Ag Weekly Online: Twin Falls, Idaho

Weather weighs heavy on wheat market

CORN

A strong demand base for corn should provide downside support for corn in April. In March, the USDA estimated demand for U.S. corn at 10.885 billion bushels, easily a record and a huge increase of 500 million bushels from only two years ago. U.S. producers are expected to seed approximately 80 million acres of corn this year.

Demand in 1998-99 was 9.3 billion bushels, forcing the U.S. farmer to produce a record yield of 143 bushels per acre to meet demand that year and to curb the trend of declining ending stocks. This year, United States producers will need to produce a new record yield of approximately 149 bushels per acre to meet demand. In nine of the last 10 years, the final plantings number has come in under the USDA March estimate. The strong demand base corn will make end users nervous about the upcoming growing season.

Like the month of March, April will have commercial and speculative traders buying weakness for a potential summer weather rally. U.S. producers will begin seeding corn acres by mid-April, and weather will become very important to pricing by May. Historically, December has traded to $2.70 in 78 percent of the last 23 years. Seasonally, highs for prices are usually made early in the month of April as the market entices U.S. producers to begin seeding enough corn acres to satisfy demand and then removes weather premium into the end of the month.

Recommendations

Hedgers: 52 cents hedge profits on 2005 crop. Long hedges on 50 percent of production at $2.38 July. Exit at $2.57. Hedged 10 percent of 2006 production at $2.65 December. Hedge another 10 percent at $2.72.

Cash marketers: Sold 100 percent 2005 at $2.47. LDP'd corn at $.40 to $.45. Sold 10 percent of 2006 production at $2.65 December. Sell 10 percent at $2.72.

Traders: Long at $2.38 July. Exit at $2.57.

SOYBEANS

Similar to the month of March supply concerns in South America and buying ahead of the U.S. growing season leaves the downside limited for soybeans. In the March supply/demand report, the USDA revealed a small increase in U.S. ending stocks to 565 million bu. and in world ending stocks to 54.42 metric tons, both record large.

The large ending stocks have been talked about in the marketplace for quite some time and should be factored into prices already. Yield reports from South America indicate the largest South American estimates have already been reported by the USDA. On April 8, the USDA will give their new estimate in the monthly supply/demand report. Uncertainty surrounding the report and the USDA estimate of the Brazilian crop will limit downside risk ahead of the report. If the Brazilian crop begins to decline in size, world soybean importers will return to the U.S. for their soybean needs.

With producers expecting to seed 74 million soybean acres this spring and planting to start in late April and early May, price direction will begin to be influenced by weather in the United States. Commercial interests and speculative traders will buy weakness in April for a possible summer weather rally. Commercial accounts have built in a large net-long position of over 68,000 contracts. This is the largest net-long position since Feb. 5, 2005, right before prices rallied over $2.00 into the spring. Don't be selling at this price level.

Recommendations

Hedgers: $1.25 hedge profits on 2005 crop. Hedged 100 percent at $6.18 basis July. Long July $5.80 calls on 100 percent of hedges. Hedge 10 percent of 2006 production at $6.50 November.

Cash marketers: Sold 75 percent of 2005 production at an average of $6.57. Sell 10 percent at $6.42. Sell 10 percent of 2006 production at $6.50 November.

Traders: Exited short July for $300 profit. Buy July at $5.84.

WHEAT

Our winter wheat crop is now breaking dormancy and will grow into our harvest, which starts in June. April and May are the months where winter wheat yields will be made or lost. As in any key yield-development time frame, if April brings little moisture, prices will soar. If there is plenty of rain, prices will fall. Our winter crop is about 70 percent of our total U.S. production, and goes mainly to the export market. Improved quality because of ample rainfall means better export business after harvest ends.

Near-term forecasts are predicting rain for the Plains and with the technical trend broken, funds with net-long positions are in a liquidation mode. However, long-range weather forecasts across the Plains indicate above-normal temperatures and below-normal precipitation. With winter wheat acres the lowest in 33 years, price action could be explosive if weather turns adverse.

Our spring wheat is currently being seeded, and producers will finish in May. Spring wheat represents about one-third of our U.S. production, and mainly goes to U.S. millers for domestic use. Smaller spring wheat acres are being seeded this year than previous years, leaving small room for error during the growing season. As recently as 1996-97, U.S. producers seeded approximately 19 million acres of spring wheat, with estimates for this crop year closer to 13 million acres.

Recommendations

Hedgers: Hedged 40 percent 2006 production at $3.97 July KC and 40 percent of September Minneapolis wheat at $4.04. Hedge 10 percent KC at $4.78 basis December. Hedge 10 percent Minneapolis at $4.61. Long $4.60 July KC puts and $4.60 September Minneapolis puts on 50 percent of production.

Cash marketers: Sold 40 percent 2006 production at $3.97 July KC or 40 percent of September Minneapolis wheat at $4.04. Sell 10 percent KC at $4.78 basis December. Sell 10 percent Minneapolis at $4.61.

Traders: Long September Minneapolis, short July Minneapolis at even money. Liquidate at 7 cents.

LIVE CATTLE

The March cattle on feed report was another bearish blow for the cattle industry. The on feed figure was 8 percent larger than last year and the largest on feed estimate ever for the month of March. This will keep the pressure on the cash markets. Placements for February were larger than expected at 5 percent more than last year and indicate a willingness by the cattle producer to place cattle on feed despite the current lack of profitability offered by the market.

February marketings were the lowest on record at 2 percent less than last year. Live cattle prices continue to slide lower with new contract lows recently established. The overwhelming bearish fundamentals of the cattle market combined with large-scale, fund-long liquidation continues to weigh on futures as any rally attempt is sold by traders and small feeders alike. With the technical trend of the market clearly lower, we should expect rallies to become selling opportunities. Seasonals are lower until late May.

Recommendations

Hedgers: Long April 94 puts on 100 percent of production. Convert to futures when options expire. Hedged 50 percent of June live cattle at $87.70. Long June and August 86 puts on 50 percent coverage.

Cash marketers: Use this break to replace feedlot inventory if profitable.

Traders: Long April live cattle/short June live cattle at $4.50 premium April. Liquidate at $5.75 or better.

LEAN HOGS

Fundamentally, the summer and fall month contracts should continue to find support from the lack of expansion plans by the U.S. producers. Demand has softened recently but is expected to improve into the summer as U.S. consumers will increase their pork purchases and retailers will begin to stock up on pork at these cheaper price levels.

Supplies are expected to remain steady through April expiration and tighten slightly into the summer. Commercial accounts are building in a bullish net-long position as they are now long over 27,000 contracts. The previous net-long position was held by commercials of over 28,000 contracts established in June 2005. Funds are short over 10,000 positions and if they are given a reason to cover shorts, the rally could be explosive.

Recommendations

Hedgers: Hedged April at $67.25 on 25 percent of marketings. Hedge June at $73.25 on 25 percent of marketings.

Cash marketers: Stay current with marketing inventory.

Traders: Long June at $67.20.

Brian Hoops is president and senior market analyst of Midwest Market Solutions, Inc., a full-service commodity brokerage and marketing advisory service. Daily market commentary and trade recommendations are available on the Internet at www.midwestmarketsolutions.com or subscribe by e-mail at bhoops@iw.net, call toll free at (866) 203-9655, or write to Midwest Market Solutions, 1028 Broadway Ave., Yankton, SD 57078.