Ag Weekly Online: Twin Falls, Idaho

U.S. producers should finish planting the 2007 corn crop by the middle of the month, and weather will then be 95 percent of the pricing influence. Ending stocks for the start of our harvest is projected at a very snug 877 million bushels and the May 11 USDA monthly crop report looks to possible decrease old-crop carryover stocks number, as demand remains solid with key competitors China and Argentina both out of the export market and less wheat being fed to livestock.

The likelihood of another decrease in ending stocks looks to give us a short-covering rally ahead of the report on May 11, as traders position themselves for the possibility of a friendly report. After the report, weather will be the only thing left for traders to trade on during the last half of the month. If weather is warm with ample moisture, prices will retreat into the end of the month, and the highs for the month should be in by May 10. The month of May is too early to make highs if weather conditions are adverse, as prices should peak during the June-through-August growing season.

Historically, a pullback in prices during the month of May is a great opportunity to buy call options ahead of the key reproductive season in case weather conditions become adverse or if less corn acres are seeded this year due to overly wet conditions.

Recommendations

Hedgers: Hedged 55 percent of 2006 production at $3.40; hedge 25 percent at $4.05 July. Hedged 30 percent of 2007 production at $3.85 December. Long December $4.00 puts on 50 percent of production. Hedge 10 percent at $4.30 July 2008. When December corn hits $3.55, buy $3.80 calls on hedges and roll $4.00 puts to $3.50 puts.

Cash marketers: Sold 55 percent of 2006 production at $3.40; sell 25 percent at $4.05 July. Sold 30 percent of 2007 production at $3.85 December. Sell 10 percent at $4.30 July 2008.

Traders: Long July/short December at $.20 July over December. Exit at $.10.

The month of May is when U.S. producers begin to aggressively seed the 2007 soybean crop. Weather will become the No. 1 pricing influence once 30 percent to 50 percent of the crop has been planted.

With the ending stocks for 2007 projected at 615 million bushels, a record large estimate, the market does have some room for error this growing season. However, prices will become very sensitive to weather issues during the summer, as speculative traders will look to get long if weather problems develop. As a result, the commodity funds and commercial entities will use weakness in prices during the planting season to buy September and November futures in anticipation of weather premiums being added as planting progress reaches the 50 percent pace.

Prices should peak into the June-through-August growing season, as the market will fear dryness or heat or both at the key yield time could cut production for the 2007 crop and lower our carryover stocks. The May 11 USDA monthly crop report looks to attract small buying ahead of the release in case there is a surprise in the report.

The one negative scenario is the possibility of good growing conditions into the last half of the month. If weather conditions are favorable, look for prices to retreat and funds to liquidate long positions as the technical trend is lower. The fundamentals determine price direction, so watch weather in the last half of the month.

Historically, a pullback in prices during the month of May, is a great opportunity to buy call options ahead of the key reproductive season in case weather conditions become adverse or if less acres are seeded this year.

Recommendations

Hedgers: Hedged 60 percent of 2006 production at $6.75; sell 20 percent at $8.20 July. Hedged 40 percent of 2007 production at $7.7625 November. Long $8.00 November puts on 50 percent of production. Hedge 10 percent at $8.25 July 2008. When November soybeans hits $7.25, buy $7.60 calls on hedges and roll $8.00 puts to $7.20 puts.

Cash marketers: Sold 60 percent of 2006 production at $6.75; sell 10 percent at $8.20 July. Sold 40 percent of 2007 production at $7.7625 November. Sell 10 percent at $8.25 July 2008.

Traders: Long July at $7.65. Exit at market.

WHEAT

Winter wheat ratings are approximately 56 percent good to excellent, compared with 36 percent last year. May is the key reproductive month for winter wheat, as approximately 26 percent of the crop is in the head stage. Winter wheat is now in need of light rain followed by warm and sunny conditions.

Seasonally, the middle of the month into the end of the month should produce lower prices as the market prepares for harvest and the key reproductive time frame for winter wheat will be past. Of course, adverse weather during May will send prices soaring.

The spring wheat crop is approximately 34 percent seeded and has the entire growing season ahead with only a small weather premium built into prices. If weather problems occur in the key spring wheat states of Minnesota and North and South Dakota, Minneapolis wheat futures look to explode higher. If normal weather patterns occur, seasonal weakness looks to prevail by mid-month and pressure prices.

The annual Kansas Quality Council tour has estimated the Kansas winter wheat crop at 392.7 million bushels vs the 2006 wheat crop estimate of 319.2 million. The estimated average wheat yield for Kansas came in at 41.0 bushels per acre vs the 2006 estimate of 37.3 bushels. In 2006, actual wheat production was pegged at 291.2 million and the yield was seen at 32 bushels per acre. Wheat should be a follower of corn and soybeans until harvest begins in the winter wheat growing regions.

Recommendations

Hedgers: Hedged 50 percent 2007 production at $5.20 December KC or 40 percent at $5.25 December Minneapolis. Long July KC 480 calls on 20 percent of hedges.

Cash marketers: Sold 50 percent 2007 production at $5.20 December KC or 40 percent of 2007 production at $5.25 December Minneapolis.

Traders: Sell July KC at $5.08.

LIVE CATTLE

Weaker-than-expected cash trade has pressured live cattle futures over the last two week. Funds were large sellers as they liquidated long positions with the technical trend turning lower. The 5-, 15- and 30- year seasonal patterns all point to a mid-May low followed by a strong rally into June.

If packers are indeed relying on formula cattle for kill needs and if feedlots are as current as they have indicated, June could post an explosive rally. The last two times futures have had a large daily price slide, once in April and once in May; heavy volume was evident on the price decline with little follow through selling. This indicates shorts are selling out of their remaining positions and strong buyers are underneath the market.

In addition, demand will also improve as weather improves this spring and grilling season begins. Producers should consider placing hedges in fall and winter months on rallies, as the increased placements will eventually weigh on the October and December contracts.

Recommendations

Hedgers: Long October 98 puts, short 108 calls and short 88 puts on 100 percent of marketings.

Cash marketers: Be willing to move cattle above $155.

Traders: Exited long April/short October for $1.00 profit. Buy June/sell August at $1.00 premium June.

LEAN HOGS

Seasonal trends are higher for the hog market until May before they turn sharply lower. The reason for this is simple; producers normally turn their attention to planting corn and soybeans rather than marketing hogs in April and May. As planting season ends in May, hog marketings usually increase and price patterns turn more bearish. As the corn and soybean planting season is in full swing, packers are forced to bid the cash market higher to secure inventory.

Cash trade is stronger and is pulling the lean hog index higher, narrowing the difference between the June futures and the index. Look for the cash trade to continue to move higher into mid-May before the seasonal trends take over and pull values lower. Additional hedges are recommended for then fourth quarter on seasonal strength.

Recommendations

Hedgers: Hedged 25 percent 2nd quarter marketings at $79.00 basis July. Hedge 25 percent of marketings at $78.25 August, $70.35 October and $69.00 December.

Cash marketers: Don’t add extra weight.

Traders: Sell October at $70.35.

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@midwestmarketsolutions.com, call toll free at (866) 203-9655, or write to Midwest Market Solutions, 327 Broadway Ave., Yankton, SD 57078.