August 13, 2011 • Vol. 39, No. 33

Is the stock market ‘broken?’ — The Dow Jones Industrial Average posted a record four consecutive days of

United We Stand

profarmer.com When you see the icon with the PF shield and the “link cursor,” go to

400-point-plus moves last week. Not only does that suggest extreme volatility, but it also suggests something isn’t “right.” Computer-driven trading programs are dominating activity and exaggerating up and down moves in many markets, including equities and commodities. That means underlying fundamental factors in any market can be pushed aside for a period of time or pulled to the forefront. Grain (and to a lesser extent livestock) futures can get caught up in these wild, unpredictable price swings. With daily trading limits in corn expanding to 40¢ on August 22, those price swings could become even more violent. USDA’s Crop Production Report and S&D update provided plenty of support for grain markets last week and heightened anticipation of the Pro Farmer Midwest Crop Tour that kicks off August 22.

Corn yield down 12 bu. August-to-August!

Trade reaction to USDA’s August 1 corn yield estimate of 153 bu. per acre was that it “matched” www.profarmer.com for more on that story! last year’s 152.8 bu. per acre. That’s not exactly right. Because USDA uses a consistent method News this week... to estimate yields ahead of harvest, the true Page 2: Did USDA change its comparison is August-to-August yields. This data analysis? Page 3: Key state corn and year, USDA put corn at 153.0 bu. per acre. As of Aug. 1, 2010, USDA put the crop at 165.0 bu. per soybean yields. acre, 12 bu. above this year. We’ve got plenty Page 4: Getting ready for Midwest Crop Tour! more perspective on USDA’s August Crop Production Report on News page 2. FSA offices in budgetUSDA’s yield estimate puts the 2011 corn cutting cross hairs. crop at 12.914 billion bushels. We’ve been here before. When USDA’s budget Which number matters most: 153 or 340? gets squeezed, talk of You know 153 — that’s USDA’s national average closing some county corn yield estimate. What’s 340? That’s how Farm Service Agency many million bushels USDA slashed from estioffices picks up steam. So far, it has been just mated total 2011-12 corn use in the August S&D that... “talk.” But this Report. (See News page 2 for more.) budget-cutting process is, and will be, different. Yield basically matches year-ago — At marketing meetings last winter, most Not only is funding tighter, but growers are agreed a 2011 corn yield equal to year-ago doing more “paperwould be a disaster and would likely push work” electronically corn prices over $10. Well... we’ve got a corn and FSA is delivering yield basically equal to year-ago, but prices fewer farm safety net remain well below $10. What if the national payments. average corn yield declines even further? Prices may struggle to rally sharply. We Illinois is the headexplain why on Analysis page 4. scratcher. One day after USDA’s Crop Production Bean crop well below trade expectations Report, we’ve had USDA’s 2011 soybean yield estimate of 41.4 many calls to the bu. per acre is 2.1 bu. per acre below its July office about USDA’s yield projection and 1.4 bu. below the averestimates of Illinois age pre-report trade guess. That puts the corn and soybean crop at an estimated 3.056 billion bushels. yields. In summary, they all stress, “No Use will be greater than production — USDA says 2011-12 total corn use will reach 13.160 billion bu., way is Illinois better than year-ago.” (News 246 million bu. more than estimated 2011 corn production. For soybeans, total new-crop use is estimated at 3.146 billion bu., page 3 for more.) 90 million bu. more than estimated 2011 soybean production.

Fed puts a timeline on low interest rates The big change in the statement following the Federal Open Market Committee (FOMC) meeting was a timeline. The Fed said interest rates will remain stable and low into at least mid-2013. (See Analysis page 4 for more.) Perspective: That’s a positive for an already-strong farmland market. Jeremy Siegel, Professor of Finance at Wharton Business School argues the timeline delays the start of inflation, but also increases the risk of eventual inflation. We agree.

