APRIL 23, 2012 GCAC WEEKLY MARKET OVERVIEW

Weekly Review—GRAINS

Overview of Last Week: The grains–wheat and corn–led the market higher to start the week, on both supply & demand-led concerns and
bullishness; but by the end of the week–with no confirmation of Chinese corn buying and the wheat weather looking less cold to the SRW crop–the wheat and corn were faltering while the beans picked-up the slack and were re-energized. So that, by the end of the week, the Meal was leading the beans higher with new contract highs in May Meal, and the spreaders were back buying beans & selling corn/wheat. Adding to the strength in soy was a tremendous weekly export sale for the Meal, coupled with reduced crop expectations in Argentina for both beans and corn. Friday added-to the bullishness in beans, as rumors circulated that even though Brazilian farmers were selling-into the rally fairly aggressively, Brazilian exporters were offering no sales to China. Brazil has since come-out on Reuters and said that the rumor “…doesn’t have the slightest foundation”, but the technical damage to the bears was already done in the old-crop beans. The July-Nov Bean Spread was making new
multi-month highs while the July-Dec Corn Spread was making multi-month lows on Friday. This left the feed-grains very vulnerable and the Nov. Beans just under their 20-day Moving Avg. of $13.56 1/4–a level that if penetrated I will pull-back on my ’12 bean hedge recommendations on paper positions.

Heading Into Next Week: I am torn by the market here in the short-term, because of what I wrote in the “Other Commodities”
Section, as well as due to the planting weather not being nearly ideal enough to encourage continued market-talk of a huge corn crop this year: the temps. are just too cold in the most recent GFS & the rainfall is too questionable given the dryness in the Central and Western Corn Belt. Yet the corn charts and spreads in particular look very poor and damaged from this past week’s trade, while the soy charts appear re-energized. I am also concerned about the downside in wheat after this coming week, because the Kansas Wheat Tour will begin, and based upon clients-producers comments from the HRW region, the crop is looking the best it has in many year–early, yes, but that too could be construed as bearish if we have no cold or excessively wet weather in the next 10-20 days, in my view. Therefore, given this conflict in the corn, I’m going to suggest to clients to give the market this coming week to turn itself around (just like I did with the hogs last week when they broke hard to the downside
as April Hogs went into expiration); now that the May options are off the board, let’s see if the weekly charts–and the index funds–can right
themselves and take-up some additional long positions. Most important, let’s see if we can get confirmation of whether China purchased US corn or not: my instinct would say that if weather is turning against the new-crop, if they need corn, they should be coming-in sooner rather than later. And I say this recognizing that there are still about 9.5 MMT of US Export Sales of corn left on the books.

The other factor I think is supportive enough to allow the corn to come around this week is the fact that the US Dollar slipped below its
50-day Moving Avg. this week on a closing basis: this is something that goes against my analysis. I have been of the view that as we headed into the middle of the calendar year that the Greenback would be the currency of choice. Maybe the Emerging Market moves mentioned in the copy below had some beneficial effects on currencies which will play-out in the commodities more this coming week. I at least want to be on the look-out for this.

Weekly Review—LIVESTOCK

I’ve been waiting for a turnaround in the hogs for 3 weeks now, led by either cash markets picking-up or a break lower in gasoline prices.
Last week, we saw gas prices go lower and talk of improving cash demand due to retail featuring–yet the hogs continued lower. That means to me that this week needs to be a sharply higher week for the hogs in order to contain more longer-term damage, especially given that the Cold Storage Report for Pork showed a 2% decline from February levels–and I think this helps explain why packers have been slow to bid-up, but it also suggests that product is moving. Hams in particular were down nearly 30% and this strongly says to me that the Easter seasonal wasn’t bad at all! Thankfully. So, with the weather promoting grilling-out and the gasoline prices here in Lafayette down about 25 cents in the last two weeks, I think we’ll see the cheaper prices at the meat-counter turn-out to be beneficial for the pork sector. China has also been quoted as saying they will begin stockpiling pork in their domestic reserves, so I think this could be taken as friendly as well.

As for cattle, the monthly cattle-on-feed report didn’t show too much difference from the trade guesses–no surprises is supportive I think.
Also, I noted that dressed weights for slaughter-ready cattle were down 3 lbs. compared with the prior week, and I think this is very supportive given that weekly production thus fell 4.6% compared with the same time last year. With the cattle having a better technical week than the hogs last week, I am encouraged and think that the stronger stock market–if it holds–should help give the cattle more upside this coming week. I do think, however, that the outside markets are likely to play a bigger role in the markets as we head into summer grilling season, so be on the look-out and read the copy below.

Weekly Review—OTHER COMMODITIES

This past week we saw re-surface the bias of a “risk-off” trade once again. The possible major cause? I think it primarily hinged upon the new IMF World Economic released mid-week, and its more detailed analysis of Europe; in it, the IMF stated, “The April 2012 Global Financial Stability Report underscores the continued high risks to financial stability relative to six months ago, despite policy steps to contain the euro area debt and banking crisis. In the euro area, sovereigns and banks face significant refinancing requirements for 2012, estimated at 23% of GDP. Deleveraging pressures are also likely to stay elevated, as banks undergo $2.6 Trillion in balance sheet reduction over the next two years”(Page 5). Now,
when you read something like this as an analyst, I immediately thought of the deleveraging as being synonymous with deflation. And in deflationary environments, hard assets such as commodities are not usually good assets to hold. And I would point-out that the fears from last week’s Chinese GDP figure were also very fresh in the market’s mind, I believe, as new copper inventory data in China was released–showing that copper stocks in that country at an all-time high at around 3 Mln. Tonnes. China consumes approximately 40% of the world’s copper.

So, we juxtapose this macro-economic data from the IMF up against three major features to this past week’s trade–features I might add
which should/could ignite a fresh round of commodity index fund buying: (1) China expands their currency trading range, with the idea that allowing their currency to appreciate will increase their domestic consumption of goods…which they likely need given the slower advanced/developed countries such as the US, Europe, and Japan. (2) India’s central bank cuts their interest rate (3) Brazil, too, cuts its interest rate to the lowest level in 2 years. These actions by three of the four BRIC’s strongly suggest to me that the Emerging Markets are very concerned about slowing GDP and feel the need to do something about it–because in part they feel they can since inflationary pressures are
less of a concern.

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–Mike Zuzolo, President

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