Corn to 8? possible
cattlenetwork.com
6/13/2008 4:10:00 PM
Schwieterman: Trends Are Up In Live Cattle, Huge Corn Gains
As expected the June crop report had some important changes. On top of the list was the cut in US corn yield from 153.9 To 148.9. Judging by the poor crop condition ratings that we have had to start the year, the cut was justified. If condition ratings continue to decline it is possible that we have further cuts, but right now I think acreage is everyone’s main concern. As you can tell from the rising price of corn there is a consensus building that we will not have 86 million acres of corn this year. A loss in acres will cut ending stocks drastically and force demand rationing.
To offset the loss in production caused by the cut in yield, USDA reduced the new crop export and feed usage estimates. This indicates that they are already thinking about demand rationing. I was very surprised to see a cut in the old crop export estimate. Sales are still much too strong to justify that, but perhaps USDA thinks price will rise enough this summer to kill exports the last couple months of the crop year.
Other changes that were made include an increase in the old crop soybean export estimate and an increase is wheat production. The increase in soybean exports was necessary because we had already gone over the estimate for the year. The interesting thing about that is that we have already gone over the new estimate too, so we should see a higher export estimate in next month’s report. I think we are going to end up seeing record tight old crop ending stocks before the crop year is over.
As for the wheat, production was increased, but so was feed usage and exports so ending stocks were just slightly higher. Soft wheat is already priced as a feed grain and the longer it stays at this price the more that will get fed. Supplies are higher than last year, but by no means burdensome. We used to think that 487 million bushels was tight.
CORN:
Trend: Short Term Up – Long Term Up
Sentiment: Headed for $8.00
The corn market made huge gains this week. The July contract picked up 81 cents and the December gained 87 ¼. Fundamentals seem to be getting more bullish on a daily basis. The concern about acreage is very real. Normally these wet weather and flooding rallies don’t last too long, but this year we are talking about losing a lot of acres at a time when we can’t stand to lose any. Then top that we the fact that next year’s fundamentals are really more bullish than this year’s and you create a scenario where we need to slow demand and we need to do it quickly. How do we do that? Higher prices.
It is very difficult to pick out new upside objectives when a market makes new all time highs. Right now, the $8.00 and $8.50 areas look like they are real possibilities. Then, when you look at the wheat, you start to set your sights a little higher. The Kansas City wheat doubled. That means corn should head to $11.00. Minneapolis wheat more than tripled. I think you can see where I am going with this. Don’t try to convince yourself that you know how high “too high” is. You don’t.
Action: I still like calls and I still think you need to be very patient pricing new crop grain. If you can’t stand it anymore and think you have to sell, then you have to buy a call too. Avoid the temptation to try and pick a top and don’t sell futures unless you like making margin calls.
WHEAT:
Trend: Short Term Up – Long Term Up
Sentiment: Nice price recovery.
The wheat followed the corn higher this week and the July KW ended up gaining 77 ½ cents. There is a great temptation to want to sell wheat right now with harvest progressing, but the strength in the corn is helping to support the wheat. There is also the fact that we saw a very large price break this spring and after a while, enough is enough. The July KW reached the 62% retracement of the entire move and held there which has encouraged short covering and a little speculative buying. Right now I would look for the July KW to head toward the $10.00 and the July ’09 to move toward $10.50. Both of these price levels will be good places to price a little bit of wheat. Unless the corn goes much, much higher, the wheat fundamentals are not bullish enough to warrant new highs, so we have to look at these strong rallies as selling opportunities for at least a small portion of our crop.
A little bit extra export demand, a little extra feed usage, and a little less production would take our ending stocks from the current level to something very tight, so that keeps me from wanting to be an aggressive seller of new crop wheat and makes me want to maintain a call option position against any old crop sales made at harvest.
Action: For a lot of people marketing some newly harvested wheat on this rally will work nicely. I want to own calls against priced wheat, and I would like to let the July KW futures get to at least $10.00 before pulling the trigger.
SOYBEANS:
Trend: Short Term Up – Long Term Up
Sentiment: New highs in the new crop
The July soybeans got within 26 cents of the contract high and the rest of the contracts made new highs. After a poor start to the week the July contract gained $1.02 ½ and the November contract picked up 91 ½ cents. The gains were impressive, but not large in relation to the corn or wheat market. There are ideas that if the weather improves there is still a chance that we will end up with enough soybean acres and that is holding the market back a little.
Exports are still too strong. As I mentioned we have already gone over the new, higher, export estimate. It seems like USDA doesn’t want to scare anyone by printing a record low ending stocks figure so they are putting it off as long as possible. The current ending stocks estimate is 125 million and in ’03/04 we had 112, which is the tightest in modern history. At the current sales pace we will easily sell enough soybeans to force USDA to raise the export estimate and cut ending stocks again. It looks inevitable. I think you can plan on much higher soybean prices.
Action: The best course of action is to not sell anything. I you feel like you have to forward price, you have to buy calls.
CATTLE:
Trend: Short Term Down – Long Term Up
Sentiment: New contract highs.
All the live cattle futures contracts made new highs except the June. Choice boxed beef spent most of the week above $1.57. Unfortunately cattle traded early again this week at the $93.00 level. Everything about the live cattle market looked good except the cash market and the June board. Bear spreading in a market really makes me nervous so I really don’t like to see it in the cattle. It makes me wonder what is going to happen to the August futures once the June expires. It is hard to be negative when we keep making new contract highs in the deferred contracts, but the poor performance up front does not sit well.
Feeder cattle didn’t fair too well because of the corn. Technicals look shaky. I thought the strength in the live cattle would support the feeders a little better than it did. I guess if we do ever see a break in the corn the feeders should see a big jump.
Action: Trends are up in the live cattle so you need to be patient with hedges. Feeder cattle are back below the 50- day moving average, so we have to look at owning puts again. If we take out this week’s lows the charts will look very negative. |