Jump in trade gap signals slower growth While most focused on USDA’s Crop Production and Supply & Demand Reports last week, the Commerce Department revealed a sharp decline in exports and the biggest increase in the trade deficit in nearly three years. That could result in a downward revision to already anemic second-quarter 2011 Gross Domestic Product (GDP) growth. Friday morning, the University of Michigan Consumer Confidence Index confirmed consumers are “confused and dazed” by what’s happening in Washington and to the economy. The index fell to 54.9, the lowest since November 2008! But it’s not all bad... July retail sales struck a more positive tone, signaling a strong start for third-quarter consumer spending.

Why USDA didn’t comment on corn pops NASS officials say after reviewing the information released in previous years, it decided this year to not comment on any data that is not presented in a table in the report. Because ear population tables are not included until the September Crop Production Report, NASS made no comments on corn stalk or ear populations. NASS also assumed normal growing conditions from Aug. 1 forward and used a five-year-average ear weight in it’s Aug. 1 corn yield estimate.

Crop Comments No mention of objective yield data in August crop report from AgWeb.com This is strange. One of the reasons traders pay close attention to the Henry Co., August Crop Production Report is because it’s the first survey(NW) Illinois: based corn and soybean crop estimates of the year. “Survey” means “Very disappointed there is “objective yield data” included in the report. USDA rarely walking fields. The heat took its toll provides details of stalk or ear counts in the August report, but it during pollination. normally provides hints of trends in populations from one year to Too many ears 12 the next. With one piece of objective yield data, we can then balance to 14 around with that against the yield estimate to learn more about how USDA 2 inches of bare cob at the tip... views the crop in the field. Things like average ear weights can be even in irrigated extrapolated from those two pieces of data. But not this year. USDA fields.” made no mention of stalk or ear population in its crop commentary. East-central Illinois: “Corn on our light ground will make 70 bu. per acre; corn on our good ground will make 160 bu. per acre. I’m not sure where the average will shake out. Our beans will make 20 bu. per acre without rain soon.”

Sioux Co., (NW) Iowa: “Thought I had a great crop out in my field until I walked in past the end rows. Talk about shock! I couldn’t believe what I saw — two to three stalks out of 10 where broken off by a wind about a month ago. Talk about living in denial... It looked good from every angle outside the field. Corn did pollinate well. That’s a good thing. At least a 20-bu. to 30-bu. yield loss. This wind covered a large portion of NW Iowa.”

Morgan Co., (C) Indiana: “Walked wildly varied corn. Estimate field yields to be 170 bu. per acre on good soil, to 50 bu. (I hope) on light soil. Estimate overall yield to be 30% lower than average. Worst drought damage since 1988, easily.”

Why compare August to August? On the front of this week’s newsletter, we highlight the 12-bu. drop from the August 2010 corn yield estimate to the August 2011 estimate. That is an apples to apples comparison because USDA should be using the same procedures in August this year as last August. Maturity plays a role, but the current year’s ear weight is not normally part of the equation until ears reach the dent stage. When ears are in the blister, milk and dough stages, USDA says its analysis of the objective yield data will include: “A five-year average ear weight and an average of the historic harvest loss for the state.” If the August 2011 report used a 5-year average ear weight... ... we’re in big trouble. Last year, USDA used the 5-year average ear weight and came up with a 165 bu. per acre national average corn yield in August. If the five-year average ear weight was used to estimate the 153.0 bu. per acre national average corn yield in August 2011, then ear populations are off dramatically from year-ago. (But that’s just a guess since USDA didn’t provide the same objective yield detail it did in 2009 and 2010.) If the five-year average ear weight was used in last week’s corn yield estimate, we’re likely to see lower to much lower yield estimates in the months ahead. While growing conditions are similar to last year, they are not exactly the same. Last year, the crop was in the middle of filling kernels when July’s hot temps hit. This year, the crop was pollinating and in early kernel fill during the heat wave. That slight difference in when the heat hit could allow the 2011 crop to benefit from cooler temps the first half of August. Crop conditions are also considered — The 2011 corn crop condition ratings as of August 1 were well below those seen last year. Lower condition ratings and the experience gained in 2010 (from monthly cuts to the corn yield) could have encouraged USDA to “lean down” on average ear weights. If so — and if USDA used a 2010-like ear weight — do not expect lower corn yields in the months ahead. That would mean a “light” average ear weight has already been baked into 153.0 bu. per acre. And it would be a change in analysis of the data... and that makes USDA’s next move more difficult to predict. 1993 was the last time USDA didn’t mention stalks or ears! In each year since 1993, USDA has made an “objective yield statement” in the August Crop Production Report and has given clues of how either stalk or ear populations compare to the record or to the previous year. In 2001, USDA even made mention of “a record average kernel row length!” After doing something for that long, omitting a statement on stalk or ear counts wasn’t an accident. (If it was an accident, someone (or agency) doesn’t understand the significance of current corn market and industry conditions.)

