Schwieterman: Cattle Up Despite Stock Market's Fall, Corn Export Sales Reach Marketing Year High

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GENERAL COMMENTS:
The Ag markets survived the financial turmoil rather well. It was kind of impressive really and makes you wonder what would happen if we had some really good news. It keeps me from wanting to be overly short at these levels, especially in the corn.

Tuesday USDA releases the May supply and demand report, which is our first look at the new crop estimates. The guesses on new crop corn ending stocks range from 1.5 billion to 2.4 billion so there is no consensus on what USDA will do. USDA used an acreage estimate of 88.8 million in the Prospective Plantings report and the trend line yield is roughly 160 bu/ac. Using those figures, production would be below last year and slightly below 13 billion bushels and would likely result in a cut in ending stocks, which is supportive to the market. However, due to the rapid planting pace there is a good chance that either the acreage, or yield estimate is increased, or there is a possibility that both are. Corn demand is also hard to peg, but new crop demand will likely be over 13 billion and a new record high. It is possible that we will see an increase in the old crop export estimate since sales have been so good lately and that would be a big help to both the old crop and new crop ending stocks.

For the wheat, both old and new crop ending stocks estimates will be close to 1 billion. It is hard to imagine seeing any bullish wheat numbers next week.

Old crop soybean ending stocks could be decreased due to an increase in the export estimate, but I don’t think that is a given this month. USDA may want to see if sales stay firm for another month. As for the new crop, plan on higher ending stocks. The range of guesses is from 200 million to 531 million, both of which are higher than the old crop.

CORN:
Trend:
Short Term Up – Long Term Down
Sentiment: Sideways

The July corn made a new high for the move this week, but couldn’t the gains and ended up 3 ½ cents lower for the week. The December contract lost 6 ¼ cents, so there was some bull spreading this week because of the strong export demand we have been seeing.

This week export sales came in at 1.85 MMT, which is a marketing year high and more than 3 times what we need to see each week. We have to watch the export market closely over the next month because if we maintain the current sales pace it implies USDA is way too low on the export estimate, which, if true, will result in lower ending stocks estimates for both the old crop and new crop, which in turn increases the need for a trend line or better yield this year and increased acreage in 2011. When you already have record demand, it doesn’t take much extra usage to change the stock levels from adequate to tight and a market from neutral to bullish.

Looking at the charts, the corn was lower this week, but the pattern for the past 6 weeks is still sideways/higher. Buying breaks and selling rallies has been very successful because there has been no follow through in either direction for quite some time. Next week’s USDA numbers could change that, so the market’s reaction to the report will be very important.

Action: Monday look to buy the June $3.60 put for 5 or less to hold through the report.

WHEAT:
Trend:
Short Term Up – Long Term Up
Sentiment: Grinding higher

The July KW picked up 6 ¼ cents this week. Every week I write there is nothing bullish about the wheat, but the wheat keeps climbing. Friday the July KW reached the highest level since early March, but failed to hold the gains.

The charts still look pretty friendly, but the July KW is still struggling with the $5.25 resistance. Friday the market was on the verge of a breakout to the upside, but ended up closing back below the 100 day moving average and well below $5.25. Trading funds are covering their short positions and Index funds are adding to their long positions, but commercial selling is keeping the market in check. Farmers are willing sellers, because we all know there is too much wheat out there. However, we have to pay attention to the money flow and the trend indicators. We are at a good spot to make sales, but if we see the July KW close above $5.25, we will see another wave higher.

Action: I still like the $5.10 - $4.70 bear put spread and selling the $5.80 call in the July KW. Make cash sales on a move to $5.80, if it were to happen.

SOYBEANS:
Trend:
Short Term Down – Long Term Down
Sentiment: Slipping.

The soybeans had a poor week. The July contract lost 39 cents, most of which came on Thursday’s sharp break.

Soybean export sales are still very good with the old crop coming in at 283,200 MT. That is more than double what we need and makes up for last week’s lower number. China is still buying old crop soybeans and they are adding to their new crop purchases as well.

Unfortunately after this week’s break the charts don’t look very good. The beans are back below the 50-day moving average and back to the April lows. The market is becoming oversold and did find some support at a trend line so the July soybean should be able to bounce back to the $9.70 area Monday, but then the direction will be determined by the reaction to the supply and demand report. I don’t think the USDA can come up with a bearish surprise, so chances are good we will see a favorable reaction.

Action: I don’t like putting on any price protection at this level. I don’t want to buy puts in the November contract unless we are back to the $9.80 level.

CATTLE:
Trend:
Short Term Up – Long Term Up
Sentiment: Holding on

The cattle market often suffers when the stock market does, but that wasn’t the case this week. One really has to be impressed by the cattle market. The market was dominated by bull spreading most of the week and the June LC gained $1.70. The beef market never faltered even with the stock market down all week.

Looking at the charts, I am concerned that the August FC are trying to roll over. It has been a long time since the market made new highs. Many technical indicators are giving sell signals. The trading action early next week will be critical. If the week starts of strong, then plan on new contract highs. However, if Thursday’s lows are taken out, look for a move down to $110.

Action: You can buy a $94 June put for a little over $1, which is a practical trade at this level. However, I would not want to be short June futures with cash cattle trading at $100. If cattle trade steady next week there is a good chance the June cattle move to $98.


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