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Rich Nelson: Demand market

Wheat Commentary

Fundamental Support: Wheat
rallied on strong exports and on the coat tails of the corn market which traded
limit up at one time today. Weekly export sales came in today at 1.115 million
tonnes. This was within the trade expected range of 500,000 – 1.3 million.
Accumulated sales to date are 46% above a year ago. With Jordan, Bangladesh,
Morocco, Iraq, and Saudi Arabia all in for various amounts of wheat, we expect
the export pace to remain robust over the next few weeks. The USDA Outlook
meeting released their full numbers yesterday. They are anticipating this year’s
wheat production to be 128 million bushels lower than last year. This is
despite total wheat acres being up 3.4 million this year. They are looking for
the trend yield to come in at 43.8. This is down from last years 46.4. They are
anticipating this years export sales to drop 150 million bushels and total use
to be 2,345 compared to 2476 last year. The net effect is a bullish ending
stock number of 663 million bushels. This is down 155 from last year and put
the stocks to use at 28.3%. . USDA’s price outlook is for a cash average of
$7.50. Assuming a $0.70 basis, that implies $8.20 July futures. That “average
year” price is around 30 cents over today’s close.


Direction: With today’s
trade, the May Chicago traded back above the 100 day MA, after testing and
holding the long term uptrend support in the overnight market. Allendale
believes the political unrest in the world will keep the world importers
aggressive in covering their needs and this should help support the market. The
weather aspect of the trade will get more important as the winter wheat crop
comes out of dormancy. With the continued dryness in the U.S. Hard Wheat belt,
spring rains will be a must to improve the condition of the crop. The
government projecting the U.S ending stocks to fall this year by 155 million
bushels, even with an increase of 3.387 million planted acres. The market will
be nervous until the crop is in the bin. Any ideas that trend yield will not be
attainable will be bullish. With this in mind, traders should continue to look
to buy breaks in this market.

Working trades

  • (02/15) Bought Sep Minneapolis/sold Chicago 60, risk 50, objective 85. Closed
    67 1/2.

Closing Cattle Commentary

Live Cattle: This week will
mark the second in a row where packers bought cattle with a negative margin.
Though wholesale beef did advance $3 to $4 for the week, packers are still in
the red. That does not mean cash cattle has to fall right away. Cash cattle
typically post their peak for the first half of the year in March or early

USDA Beef Outlook: Compared with 2010…Head Slaughtered -3%, Beef Production
-1.5%, Imports +4%, and Exports +2%. Though no Beef Left for US Consumers
estimate was noted we compute it to show a decline versus last year. For
prices, they estimate live cattle will average from $102 to $109. For
comparison futures, after applying normal basis, are implying cash cattle will
run from $111 to $121 this year. Though we generally do not put much into USDA’s
livestock price projections we do feel they are right for the first half of the
year. For the second half we are clearly aligned with futures.

Margin Losses: This chart, of which many variants are used throughout the
industry, shows implied packing margin rates. It is based on a model of revenue
per carcass from meat and by-product sales, with the cost of the live animal
subtracted. Losses were implied from last week’s $110 purchases. This week’s
losses will be similar.

Direction: As we still have a negative expectation of prices in the second
quarter, and wholesale beef is not justifying the stronger cash cattle market,
we still suggest this market is overvalued. It may not have peaked yet but it
should happen in the coming weeks. If you attempt a sell-side position, like
our trade below, make it a position that does not get hurt during the next two
to four weeks. 

Trade Recommendation:

  • (01/26) Sold December 110 put 3.50, risk 3.75, objective 0. Closed 2.47.
  • (02/23) Bought June 114 put/sold 120 call/sold 106 put -.22 (22 cent credit),
    risk to -2.22, objective +6.50. Closed +.17.

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