Weekly Review—GRAINS

Overview of Last Week: A major test of the weekly commodity index chart support–specifically the DJ-UBS Grains Index–occurred mid-week this past week, with that key support holding. Because of this, and also because of the late-week turn lower in the US Dollar, I think these were the two primary drivers to keeping the market from falling even more than it did. Even with the late-week rebound in prices, July Corn ended 25 3/4 lower, July Beans 9 lower, and July Wheat finished the week 12 3/4 lower. Do you notice the trend? Last week we saw the return of the inter-commodity spreads of buying beans/selling feed-grains. Why? Simply put, I think that the lower Argentina Agr. Ministry bean production forecast, the Argentine truckers strike, and the fact that weather in South America still hasn’t settled-down all added-up to a renewed supply-side fear by the soybean trade that a sufficient risk premium in both old-crop and new-crop futures had not yet been added as we approach the acreage report on the 30th. And even though this makes sense from a supply-side, it does not when looking at demand; beans saw yet another week of weekly export sales falling below trade guesses, falling 56% below the 4-week average. As for the YTD Export Inspections, they continue to be about 25% below year-ago levels for the beans. Compensating for this weakness in the beans, however, has been a continued strong push in demand for both Malaysian Palm Oil as well as a strong demand base for Meal–Crush Margins in Chicago at the end of the week, in fact, were registering around 60 cents all the way into September. Thus, the beans won another week against the corn and wheat.

Heading Into Report-Week: As we approach the big reports on Friday, I’ll be laying-out several strategies to clients, focusing on both old-crop & new-crop corn, as well as new-crop beans. Specifically in the beans, hedgers with bought puts/short calls in the November will be recommended to roll-up their bought puts to increase/improve their floor price…especially after Monday’s Weekly Export Inspections and to see if Monday brings any confirmation of the rumored Chinese soy purchases of last week (Here again, with the Gulf Basis in beans finding good support, the trade psychology was quick to assume that China was buying more US beans). By Wednesday, I expect to make the roll recommendation for clients, or faster if May Beans can’t hold the critical support tested from last week at $13.62.

 

1. Why Roll-Up The Bean Puts? Technically “Overbought” Daily & Weekly Charts, continued signs of an economic slow-down in both Europe and China, and a lack of export demand all suggest to me that the past 4 months of Nov. Beans climbing on Dec. Corn has pushed a huge amount of risk-premium into the bean futures. Take, for instance two issues this past week: (1) The Nov. Bean/Dec. Corn Ratio jumped to levels not seen since November, 2010, to 2.37: that means that Nov. Beans are 2.37 times the price of Dec. Corn. If we were to go back to the November Lows in this Ratio of 1.83, at $13.25 Nov. Beans, Dec. Corn would be $7.24/bu.! This suggests risk-premium is indeed in the market, especially given that corn YTD export inspections are off only 3%. (2) One of the big newswire organizations released new-crop, 2012 acreage figures just before Friday’s close; these figures showed an average estimate of 94.65 Mln.
2. Corn Acres & 75.43 Mln. Bean Acres. This compares with 94 Mln. and 75 Mln. by the USDA in February…and it also suggests to me that the trade, who I believe is trading 75.3 Mln. based upon contacts in Chicago and other sources, that the rally in new-crop beans over corn has indeed pushed more bean acres into the mix. That is, unless, corn-planting weather starts 2-3 weeks earlier than normal thanks to Mother Nature.

Weekly Review—LIVESTOCK

I’ve been expecting a turn higher in the Hogs for 2+ weeks now, yet they continue to go lower in the futures even though the CME Cash Index closed Friday at a $2.32 premium to the lead-month April Futures. Why haven’t the hogs found support? I think the primary reason is that Commodity-Trading Funds continue to sell/liquidate longs because they see very little packer demand show-up in the cash market…for both the cattle and the hogs. Last week’s numbers show that they are right in their assumption: weekly Beef Production was off 2.2% from the previous week while the Weekly Pork Production lost 1.9%, with slaughter coming-in at 2.132 Mln. Head. Weekly Beef Export Sales were the best in a decade on Thursday, and this did seem to slow the selling-down in the cattle market. However, Friday’s Cattle on Feed Report suggested to me that the Live Cattle could resume a down-trend in relation to the Feeders, since Marketings were lower than trade estimates, coming in at only 98%. I think this is especially disappointing if the gasoline prices continue to go higher in the next week, and given that the Easter Seasonal has concluded, we have little to rely upon in the hogs too. The biggest issue that has turned the overall meat complex weaker, in my view, is that the fuel prices going higher is likely to drive meat consumption lower–even though the summer grilling season has started to come alive earlier than normal. Therefore, if we don’t find some good support in these markets, and Commodity Trading Funds don’t stop selling by the close on Tuesday, I may have to recommend some June Bought Puts for summer marketings to clients.

Weekly Update–Corn Planting Weather

The markets have seen a big switch in the GFS Model in the past week–that to a cooler and somewhat wetter forecast as we head-into the 1st week of April. Temperatures are more normal for this time of year, so they aren’t super cold, although I do see for our area of north-central IN the temps. could dip to 37-39 degrees for April 2nd through April 6th, with highs only reaching into the mid-60s. I know that many farmers are telling me that their ground temps. are plenty warm, but I’m wondering if this won’t slow the process of planting super-early down a little bit…I hope it does for the farmers’ sake (I’m very nervous that we will “rush it” this year in trying to get the biggest yields and end-up really causing yield declines instead…this is a big reason why I’m hedging much more in paper positions for ’12 corn currently versus cash-related sales).

The western corn belt looks warmer than the Great Lakes, so we could start to see some heavy planting after the report if the rains aren’t too heavy.

 

Don’t forget to visit my website at www.globalanalytics.biz and sign-up for a free 2-Week Trial of my Daily-Weekly Market Update

–Mike Zuzolo, President

General Risk Disclosure-There is substantial risk of loss in trading futures and options, therefore you should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. The information above is not meant to be advice to buy or sell futures and options.

Options Risk Disclosure-The purchaser of options should be aware that he could lose all premium paid for such options as well as any commissions and fees. Further, purchasing deep-out-of-the-money options have a remote chance of becoming profitable. The writer or seller of options should be aware that there is unlimited risk and could result in such seller being required to maintain a futures position with any associated liabilities for margin.

Past performance is not necessarily indicative of future results.

Information Disclaimer-The information and data contained herein was obtained from sources deemed reliable. Their accuracy and completeness is not guaranteed. Any decision to purchase or sell based upon such information is the responsibility of the person authorizing the transaction.

Copyright, 2012 Global Commodity Analytics & Consulting LLC