August 13, 2011 / News page 2

USDA slashes corn use From July, USDA cut total corn use 340 million bu.: Feed & residual use was cut 150 million bu. (to an unbelievably low 4.9 billion bu.); Food, seed & industrial use was cut 40 million bu. from July; estimated exports were cut 150 million bu. from July. This isn’t “tweaking.” These demand changes are potentially market-changing and might help explain why corn prices failed to close limit up following the August 11 Crop Production Report. Compared to 2010-11, USDA says total corn use will be down 85 million bushels. Perspective: USDA is anticipating a demand slow down based on its much-higher price projection. If the price rise fails to materialize, USDA should ratchet new-crop use back up. Old-crop carry also up — USDA’s 2010-11 corn carryover estimate jumped to 940 million bu., up 60 million bu. from July. USDA cut estimated FSI use 10 million bu. and estimated exports 50 million bu. from July. USDA’s price outlook inched up a nickel from last month. NWS Temp Outlook

August 17-21 On the temp map above, the darker the brown, the higher the odds of above-normal temps; the darker the blue, the higher the odds of belownormal temps. On the precip map below, the darker the brown, the higher the odds of belownormal precipitation. The darker the green, the higher the odds of above-normal precip. White on both maps is a normal outlook.

NWS Precip Outlook

August 17-21

USDA lifts old-crop bean USDA offsets smaller wheat carry, cuts new-crop outlook crop with smaller wheat use

State-by-state yields show USDA still has work to do!

USDA added 30 million bu. to its 2010-11 soybean carryover estimate from July, driving it up to 230 million bushels. USDA cut estimated crush 5 million bu. and estimated old-crop exports 25 million bushels. USDA’s new-crop bean carryover estimate was driven by the smaller-than-expected 2011 crop estimate. Compared to July, USDA sliced 118 million bu. from total use with crush down 20 million bu. (1.635 billion bu.); exports were 95 million bu. lower (1.4 billion bu.) and residual down 4 million bu. (21 million bushels). That left 2011-12 soybean carryover estimated at 155 million bu., 20 million bu. below July. The national average on-farm cash soybean price projection was hiked 50¢ on both ends of the range from July, to $12.50 to $14.50. As with corn, the assumed higher cash price is why USDA is projecting a drop in total soybean use. Perspective: USDA’s new-crop export forecast at this time of the year is historically too low. In the August 2010 S&D Report, USDA put 2010-11 soybean exports at 1.435 billion bu. (estimated at 1.495 billion bu. last week). In August 2009, USDA put 2009-10 bean exports at 1.265 billion bu. and actual exports that year hit 1.499 billion bushels.

The August Crop Production Report is the least reliable of all survey-based crop estimates. And with good reason! Corn and soybean crops are far from mature and a lot can (and normally does) change between now and harvest. With that in mind, these state-by-state corn and soybean estimates should be considered “tentative” — especially in a year like 2011!

USDA’s 2011 all wheat crop estimate of 2.077 billion bu. is down 29 million bu. from July. That drop in supply was offset by a 30-million-bu. cut to total 201112 wheat use. USDA actually increased wheat feed & residual use 20 million bu. from July, but cut estimated wheat exports 50 million bushels. USDA puts the national average on-farm cash wheat price at $7.00 to $8.20, up 40¢ on the bottom of the range and up 20¢ on the top of the range from July. Perspective: Even in wheat, USDA continued the “theme” of the August S&D Report that higher prices (assumed) will eventually cut total use. Spring wheat peg sliced — USDA now puts the other spring wheat crop at 522 million bu., down from 550 million bu. in July. Durum wheat production is now estimated at 57.1 million bu., down from 62.7 million bu. in July. Perspective: The pasta industry is in trouble. Last year, the U.S. produced 107 million bu. of durum and used 139 million bu. (imports from Canada made up the difference) and still had 35 million bu. of carryover. This year, USDA says we’ll use 115 million bu; carryover was cut a to too-tight 13 million bushels.

