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Weather, USDA June 11 report to impact corn pricing
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| Brian Hoops |
WHEAT
The month of June brings the end to the growing season for the winter wheat crop, as harvest will progress quickly from Texas northward. The spring wheat crop will be in the followers role as it is the beginning of the spring wheat growing season.
The winter wheat crop is rated approximately 57 percent in good to excellent condition versus 26 percent a year ago. Harvest has begun in Texas and Oklahoma but has been slowed by heavy rainfall which is also producing concerns about the quality of wheat. Harvest should move north into number one winter wheat state Kansas by the middle of the month, assuming good harvest weather.
The USDA will update early yield results in the June crop report. The USDA will also update world wheat ending stocks, which are historically tight.
The tight world wheat stocks situation, leaves a bullish scenario for wheat values as the world should be aggressive buyers of newly harvested U.S. wheat.
After the USDA supply/demand report on June 11, there will be no fundamental news for the market to trade on except harvest results and weather in the spring wheat belt.
The spring wheat crop was seeded at a near record fast pace and is highly rated. The next fundamental price determinant for wheat will be weather in the spring wheat belt as a hot and dry summer will force price rationing as the supply side of the wheat will again be threatened. Recommendations:
Hedgers: Hedged 50 percenet 2007 production at $5.20 December KC or 40 percent at $5.25 December Minneapolis. Long July KC 480 calls on 25 percent of hedges.
Cash Marketers: Sold 50 percent 2007 production at $5.20 December KC or 40 percent of 2007 production at $5.25 December Minneapolis.
Traders: Buy December KC at $4.97. 20 cent stop.
CORN
The outlook for prices is simple as weather and how it impacts the emerging crops will be 95 percent of the pricing movement. The only other supply side news the market will deal with is the June 11 USDA monthly supply/demand crop report.
Last month’s report put the ending stocks report for the 2007/08 crop at 947 million bushels. This was a bullish surprise to the market as this ending stocks figure was well below trade estimates. This tight ending stocks figure will put a solid floor underneath prices until an above trend line yield can be confirmed.
High good to excellent crop ratings to end the month of May, has capped rallies so far, however if these crop ratings begin to fall in the month of June, the market will have no choice but to rally sharply to ration the ending stocks.
Since the May report was a bullish surprise, anticipate some buying ahead of the report release on the morning of June 11. The market will want to be bullish because of the long term fundamental picture, however it will take weather concerns to ignite a rally.
Producers will want to use options as a way to manage risk and provide price insurance. The end of the month will also have the quarterly stocks and planting intentions report from the USDA.
This report could be a shocker to the market as some reports have farmers increasing seeded acres from the last report in March, however excessive rains in the western cornbelt could have forced some farmers to have left some corn acres idle. Seasonal highs are usually formed by June 23.
Recommendations:
Hedgers: Hedged 55 percent of 2006 production at $3.40; hedge 25 percent at $4.05 July. Hedged 30 percent of 2007 production at $4.00 December. Long December $3.50 puts on 50 percent of production. Hedge 10 percent at $4.30 July 2008. Long $3.80 December calls on 50 percent of hedges.
Cash Marketers: Sold 55 percent of 2006 production at $3.40; sell 25 percent at $4.05 July. Sold 30 percent of 2007 production at $3.85 December. Sell 10 percent at $4.30 July 2008.
Traders: Long July/short December at $.20 July over December. Exit at $.10. Buy December corn at $3.70. 15 cent stop loss.
SOYBEANS
The month of June looks to be similar to corn as we are in a weather market and weather forecasts will be the primary driving force. The early soybean seeding pace is at a near record, however there should be approximately 25 percent of the crop yet to be seeded. The crop looks to be seeded before June 10 leaving beans to spend the rest of June developing its root system. Rains after June 10 will be viewed as beneficial to crop development and negative for prices. However, dryness in the month of June will send prices sharply higher after one of the driest springs in the eastern soybean belt in the last 50 years has left soil moisture reserves at a minimum. Demand has slowed for U.S. beans into late May as it seasonally does due to China, our major buyer, turning to cheaper South American beans and a slowdown in Chinese domestic crushing.
This slower demand in May could lead the trade to anticipate the June USDA crop report to leave the ending stocks figure unchanged at 610 mb for the old crop. For new crop, the USDA forecasted ending stocks at a bullish 320 mb, a significant drop from the old crop stocks.
Like the corn market, producers should use options as a risk management tool and price insurance. The month of June is not the key reproductive month for soybeans, however, the market will be quick to add a premium into prices on less than ideal weather.
The acreage report at the end of the month could be a shocker to the trade. The market has already anticipated a smaller seeded acres than 2006, however if producers planted more acres to corn than previously thought, prices could push even higher. However, larger than expected seeded acres will present the next buying opportunity. Seasonal highs are usually formed by June 23. Recommendations:
Hedgers: Hedged 80 percent of 2006 production at $7.10; hedge 10 percent at $8.45 July. Hedged 40 percent of 2007 production at $7.76 1/4 November. Long $8.00 November puts on 50 percent of production. Hedged 10 percent at $8.25 July 2008. When November soybeans hits $7.90, buy $8 calls on 25 percent of hedges.
Cash Marketers: Sold 80 percent of 2006 production at $7.10; sell 10 percent at $8.45 July. Sold 40 percent of 2007 production at $7.76 1/4 November. Sold 10 percent at $8.25 July 2008.
Traders: Buy November at $7.90, 20 cent stop loss.
LIVE CATTLE
The month of May saw live cattle and cash cattle trade deteriorate throughout the month. Supplies, estimated by the USDA as the second largest since 1991 are adequate to meet the current demand.
Demand is slow and doesn’t appear to be increasing despite the warmer weather and the peak in the grilling season. However, beef prices are already near historic highs and with gas prices very high, consumers may not have a lot of excess funds to purchase the high priced beef. Funds have built in a large net long position as the market rallied this spring, now they are left with a net long position in a bearish technical market. This indicates rallies will likely be sold by funds as they liquidate long positions.
Producers should consider placing hedges on rallies as placements this spring indicate supplies will remain very large throughout the fall.
Recommendations:
Hedgers: Long October 98 puts, short 108 calls and short 88 puts on 100 percent of marketings.
Cash Marketers: Don’t add extra weight. Traders: Long June/short August at $1 premium June.
LEAN HOGS
The best hope the hog market has for a rally is with higher feed costs. If feed costs rally this summer, i.e., corn and meal values increasing, the fall month hog values will rally in accordance to provide producers and incentive to feed out their hogs given the high feed costs.
Slaughter levels should remain high, nearly as high as 2 million head per week as producers will do an excellent job of marketing their hogs given the high cost of production. Hog weights remain below year a go levels as evidence the producers are making an extra effort on their marketings.
At the end of this month, the USDA will release the quarterly hog and pig report. This report has had a strong history of being a bearish report. Producers should have hedges in place prior to this report’s release.
Recommendations:
Hedgers: Hedged 25 percent second quarter marketings at $79 basis July. Hedge 25 percent of marketings at $78.25 August, $70.35 October and $69 December.
Cash Marketers: Don’t add extra weight.
Traders: Sell October at $70.35.
Copyright 2007
Midwest Market Solutions, Inc.
