Schwieterman: Cattle Futures & Corn Follows Stock Market

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The stock market fell to a new low for the year on Tuesday, but made a strong bounce back to close only slightly lower for the week. The rally back stalled out at the 50% retracement of the move down in the June S and P futures, which suggests we may see a retest of the lows. It was nearly the same scenario in the crude oil which fell to new lows for the year on Tuesday and but closed Friday nearly $4.00 higher for the week. However, Friday’s rally stalled out at the 38% retracement of the move higher, which suggests we could easily see a retest of the lows. If we do retest the lows and the support holds, it will be a very good buying opportunity, so watch for that chance next week.

The corn market spent most of the week trading sideways/higher, but followed the stock market lower on Friday and gave up all of the week’s gains. The corn is still stuck in the same sideways trading pattern it has been in for over 2 months. Demand is good, which supports the market on breaks. USDA will have to increase the export estimate, and possibly the ethanol usage estimate in the next supply and demand report. There is a good chance the old crop ending stocks are cut by 100 million bushels. On the other hand, traders are concerned about the rising crop condition ratings and the possibility of another record high yield, which would keep new crop stocks at comfortable levels. Weather will be critical this year, as usual, and right now traders are comfortable with the start to the crop year.

Looking ahead to next week, a break to the $3.75 level in the December contract is likely, but that level should hold. There is still too much uncertainty for a move below that in the short run. The July KW tested the $5.00 area 3 times this week and failed each time. There is too much wheat and too poor of a basis level for the wheat to sustain any sort of rally. Until we see a major improvement in demand, there isn’t any reason to expect to see the wheat do anything other than trade sideways to lower. Rallies are your chance to sell call options. Collect the premium and if the wheat does happen to rally, sell your wheat if it reaches your strike price.

I have been expecting to see the July KW reach the $4.73 area for a while now and next week could finally be the time it happens. The market made new lows for the move this week. It made three failed rally attempts and I think that if there is any negative news next week the wheat will move sharply lower. If the March lows don’t hold as support, then we will have to look for a move to $4.50 as harvest activity increases.

The July soybeans moved through trend line resistance on Thursday, but failed to follow through on Friday. The market is basically sideways as traders try to balance the strong old crop demand with the large new crop supplies and the volatility in the outside markets. USDA is probably still too low with the export estimate and the old crop ending stocks are probably too high. I look for the June supply and demand numbers to be friendly to the old crop, but it is hard to get a sustained rally when there is so much potential for large new crop stocks. For new crop price protection, something to consider is to sell 3 of the November soybean $8.00 puts, and then on a rally buy 1 $9.00 put and sell 1 $10.00 call. It is a good idea to have downside protection in the market, but near the money put options are too expensive to be practical, but at the same time it is unlikely that the market falls below $8.00. Selling a call is a good way to help pay for your put, and if the market does move to $10, price your soybeans and exit the positions.

Live cattle futures basically chased the stock market around. August LC made new lows for the move on Tuesday, bounced back Wednesday and Thursday, then went lower on Friday. Technical indicators are oversold, but it looks like the August LC want to move down to the $88.00 level before turning around. Supply fundamentals are still friendly, but in the short run traders seem to be more concerned with the stock market.

The August feeder cattle reached the 50% retracement of the entire move up on Tuesday and spent the rest of the week consolidating just above the support. We will probably see at least one more test of the lows and if they hold through next week, one should consider owning August feeder cattle calls.


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