USDA Corn Yield Estimates 2011 2010 Aug. 1 Final Illinois 170 157 Indiana 150 157 Iowa 177 165 Kansas 110 125 Minnesota 166 177 Missouri 126 123 Nebraska 166 166 N. Dakota 125 132 Ohio 158 163 S. Dakota 141 135 Wisconsin 159 162 U.S. 153 152.8 USDA Soybean Yield Estimates 2011 2010 Aug. 1 Final Arkansas 36 35 Illinois 48 51.5 Indiana 43 48.5 Iowa 52 51 Minnesota 40 45 Missouri 39 41.5 Nebraska 52 52.5 N. Dakota 30 34 Ohio 44 48 S. Dakota 38 38 U.S. 41.4 43.5

Is the Illinois corn yield really 13 bu. better than year-ago? That’s the most glaring question of all of USDA’s state-based corn and soybean yield estimates as of August 1.

Outside Market Analysis Crude Oil: In last week’s S&D Reports, USDA made assumptions that higher prices will slow down total use of corn, soybeans and wheat. That’s probably right. We’re still bullish corn, but we simply don’t see much upside price potential from current levels. One reason is the last time futures crossed $7.25, demand was hammered! Another reason — the U.S. and world economy are in worse shape than when old-crop corn futures flirted with the $8.00 level on June 10. Also on that day, front-month crude oil futures closed at $99.29, well above current levels in the mid-$80s. The fall in competing energy prices should make it more difficult to push corn prices to a retest of $8.00.

Daily September Crude Oil Futures Trend is down. When front-month corn futures were making all-time highs, front-month crude oil futures were trading just under $100.

Mille Lacs Co., (EC) Minnesota: “Beans looking good considering the ones that were drowned out and having 22” of rain since the 1st of April. Beans are between R-3 and R-5 and should finish good with a forecast of very little rain for the next two weeks. Haven’t seen this much water for 25 years. Good luck to all.”

Jasper Co., (NW) Indiana: “After a season of just about every weather extreme you can imagine, corn crop looks fairly good. I said ‘looks.’ It doesn’t take long to discover something went terribly wrong during our growing season. Flood, drought, heat... a combination of all three. Whatever the culprit, the end result is the same: Substantially less than last year!”

Adams Co., (SW) Iowa: “Worst corn I’ve seen in the last decade. Short ears, with 30% kernel dropout from heat and lack of rain for last four weeks. Beans are in bad shape from a lack of rain and bean leaf beetle infestation.”

Coles Co., (ESE) Illinois:

$100

$89.61 Technically, crude oil futures fell too far, too fast. That’s put the energy markets back into a recovery mode. Look for resistance in September crude futures at the June low of $89.61.

We went from having the best crop started in a long time, to being close to having a disaster. We had three-tenths of a inch of rain in July and — so far — none in August.

Crop Tour starts August 22!

