The Prairie Star: Montana Ag Newspaper

Corn

Finding technical strength from a double bottom in December, corn has been able to rally, forcing the commodity funds out of their short positions.

July corn rallied approximately 15 cents off of the lows as funds covered just over 66,000 contracts. In the December USDA report, the USDA lowered the export forecast for U.S. corn by 100 mb and will likely continue to lower export forecasts in future reports.

With the drop in exports, the projected carryout is forecast at 2.419 bb, a huge amount of corn that will limit rally attempts. The one hope that corn has for a rally will come as funds continue to buy back short positions.

In December I forecasted funds to cover short positions as they always cover positions ahead of the end of the month, the quarter and the year, and should continue this pattern. Remember, this is a bear market and the market will have a tough time sustaining any rally attempts and will not be able to meet the carry that has been built into prices.

Look for traders to rebuild a large short position ahead of the January USDA report. After the first of the year, we should also expect prices to find weakness from increased producer and fund selling.

Recommendations:

Hedgers: 52 cents hedge profits on 2005 crop. Hedged 100 percent at $2.25 basis July.

Cash Marketers: Sold 40 percent 2005 at $2.64. Sold 35 percent at $2.25 basis July. Sell 25 percent of 2005 production at $2.35 basis July. LDP’d corn at $.40 to $.45.

Traders: Sold July corn at $2.25.

Soybeans

January is a difficult month to call, as there are many variables that could influence prices. First, the Jan. 12 USDA crop report should show a larger ending stocks figure due to slow export sales and another production increase in the 2005 soybean crop. In the December report, the USDA lowered the export forecast by 55 million bushels, sending ending stocks to 405 million bushels from 350 million previously.

As the current U.S. export forecast is running 165 million bushels behind last year’s export pace, look for additional cuts in the export forecast by the USDA in the future. This should be the most bullish export timeframe for the U.S. as the U.S. is the sole port of origin in the world for soybeans and bean products until South American crops are harvested during March.

By February, if South America’s crop looks good, Asia could turn from buying U.S. soybeans and begin to forward contract beans from South America as their beans will be cheaper than the U.S.

Brazil traditionally sells soybeans $6 per ton under any U.S. posted price to insure beans move quickly from field to port as the country’s storage capacity is only about 25 percent of production.

The wild card in January will be South American weather. Currently, drier than desired conditions in South America, has spurred a large fund short-covering rally, producing a rally of approximately 75 cents on weekly charts.

Traders always trade fear before fact and they are fearful of another problem with the growing conditions in South America, and U.S. soybean values have staged a nice rally. The January report should also show an increase in U.S. production, however after the report, the market focus will shift towards a potential increase in U.S. seeded acres and weather in South America.

Recommendations:

Hedgers: $1.25 hedge profits on 2005 crop. Hedged 50 percent at $5.92 basis July. Hedge 50 percent at $6.42.

Cash Marketers: Sold 35 percent of 2005 production at $6.35. Sold 5 percent at $6.50. Sold 10 percent at $7.60. Sold 25 percent at $5.92 basis July. Sell 10 percent at $6.42. Take LDP’s at $.40 to $.45.

Traders: Sold July at $5.92.

Wheat

Wheat has rallied in the month of December on short-covering by commodity funds of a record large net short position. This profit-taking has enabled wheat to bounce without strong fundamental support, which always makes a rally suspect.

Winter wheat is in the dormant stage in January and any rally that occurs due to potential winter kill should be sold as professional traders know there is no loss to production potential for winter wheat during the month of January.

Demand news looks to be bearish this month as Australian production is becoming available and will cut into U.S. exports. Wheat has seasonal price strength into the first 10 days of January, before beginning to work lower into late March.

The “Voice From the Tomb” also has a sell signal on January 10, which is one of the more reliable seasonal indicators available.

Recommendations:

Hedgers: Hedged 100 percent of 2005 at $3.75 Kansas City or 100 percent at $3.75 Minneapolis. Hedged 40 percent 2006 production at $3.70 July Kansas City and 30 percent of September Minneapolis wheat at $3.83.

Cash Marketers: Sold 100 percent of 2005 at $3.75 Kansas City or 100 percent at $3.65 Minneapolis. Sold 40 percent 2006 production at $3.70 July Kansas City or 30 percent of September Minneapolis wheat at $3.83.

Traders: Exited long March Chicago from $3.11 at $3.31 for $1,000 profit.

Lean hogs

Commodity fund buying had propelled prices to a retest of the all-time highs. Both large commercial hedgers as well as small traders, have been selling on a scale up basis, reaching all-time record net short positions by mid-December.

Where this pattern occurred in the past, it usually has signaled a top. When the funds expend their buying capacity without securing a breakout to new highs, a successful breakout is highly unlikely because there are too few uncommitted potential buyers.

For short hedgers, the current proximity to record highs provides an opportunity to place hedges at a very high price level, with strong risk to reward tradeoffs.

Fundamentally, poor wheat conditions in the Plains, has forced cattle off of pastures and into feedlots. Placement data came in 17 percent above last year and indicates second quarter production will be much larger than last year. This is turn will pressure demand trends to support prices this summer and attract hedging pressure in the summer months. Thus, rallies should be sold, especially if prices near weekly resistance of $97.40 to $99.50.

Recommendations:

Hedgers: Hedged 50 percent of February live cattle at $89.00. Long April 90 puts on 50 percent of production. Hedged 50 percent of June live cattle at $87.70.

Cash Marketers: Sell market ready inventory on rallies.

Traders: Sell February live cattle at $97.40.

Lean hogs

In the last article, I noted that packers will likely use the upcoming Christmas and New Year’s holiday to slow slaughter levels and weaken the cash market to regain lost margin. However, as long as demand remains strong, there is no reason to think the bull run in hogs should not continue. The quarterly hog and pig report indicates no expansion plans are under way, which indicates summer month prices may be under valued and need to move higher. Commercial accounts are beginning to slowly hedge the rally, which will eventually cap the rally. However, the incredible strength of export demand, which shows no sign of slowing yet, will continue to be the dominate supportive factor for the first quarter of 2006.

Recommendations:

Hedgers: Hedged 25 percent at $63.72 basis February. Hedged 25 percent of February at $68.05. Hedged April at $67.25 on 25 percent of marketings.

Cash Marketers: Stay current with marketing inventory.

Traders: Buy June at $69.92.

Copyright 2005

Midwest Market Solutions, Inc