Weekly Roberts Report

US - Agricultural US Commodity Market Report by Mike Roberts, Commodity Marketing Agent, Virginia Tech.
calendar icon 17 May 2006
clock icon 9 minute read

Profit-taking in gold markets weighed on the grains and soybean markets early as gold backs off a new high in a setback. As discussed last week … the gold, silver, and crude markets affect the grains and other commodity markets now and we see those markets backing off as well.

LEAN HOGS on the CME ended higher on Monday with the JUNE’06LH contract at $66.60/cwt, down $0.525/cwt but within $0.05/cwt of last week’s close at this time. The JULY’06LH was off $0.0.50/cwt at $66.075/cwt and $0.99/cwt from this time last week. Selling was seen as prompted by expectations of a seasonal downturn in price to be starting soon … “if not this week then next.” One trader said. Demand for pork is already seen as waning by the market with the cutout value slipping. Cash hog bids for Tuesday ranged from steady to weak as poor packer margins limit demand. Packers appear to be backing away from kill levels with Monday’s USDA estimated slaughter near the low end of analyst’s expectations. USDA placed Monday’s kill at 381,000 head, on the low end of the 380,000 – 390,000 head estimated. The composite port cutout value last Friday was placed at $68.75/cwt, down $0.07/cwt. The average plant margin for Monday was estimated down $0.40/head at $1.85/head from Friday and down $7.05/head from a positive $5.20/head a week ago, according to HedgersEdge.com. The latest CME lean hog index was up $0.48/cwt at $66.64/cwt. Local spreaders bought July and sold June and August. Hedgers should consider protecting 3rd quarter marketings at this time. Cash sellers should keep sales as current as possible pushing weights to the limit while hedging corn futures against price increases.

CORN on the CBOT for the MAY’06 futures closed at $2.604/bu, up 2.2¢/bu from the previous close and 33.2¢/bu higher than last Monday’s close. The DEC’06 contract closed at $2.840/bu, up 2.2¢/bu and 22.6¢/bu higher than last week at this time. Corn futures ended mostly firm on Monday, recovering late in the day to confirm Friday’s double-digit gains, floor sources said. Last Friday corn futures trading volume hit a high not yet seen on the Chicago Board of Trade (CBOT). The USDA report lowering ending stocks 1.1 billion bushel to 1.141 billion bushels provided the market (rocket?) fuel!

Ending stocks were lowered in large part due to expectations for ethanol production to increase by 34% for the next year’s marketing year. Ethanol production is now expected to consume more than 2.15 billion bushels of corn, or about 11% of the entire U.S. corn crop. 336,422 corn futures (1,682,110,000 bushels … 1.7 billion) were traded on Friday. The previous record was 331,455 contracts set on March 31 when the USDA issued another report. Open interest set an all time high too at 1,294,535 contracts (6.5 billion bushels). This has left us all wiping our foreheads.

Even USDA is unsure of prices setting the 06/07 season average farm price range at $2.25/bu - $2.65/bu. Sure makes growing corn more attractive. It is interesting to note however that all months through JULY’07 corn futures were up while the SEPT’07 through DEC’08 futures were down but still trading over $3.00/bu. This reflects market uncertainty regarding the future of biofuels vs. crop consumption. After modest openings today’s forecasts for rain buoyed the corn market as they are expected to delay farmer plantings resulting in trimmer yield potential. Farmers have planted only about 40% of the crop in the Corn Belt with USDA expected to report all U.S. seedings at 85% complete. Weekly export inspections provided a strong showing at 43.9 million bushels (.2 billion bushels more than last year at this time) compared to expectations of 35-45 million bushels. South Korea was confirmed as buying 113,000 tonnes (~4.5 million bushels) of U.S. corn last week.

The CFTC’s Commitments of Traders report showed funds backing off heavy long positions in CBOT corn futures and options as of late Friday. Cash corn basis were weaker early Monday in areas showing strong farmer selling last week while opening bids for corn in Mid Atlantic states were stronger at 10¢/bu -11¢/bu higher. There were 619 deliveries against the MAY’06 contract as it expired on Monday. Last week the gap in the DEC’06 corn chart was expected to be filled at least in the short run. Boy was it filled! The DEC’06 corn contract is a good example of a very important market analysis concept, fundamental analysis vs. technical analysis and how they interact. Fundamental analysis will almost always indicate the direction of a market while technical analysis provides keys to trading triggers. The DEC’06 corn chart shows a nicely symmetrical triangle with bullish potential (noted last week as at least in the short run). USDA’s huge lower ending stocks provided an enormous fundamental effect. The market surged out of the symmetrical triangle to the upside fueled by retreating gold markets and large speculator buying.