August 13, 2011 / News page 3

Keeping the Crop Tour ‘consistently random’ by Editor Chip Flory

O

ur annual trek across the Midwest is starting as late as it can this year — and that’s a good thing! With late plantings in the eastern Corn Belt, the late start of the Tour will give some plants a chance to set ears to give scouts something to count! The 2011 Pro Farmer Midwest Crop Tour will be the biggest Tour we’ve ever run. In fact, we’ve had to turn away potential scouts simply because of logistics! It’s tough to get everybody from one overnight stop to another while giving them the experience they want and deserve. With 60 scouts on the eastern leg, PF Sr. Analyst and Tour director Brian Grete will already have scout teams doubling up on routes. What we won’t do is add routes. We’ve run 12 routes on the eastern leg of the Tour with success, but we don’t want to push past that tally. Reason: There are only so many roads to get from one location to the next. By adding routes, teams would be forced to travel too close together, increasing the number of samples pulled from that area. We strive to keep the data collection process consistent year-to-year and increasing the samples pulled from one or two areas would weight that state more heavily toward those areas than in the past. That’s when year-to-year comparisons become murky. So even with a record number of scouts, we’ll stick with 12 routes in the east to keep the 2011 Crop Tour consistent with the previous 17 Tours we’ve run through the eastern Corn Belt. Keep the investigation consistent — The Pro Farmer Midwest Crop Tour starts the third Sunday of every August. On Monday, scouts move into the field for the first day of sampling with the eastern leg of the Tour traveling from Columbus, Ohio, to Fishers, Indiana, (near Indianapolis). Out west, day one will find scouts in fields between Sioux Falls, South Dakota, and Grand Island, Nebraska. The remainder of the eastern leg of the Tour will take scouts to much-deserved overnight stops in Bloomington, Illinois, and Iowa City, Iowa, before wrapping up in Austin, Minnesota. After the overnight stop in Grand Island, western scouts will spend nights in Nebraska City, Nebraska, and Spencer, Iowa, before meeting up with the eastern gang in Austin. Scouts stop every 15 to 20 miles where they sample a corn and soybean field at the same time. With each team of scouts sampling each field the same way, we can compare yield potential in Nebraska to that in Ohio. In corn fields, scouts get past the end rows and walk 35 paces down the main rows before laying out a 30-foot plot of two rows. At the plot, scouts count the number of ears that will make grain on two 30-foot rows, then pull the fifth, eighth and 11th ear from one row (three total ears). On those sample ears, scouts count (and average) the

number of kernel rows around and measure the length of grain on each ear in inches (and average). The final piece of data for the yield calculation is row spacing. Yield calculation: The average number of ears on 30 feet of row, times the average number of kernel rows around, times the average inches of grain per ear, divided by the row spacing. Example: (50 ears X 16.6 kernel rows X 6.3 inches)/30 inch row spacing

In each soybean field, scouts go to a “representative” area of the field and lay out a one-row, 3-foot plot. All plants are counted, then three plants are pulled at random. All pods on the three plants are counted and an average number of pods per plant is calculated. To determine the total number of pods in 3-feet of row, multiply the average number of pods per plant by the total number of plants in 3-feet of row. To make it possible to compare the production potential of a field with 30-inch rows to that of a drilled bean field, multiply the number of pods in 3-feet of row by 36 and divide by the row width. That figures the number of pods in a 3’X3’ square, providing data to compare one field to another. There is power in numbers — In four days, the eastern and western legs of the Tour will collect more than 1,000 corn and 1,000 soybean samples, and we’ll travel more than 25,000 miles. We do that by traveling in scout teams of three or four with each team following a pre-determined route (but fields are not pre-determined). This year, we’ll run 12 routes on the eastern leg and at least nine routes out west. The Tour will average 550 total samples each day. Here’s an interesting concept. On the Tour, we strive to keep each year’s effort “consistently random.” The Tour is consistent by traveling the third week of August every year, by traveling the same routes each year and by using the same sampling procedure each year. The “randomness” of the Tour is achieved by not predetermining which fields are sampled and by allowing each team to select the location in the field. More “consistent randomness” is added by pulling the fifth, eighth and 11th ear from one sample row. Scouts might pull the three best or worst ears from that row. That’s a lot of investigation... but how do you use it? There is only one way to use the data collected on the Pro Farmer Midwest Crop Tour — compare the results to past Tours. (We’ll go over the details of past Tours in next week’s Pro Farmer.) That comparison has proven to be the most reliable analysis of the fresh data. New ways to keep up with the Tour! Follow us on Twitter! We’ll tweet key observations throughout the week. Search for #pftour11 to get in on the Crop Tour conversation with tweets from @ChipFlory, @BGrete, @MNWeedWizard and @Terry_Johnston.

