Monday, March 10, 2008
Sell Chicago July wheat at $10.42 on a stop to hedge 10% of the 2008 crop.
The grain/soy complex got slammed at the opening bell, with soybeans immediately locking limit down. But all three of the major markets have staged a modest rebound at mid-morning. Soybeans have come off limit, while the corn and wheat markets at the CBOT have reduced losses to single digits. It’s anybody’s guess how today will end. If settlement prices are at or near the bottom of the intra-day trading ranges, however, it will tip the scales much more heavily toward the likelihood the pre-planting top is in for corn and soybeans.
One of the reasons these markets have found a little support this morning is that crude oil prices have shot to new all-time highs of $107/barrel. Will this be enough to rekindle the overall bullish attitude toward commodity prices that most fund managers have held for months? Perhaps, but long liquidation (i.e. profit taking) remains the biggest threat for the grain and soy markets for at least the near-term.
Up until late last week, speculators held a massive net long position in all of these markets. As a group, they still are very heavily long and that means there could be more downside pressure on prices if they continue to lighten up. This appears to be the significant test of the funds’ resolve since this rally got rolling late last year. Every other time prices have broken this winter, the funds would step in and buy weakness. However, it gets more difficult to justify that action at higher price levels, so it remains to be seen whether the funds will come to the rescue this time.
Frankly, the fundamentals have not had much influence on price swings lately. But talk China might be backing away from U.S. soybeans and soybean oil is one of the reasons the soy complex has been leading the way down the past few sessions. China has been aggressively booking both beans and oil, largely in an effort make edible oil more plentiful and ease inflationary pressure. It is very possible that China will now start to focus on securing South American supplies. Their harvest is close to being in full swing and yield reports are good. Record production from Brazil looks like a sure bet and the same could be true for Argentina.
Even though the corn market dropped the 20-cent daily limit on Friday, the charts for that market did not look as bad as for soybeans. The long-term uptrend lines on the daily corn charts were not broken. December corn did drop below a near-term trend-line, however, and it was an outside week down on the weekly corn chart.
The corn market remains concerned about give too many acres back to soybeans this spring. How much is too much? If corn plantings drop below 88 million acres (compared to 93.6 million last year), this market will be extremely reactive to any kind of a weather problem throughout the growing season. The soybean, on the other hand, is counting on a big rebound in acreage – perhaps a million acres or more.
Wheat futures have plotted a wide daily trading range this morning. The huge spike high of left on the daily charts a couple weeks ago still looks like a historical top. But winter wheat futures are reluctant to break daily chart support. Because global supplies are still extremely tight, the wheat market needs a strong rebound production almost everywhere wheat is grown. Growing conditions around the world are generally better than a year ago, but the market is not confident enough of increased global wheat production to push prices sharply lower just yet.
NO NEW RECOMMENDATIONS
Hog futures started the trading session under significant selling, but the market has been able to cut its losses and the front two trading months are now on the plus side. Because the index funds control a sizeable percentage of the open interest in this market, this intra-day rebound could easily be link to the move by crude oil futures to new all-time highs. All the index funds are heavily invested in energy markets, so strength there tends to support the other commodities in their commodity mix.
Last week’s kill topped 2.2 million head. That’s a very big number for this time of year, but because the year-earlier slaughter total was unusually large a string double-digit increase on a percentage basis that lasted nearly two months was broken. For the year, hog slaughter is up 10.1% from a year ago – far above expectations based on the most recent hog report. Also, average weights continue to run at or above year-earlier comparisons, despite high feed costs. This is because runs have stayed close enough to full capacity that finishers have been unable to pull marketings ahead enough to reduce average weights significantly.
Things could be worse, though. Packer demand for hogs remains strong. While the national average cash price paid for pork carcass is down 7% from a year, pork cutout is down 13%. Packing companies want hogs badly enough that they’re not passing on the entire decline in product prices.
