The markets changed with each change in the forecast this week and it seemed like the changes came every day. Being down on Friday doesn’t bother me too much, because at the moment, I assume that the forecast is going to change again before Monday. If heavy rain really hits the ground next week, then we have probably topped out the corn market for now.
Next Wednesday is the July crop report. It should be very bullish for the wheat. We will have more spring wheat acres, but the yield should be lower. Harvested acres in Kansas should be reduced. We will get the class-by-class break down, and chances are that this will be one of the tightest years for HRW stocks ever.
For the corn we will have more acres than last month, but we will have smaller old crop ending stocks. The big question is whether the USDA will raise yield or not. The current crop condition ratings suggest that they will. So, more acres, plus higher yield, will make the new crop ending stocks jump quite a bit. If it is not raining on Wednesday when the report comes out then it won’t matter if they raise yield because everyone will assume it is wrong. If the weather looks good though, we are probably headed for the contract lows.
For the soybeans, we will have fewer acres, but it really doesn’t matter. We need to see a sharp reduction in yield to make the fundamentals bullish and that isn’t going to happen without a serious weather problem.
CORN:
Trend: Short Term Up – Long Term Down
Sentiment: Weather is in control
The corn was very choppy this week, but the December contract managed to gain about a nickel. The December corn peaked right at the 62% retracement of the last leg down and could not manage to stay above the 50- day moving average. If it rains in the Corn Belt next week, this run up will look like nothing more than a perfect bear market correction on the charts.
We have the crop report next week, but it is probably not too important this time. Crop size is still in flux and traders are not apt to believe the USDA estimates when we are right in the midst of a weather market. Rainfall totals next week will have far more market impact than the USDA numbers. It is basically this simple: Heavy rain = a quick drop to $2.47. No rain = new contract highs.
Action: If it is wet next week, we will have to accumulate $2.50 and $2.60 puts and sell calls if you are more aggressive. If it is dry, we are going to use the contract highs as a pricing opportunity.
WHEAT:
Trend: Short Term Up – Long Term Up
Sentiment: Following the corn
December KW ended up being just about unchanged for the week. We saw new contract highs, but the gains were all given up due to unwinding of spreads and profit taking. The market was overbought and due for a correction, but fundamentals will eventually carry the market higher.
To me, the forecasts for the spring wheat area do not look good. Basically it is going to be hot and dry for another two weeks. Crop condition ratings should decline for at least another two weeks. The situation is the same in the Canadian prairies, so we are looking at widespread crop damage. This means the July crop report will be very bullish, not just because of the HRW problems, but because of the HRS crop as well. World numbers will eventually get tighter too, because of the problems in Canada and in Australia.
Action: Buy breaks. It will be harder for the wheat to continue higher in the corn is dropping, but the long term fundamentals of the wheat will be supportive. If the corn is making new highs, then the wheat will definitely be moving higher too.
SOYBEANS:
Trend: Short Term Up – Long Term Up
Sentiment: Testing the top of the range
The soybeans almost made a major upside break out this week. The November beans traded above a down trend line that has been in place since July of 2005, but did not close above it. Ideas of hot and dry weather got traders excited, but like in the other markets, as the weather forecasts got wetter, the enthusiasm dried up.
Looking solely at the chart, I would say that the November beans will go back and test the support at the $6.18 level, and eventually fall back to the bottom of the trading range around $5.95. However, after seeing the buying interest this week, I think that if the Corn Belt is dry next week, there is a good chance that the beans will be able to break out. A close above $6.39 would suggest a move up to $6.60, which is the contract high.
Action: I still don’t want to do anything to limit the upside potential of the soybeans unless you are willing to sell calls to pay for puts. $7.40 November calls are still above 10 cents. I still like out of the money puts instead of at the money puts.
CATTLE:
Trend: Short Term Down – Long Term Up
Sentiment: Topped Out
Cash trade was disappointing again this week. The basis was very soft and that does not bode well for the futures next week. It really feels like we have topped out for a while. Look for the August LC to make a quick trip to $82. That would be a 62% retracement of the last leg up and a test of trend line support. $82 is probably where we should be anyway if we are going to be trading cash cattle at $83 or less.
Boxed beef is also showing signs of top ping out, which is the only thing really supporting the market right now. If we drop very much value off of the Choice, it will be hard for the cash cattle price to hang on.
Action: I like buying August FC $115 puts and selling the $118 call.
Schwieterman Marketing, L.L.C.
1616 Kansas Avenue
Garden City, KS 67846