News alert and analysis exclusively for Members of Professional Farmers of America® P.O. Box 36, Cedar Falls, Iowa 50613-9985 Sr. Vice President, Chuck Roth • Publisher/Editor, Chip Flory • Editor Emeritus, Jerry Carlson • Sr. Market Analyst, Brian Grete • Sr. Markets Editor, Julianne Johnston • Reporter, Meghan Pedersen Member Relations Manager, Shelley Eilderts • Washington Consultant, Jim Wiesemeyer, Informa Economics Subscription Services: 1-800-772-0023 • Editorial: 319-277-1278 • To record your news alert for PF editors: 1-800-PFA-NEWS (1-800-732-6397) ©2011 Professional Farmers of America, Inc. • E-mail address: [email protected] CEO, Andrew Weber • President, Jeff Pence

August 13, 2011 / News page 4

August 13, 2011

CATTLE

Position Monitor

Fundamental analysis

Feds Feeders Game plan: 0% Fed cattle pro- III’11 0% 0% ducers have IV’11 25% I’12 0% 0% 25% of 4thII’12 0% 0% qtr. production hedged in Dec. live cattle futures at $120.05. Be prepared to heavy up hedge coverage once the boxed beef and cash cattle markets top.

The boxed beef market is strengthening right on schedule. The increased retailer buying should last for a couple more weeks as retailers make purchases for Labor Day features. But several weeks of price strength would likely push Choice boxed beef prices to levels that have slowed retailer buying in the past. And given economic uncertainty, retailers are likely to be more selective buyers as prices rise. That suggests boxed beef prices will continue to follow the seasonal pattern and fade from late August/early September into midOctober as grilling-season demand dries up. Because of the current supply/demand situation, the boxed beef market should continue to guide price action in the cash cattle market and live cattle futures into fall.

Boxed Beef Price $195.00 2009

$185.00

2010

2011

$175.00 $165.00 $155.00 $145.00

Dec

Oct

Nov

Sep

Jul

Aug

Jun

Apr

May

Mar

$125.00

Feb

$135.00

Daily December Live Cattle Trend is choppy. Strong resistance stands at the contract high at $126.40. A close above that level should trigger fresh technical-based buying.

$126.40

$118.90 $112.45

Fresh buying interest surfaced on the test of support at $118.90. Consecutive lower closes below that level would open downside risk to the June low at $112.45.

HOGS Position Monitor

Fundamental analysis

Lean Hogs Game plan: III’11 0% Continue to carry IV’11 0% all risk in the cash I’12 0% market for now. II’12 0% The recent sharp downturn in price should trigger a fresh wave of buying interest unless economic concerns keep investors out of the long side of the market. Pork Cutout Value

Dec

Nov

Oct

2011 Sep

Aug

Jul

2010 Jun

May

Apr

Mar

Jan

2009 Feb

$120.00 $110.00 $100.00 $90.00 $80.00 $70.00 $60.00 $50.00 $40.00

The string of record pork prices came to an end last week, but the pork cutout value remains historically strong amid robust demand. While there are no major signs of a top in the product market yet, traders actively sold deferred lean hog futures last week on concerns historic prices and economic uncertainty will slow demand as production increases through winter. But given the near $20 discount October hogs hold to the cash index, a lot of the expected seasonal decline in hog prices is already factored into the market. That suggests unless there’s a stronger-than-expected plunge in pork product prices, near-term downside risk should be limited for falland winter-month lean hog futures — and traders may continue to view breaks as buying opportunities.

Daily October Lean Hogs Trend is choppy.

The gap below $88.90 makes that level strong resistance. A close back above $88.90 would point to another challenge of contract-high resistance at $94.50.

$94.50 $88.90

$85.35 $82.65

The June 30 low at $85.35 is initial support. Stronger support lies at the May low at $82.65.

FEED

Feed Monitor

Corn

III’11 IV’11 I’12 II’12

Meal

III’11 IV’11 I’12 II’12

Corn game plan: 25% of 3rd- and 4th-qtr. 50% corn-for-feed needs were covered in the cash 50% market in early May. Another 25% of 2nd-half 0% corn-for-feed needs are covered in long Dec. 0% corn futures at $6.83. 50% Meal game plan: 25% of 3rd- and 4th-qtr. meal 50% needs were covered in the cash market in early 0% May. Another 25% of 2nd-half needs are cov0% ered in long Dec. meal futures at $360.20.

