Tri-State Neighbor: South Dakota Farm Newspaper

The February USDA supply/ demand report confirmed the long-term bullish trend of the corn market.

The USDA left ending stocks unchanged at 752 million bushels, the tightest ending stocks since 1996-97 and the stocks to use ratio is the second tightest in history. Until there is evidence of United States ending stocks rebuilding, the demand rationing phase in incomplete.

Export sales have slowed in recent weeks, however feed demand remains strong as the cold spell that has blanketed the Midwest will encourage more feed usage by livestock producers. The market is still faced with the job to ration the crop which can only be accomplished by forcing prices higher. The endings stocks, estimated at 752 million bushels will also force new crop corn prices to move sharply higher in an effort to entice producers to plant more corn acres in 2007 than in 2006 to meet the record demand base of corn.

With demand forecast at 11.76 billion bushels, United States producers will need to plant at least 8 million to 10 million more acres in 2007 to begin to rebuild the carryover stocks and ensure the United States will not run out of corn. December corn has already established a new all-time high price and the next upside price targets are $4.20 to $4.30. Annual highs should be scored this spring as the market competes for acres during the planting season.

Recommendations:

Hedgers: Hedged 55 percent of 2006 production at $3.40. Long July 360 puts on 25 percent of production. Hedged 20 percent 2007 production at $3.45 December 2007. Hedge 10 percent at $4.25 December.

Cash Marketers: Sold 55 percent of 2006 production at $3.40. Sold 20 percent of 2007 production at $3.45 December 2007. Sell 10 percent at $4.25 December.

Traders: Buy July/sell December at 20 cents July over December.

Soybeans:

The February USDA supply/demand report confirmed record-large soybean ending stocks. The USDA forecast soybean ending stocks at 595 million bushels, leaving the United States awash in soybeans. However, November soybean futures have rallied over $8 recently in an effort to make sure United States producers seed at least 70 million acres to soybeans.

With $8 new crop futures, United States producers in the Delta region will have second thoughts about switching over to corn. In addition to more trips through the field to grow corn, there is more fertilizer, seed and chemical costs to consider when planting corn, not to mention more risk in locations with a smaller growing season or too hot of a climate. Thus, similar to the corn market, soybeans should rally into the spring planting time frame to induce as many seeded acres as possible, before establishing seasonal and possible annual highs. For old crop inventory, record demand has pulled old crop prices higher.

However, South America’s growing season will come to an end in March and United States export sales will begin to slow as early planted beans in northern Brazil begin to come to harvest and hit the world market at a price about $6 a ton under any United States posted price. Since Brazil can only store up to 25 percent of their harvest, they are forced to forward sell approximately 75 percent of their early harvested soybeans. It is the period between March and May that South America overtakes the United States as the primary port of origin for beans. For now, soybean’s main job is to compete with corn for acres into the spring planting season.

Recommendations:

Hedgers: Hedged 60 percent of 2006 production at $6.75. Long July 660 puts on 25 percent of production. Hedged 30 percent of 2007 production at $7.22 November. Hedge 10 percent at $8.30 November.

Cash Marketers: Sold 60 percent of 2006 production at $6.75. Sold 30 percent of 2007 production at $7.22 November. Sell 10 percent at $8.30 November.

Traders: Stand aside.

Cattle:

The live cattle market has responded well to the latest cattle on feed reports by rallying to new contract highs in all months. While on-feed supplies are currently larger than last year, the market is anticipating these on-feed supplies will shrink and become tight into the third quarter of 2007.

The on-feed totals peaked at over 12 million head on feed in February of last year and trended lower, so it is likely this trend will be repeated in 2007. In fact, placement levels are well below last year and should remain below last year until corn prices peak and turn lower. Feeder cattle are anticipating better demand and have bounced off long-term monthly support of $90 as 8 million to 12 million more acres seeded in 2007 compared to 2006 is likely to pull corn prices lower by fall. June live cattle have upside potential of $96 to $98 this year.

Recommendations:

Hedgers: Hedged 50 percent of first quarter marketings at $92.50 basis February. Lift hedges at $89.50. Hedged 25 percent of marketings at $95 basis April.

Cash Marketers: Be willing to move cattle above $145.

Traders: Stand aside.

Wheat:

The February USDA supply/ demand report held little changes for the balance sheet as United States ending stocks were left unchanged at 472 million bushels. Demand trends have been well behind last year due to the much higher price levels of wheat, however since the first of the year United States export sales have slowly began to improve as prices have eased off of their highs and the world buyers have returned to purchase wheat at cheaper price levels.

The USDA choose to leave the export forecast at 875 million bushels due to the recently improved export pace. The one positive development in the February supply/demand report was a slight decrease in world carryout from last month. The USDA forecast February world ending stocks at 120.8 million metric tons down from 121.83 million metric tons last month and well below last year’s 147.42 million metric tons a year ago. The tightening world balance sheet will serve as a reminder to the trade that the 2007 United States winter wheat crop will be very important in restoring world wheat stocks.

Wheat prices will need to stay competitive with the rising corn and soybean markets to ensure United States producers do not abandon their winter wheat crop and instead plant corn and soybeans. Seasonal tendencies for wheat are lower for only another wheat and then turn higher as wheat breaks dormancy and grows into maturity and is harvested in May and June. The growing season could produce large swings in prices as adverse weather will send prices soaring higher due to the tight world ending stocks.

Recommendations:

Hedgers: Hedged 40 percent of 2007 production at $5.04 December KC or 20 percent at $5.01 December Minneapolis. Long July KC 480 calls on 20 percent of hedges.

Cash Marketers: Sold 40 percent of 2007 production at $5.04 December KC or 20 percent of 2007 production at $5.01 December Minneapolis.

Traders: Buy September Minneapolis $5.11, $4.99 stop loss.

Hogs:

Strong United States export business combined with rising corn costs continues to push summer month hog prices into new contract highs. The job of the hog market is to provide an incentive for producers to continue to purchase and raise feeder pigs in 2007. With the rising feed costs, producers are expected to slowly start herd liquidation into the summer rather than pay a premium for very expensive feed costs. Therefore the summer month hog values should continue to push higher with $80 in the June contract a likely target for the market to reach.

If feed costs peak out this spring or summer, hog prices are likely to begin to peak out, which will pressure summer hog values. Producers should begin to slowly hedge summer month hog supplies at very profitable price levels. The strong summer month premiums will slow expansion plans by producers and might encourage additional fall and winter supplies.

Recommendations:

Hedgers: Sell 25 percent second quarter marketings at $79 basis July.

Cash Marketers: Stay current with marketing inventory.

Traders: Stand aside.

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