Last week it was expected that the down-trading gap established on Monday would be filled quickly as it was within the trading range rather than outside the trading range. The question now is, “How far up will it go?” Prices for new crop corn are still expected to be around the $2.50/bu range. This writer would not be surprised if the 2006 crop averaged $2.60/bu - $2.75/bu. If cash sellers have priced up to 40%-50% of the crop, they are in good shape having cost of production covered. The market expects prices to stay around this range for the ‘06’07 crop year so advice is to strongly consider not pricing more of the crop at this time. Hedgers were stopped out of the market last Tuesday. Buying a put option would protect against a price decline but is considered unnecessary at this time as the market is not expected to decline. If you think that prices will come down for the ’06 crop year, then an out-of-the money put option may be purchased in order to take advantage of any downside move. Hedgers at the 20%-25% of the ’07 corn crop are recommended to consider remaining at those levels.

SOYBEANS futures at the Chicago Board of Trade (CBOT) finished down Monday with the JULY’06 contract down 8.6¢/bu at $6.042/bu. NOV’06 soybean futures ended the day at $6.250/bu, down 7.0¢/bu amid technical selling. The chart gap established last Tuesday in the JULY’06 contract was filled while the gap on the NOV’06 chart remains to be filled. It is quite possible that the high established last Friday will be a major high point for the NOV’06 contract and the gap will be filled with a large downside breakout within the next few days … especially if the weather breaks allowing planting to resume. Soybeans were also lower in response to weakness in outside inflationary markets and burdensome ending stocks.

Unlike brother corn, the soybean market received no bullish note from USDA’s supply and demand report last Friday. The large carryout forecasts amid the lack of outside market support finally allowed soybean futures to be directed by fundamentals. USDA reported Monday’s export inspections for the week ended May 11 were at 7.172 million bushels, down 28.8% from last week’s 10.069 million bushels. This was below the expected 8 – 13 million bushels. South American soybeans were sharply lower as farmers there began to hold beans back, closing several crushing plants.

South American on-farm bag storage is very flexible and is widely used. It is strongly recommended that cash sellers not forward priced at 50% of the 2006 crop consider getting there quickly. Hedgers should consider being at or near 40% - 50% of new crop beans. In NOV’06 futures there is a cluster of sell orders in the $6.25/bu - $6.23/bu range. It would be wise for hedgers to place sell orders in the $6.18/bu-$6.20/bu range in order to get filled.

WHEAT in Chicago for JULY’06 wheat futures closed 2.0¢/bu lower at $3.994/bu with deferred months down from 1.5¢/bu to 4.25¢/bu in light technical corrections after last week’s gush to highs not seen in two years, floor sources said. Declines in the gold and crude oil markets bearishly influenced the market along with a strong U.S. dollar making wheat too high priced for export. However, the late, fund-driven rally in CBOT corn helped lift wheat off session lows.

Wheat futures traded higher early on amid bullish USDA crop reports from Friday that projected the U.S. 06/07 at 1.87 billion bushels, below the average trade estimates of 1.95 billion bushels. This news fired up the funds into a frenzy of buying 20,000 contracts (100 million bushels) setting contract highs last Friday. The USDA data fueled heavy fund buying on the CBOT reporting volume at 104,739 contracts with open interest at a record 460,087 lots ahead of Monday’s trade. The CFTS’s Commitments of Traders report showed funds expanding net long positions in CBOT wheat combined futures and options to 12,027 lots as of May 9. The nine-day Relative Strength Index (RSI) for JULY ’06 wheat stood at 77.16 on the close.

An RSI over 70 is considered to show the market is oversold. Weekly export inspections were placed within the range of 12 – 18 million bushels. Recent rains were expected to benefit the spring wheat crop in the U.S. Plains HRW belt amid dry conditions for the next few days. USDA is expected to report spring wheat plantings at 70% - 80% complete on Monday. Deliveries on the CBOT May contract that just expired were light at 46 lots. Cash wheat premiums for protein fell as farmer selling increased. USDA reported midday rail bids for 14% protein at 60¢/bu to 70¢/bu over Minneapolis JULY’06 wheat futures, after trading at 70¢/bu over last Friday. The CFTC’s Commitments of Traders report late Friday showed large speculators adding to their heavy net long positions in the MGE wheat futures for the week ended May 9. Cash sellers who have not priced 50% of the ’06 crop can use this opportunity to get there. Hedgers should not have any short hedges in place at this time but put options may be considered.

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