ceiling, the U.S. will default on at least some of its obligations. This would more than likely cause the country's credit rating to tank. This would then cause the U.S. borrowing cost to rise, and this could have an even bigger negative effect on the economy than a government shutdown. The rain that has come across the Midwest over the past 24 hours was viewed as beneficial for the very late-season and possibly the double-crop beans. 

From this point on, we would think the trade will view rain as negative as it could bring on harvest delays from here on out. Next week’s forecast looks dry for at least the first part of the week, which should allow for harvest to progress. We anticipate the market will continue its wide trading range as the market tries to determine what size of crop is actually out there. It looks like it will take real harvest results or the October WASD before the trade will have any confidence in the yield number.   --Jim McCormick

Trade Recommendation:

6-11-2013  Bought 1 unit of November $11.00 bean puts for 10 cents; Risk value of option will hold until anticipated “fall break.”

9-11-2013 Bought  Dec 1400 call sold Dec 1500 call at 23 1/2 cents. Risk 10 cents stop close only; objective 1.00



Cattle Commentary


The afternoon Cattle on Feed report came in even a little more bullish than expected. USDA’s survey of the nation’s feedlots found that August Placements, the number of new calves and feeders starting their feedlot period, was 10.9% lower than August of last year. This Placement number, at 1.788 million head, is the lowest August of this current data series, which goes back to 1996. It was a full 205,000 head smaller than the previous August low of 2005. Feedlots have not made money in over two years. They are waiting for feed prices to continue their descent, and perhaps a few backgrounds scooped numbers up for a quick fall visit to pastures. The other possibility that must be discussed is the potential that some heifer retention is being seen. That will be be confirmed for a few more weeks. In the big picture we now have four months in a row of low placement numbers. We now have monthly cattle slaughter estimates known through January. January cattle slaughter comes from placements in May of under 600 lbs., June of the 600-699 lbs., July of the 600-699 and 700-799 lbs., and August 700-799/800+. Here’s the breakdown of those specific categories vs. previous year…-25%, -28%, -3%, -15%, and -8%/-9%. The range of each category of Placements that will make up February slaughter is…-32%, -15%, and -9%. Though we don’t have one category here, September 800+ feeders, that won’t change the net message. In the beef industry, feedlots do fill some holes in marketing. However, this is such a deep hole that is set for January through March (likely longer) that you cannot hold back December finishers or market March/April groups early to fill this problem. Q1 is set for an excruciatingly small slaughter. February 2014 futures are implying cash at $131. This past February cash cattle ended at $128. So we are looking at a few weeks of slaughter 8% to 10% lower than last year and futures have a $3 premium? We hold to our February futures projection of $140.

August Marketings, the number fat cattle that have finished their three- to eight-month feeding period, were 3.7% smaller than last year. That is actually better than expected. Keep in mind this Marketing number was artificially low by 3.6% as August had one less weekday/one more Saturday than in 2012. As a whole, the feedlot population fell from 5.9% smaller than last year on August 1 to now 7.2% smaller than last year on September 1. Cash cattle traded today at $124, which is up $1. Today’s COF report may have ended the August/September laziness in cash cattle ($123). We look for a mild increase to $125 for October. Once we get past that point, it is full steam ahead.

Working Trade:

(7/22) Bought February 130.00, move risk to 129.00. objective 135.10. Closed 131.52.

(8/14) Sold February 128 put market 1.65, move risk to 2.50, objective 0 Closed 1.50.

(8/26) Bought February 131.72, move risk to 129.00. objective 137.20. Closed 131.52.

Trade Recommendation:

(9/20) Buy 134 Feb call/sell $128 Feb put at market, risk 1.80 from entry, objective 4.60 from entry.



Rich Nelson 

Allendale Inc. 


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