Live cattle futures have been under selling pressure recently, with the nearby contract dropped to a new low late last week. There are now signs a rebound is imminent. Part of the problem is the sluggish nature of the cash fed cattle market. April live cattle dropped down into the $90 area, which is what most cattle brought last week on a live weight basis. It’s hard to make a case for futures being undervalued when the front trading month is well aligned with the underlying cash market.
Beef production is not overwhelmingly large. But the wholesale beef market seems to be having a difficult time maintaining acceptable movement whenever asking prices rise a few dollars. This hints that Americans are spending less on beef due to recessionary concerns. Also, despite the possibility of a beef deal with Japan, the export outlook for beef is not strong enough to lift prices.
Feeder cattle futures are under pressure this morning, in a bit of a surprise. Perhaps this market anticipated the rebound in corn we’re seeing at mid-morning because normally any indication feed prices might be headed lower would be price friendly news for feeder cattle. May feeders set a new low for the move this morning and appear poised for a challenge of contract lows.
CORN: Strict Cash Marketers: 2007 Crop -- 100% sold in the cash market (6-20-06, 4-11, 6-27, 11-12, 11-13, 1-9 & 1-23) and 20% HTA’d for July delivery (10-1)
2008 Crop -- 50% HTA’d or cash contracted(8-16, 11-27, 1-23 & 3-6)
Hedgers: 2007 Crop -- 100% sold in the cash market (6-20-06, 4-11, 11-12, 11-14, 11-28 & 1-23) and 30% HTA’d For July delivery (10-1)
2008 Crop -- 30% HTA’d (8-16 & 1-9); long Dec. ’08 $4.20 puts/short two Dec. ’08 $5 calls on 20% (11-17 & 11-26);
2009 Crop – short Dec. ’09 futures on 10% (3-7)
SOYBEANS: Strict Cash Marketers: 2007 Crop -- 80% sold (1-9, 5-29, 11-12, 1-9 & 1-23) and 20% HTA’d for March delivery (9-21, 9-25 & 10-27)
2008 Crop -- 30% HTA’d for Nov. and Jan. delivery (10-2 & 11-27); 20% cash contracted (1-23 & 3-6))
Hedgers: 2007 Crop -- 70% cash contracted (1-9, 11-12, 11-27 & 11/28) and 30% HTA’d for March delivery (9-21 & 9-25)
2008 Crop -- 40% HTA’d for Nov/Jan delivery (10-2, 11-27 & 1-9)
WHEAT: Strict Cash Marketers: 2007 Crop -- 30% sold on hedge-to-arrive contracts (5-19 & 8-17) and 70% cash contracted (5-31, 6-19 & 7-31)
2008 Crop -- 40% sold on HTAs (8-17-06, 7-31-07 & 9-7) and 10% cash contracted (12-11).
2009 Crop -- 30% HTA’d (7-31, 9-7, 10-25)
Hedgers: 2007 Crop -- 30% sold on hedge-to-arrive contracts (5-19 & 8-17) and 70% cash contracted (5-31, 6-19 & 7-31)
2008 Crop -- 40% HTA’d (8-17-06, 7-31 & 9-7) and 10% cash contracted (12-11)
2009 Crop -- 30% sold on HTAs (7-31, 9-7 & 10-25)
HOGS: Short June futures on 25% of 2nd quarter marketings (12-14)
LIVE CATTLE: Carry all risk in the cash market for now.
FEEDER CATTLE: Carry all risk in the cash market for now.
MILK: Carry all risk in the cash market for now.
FEED BUYERS: Carry all risk in the cash markets for now.
COTTON: strict cash marketers and hedgers have sold 100% of the 2007 crop (7-17, 1-3, 1-16 & 2-11)
NOTE: Along with the potential for profit, there is always a risk of losing money when trading futures and options contracts.
Copyright 2008 by Richard A. Brock & Associates, Inc.
Any unauthorized redistribution or reproduction of this commentary is strictly forbidden.
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