Daily December Meal

Trend is choppy to higher.

$370.90

A close above tough resistance at $370.90 would put bulls’ target at the 2011 high of $390.70 on the weekly continuation chart.

$329.00

Price breaks into the lower half of the extended choppy range continue to be viewed as buying opportunities. A close below key support at $329.00 would be technically bearish.

Analysis page 1

CORN

Position Monitor

’10 crop

’11 crop

90%

50%

Hedgers (cash sales): 100% Futures/Options 25%

60% 25%

Cash-only:

Daily September Corn Trend is up. The July high at $7.23 1/2 is initial resistance. Tough resistance stands at the contract high of $7.65. A close above that level would make the all-time high of $7.99 3/4 from the weekly continuation chart bulls’ target.

Game plan: Our long-term bias is bullish given strong fundamentals, but economic uncertainty could trigger downside corrections. Hedgers have 25% of 2010-crop reowned in long Sept. $9.00 call options for 19 3/4¢, which will likely expire worthless. Hedgers also have 25% of 2011-crop reowned in Dec. $7.50 call options for 28 1/2¢. Cash-only marketers should be prepared to finish old-crop sales soon.

$7.23 1/2 $7.65

$5.81 1/4

$6.03

Challenges of the long-term uptrend continue to attract buying interest. Clear violation of the uptrend would make the July low at $6.03 key support. Critical longer-term support lies at the March low at $5.81 3/4.

Fundamental analysis

Daily December Corn

Average Corn Basis

$6.23 Nov

Oct

Sep

Jul

Dec

$5.75 1/2 $5.44 3/4

'09-10

50

'10-11

40

USDA

30 20

Failure to clear contract-high resistance would point the contract to a test of uptrending support. If the uptrend is violated, flat support lies at $6.23 and $5.75 1/2.

July Aug

May Jun

Jan Feb

Sept Oct Nov Dec

Mar Apr

Million metric tons

10

WHEAT

PositionMonitor Monitor— All Wheat Position

Daily Chicago September Wheat

Trend is choppy to lower.

The contract must clear flat resistance at $7.29 1/4 and $7.72 1/4 to signal a low has been posted and swing momentum back to bulls.

’12 crop

50%

0%

Hedgers (cash sales): 50% Futures/Options 0%

0% 0%

Fundamental analysis

$7.72 1/4 $7.29 1/4

The Aug. 8 low at $6.42 1/4 is initial support. A close below that level would open the downside to stronger support at the July low of $5.92.

’11 crop

Cash-only:

Game plan: Get current with advised 2011-crop sales. No additional sales are recommended at this time. There’s no urgency to make 2012-crop sales yet.

$9.05

August 13, 2011 / Analysis page 2

$7.22 3/4

2011

Total Corn Export Bookings

60

0

Trend is up.

A close above the contract high at $7.22 3/4 would make the psychological $8.00 mark bulls’ next target.

Aug

Jun

Apr

May

Mar

Feb

Jan

0.50 Basis Sept. futures 0.40 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30 3-year avg. -0.40

Aug

The fundamental outlook for corn got even stronger as USDA’s first corn crop estimate came in smaller than expected and the new-crop carryover projection was cut more than anticipated. While that suggests sharply higher prices are needed, there’s more at play in the corn market than crop size and carryover. Traders are still keeping a very close watch on the global economic situation. Unless investors suddenly become more comfortable with the U.S. and European fiscal situations, it will be hard for corn to trigger a sustained, strong rally. It’s going to take a combination of bullish fundamentals and strong investor buying to propel futures sharply higher from current levels. But the bullish fundamental outlook will continue to limit the downside and ensure active enduser buying on price pullbacks.

$6.42 1/4 $5.92

SRW: USDA cut its U.S. wheat export forecast and raised the global wheat ending stocks projection amid increased production and exports from the Former Soviet Union. With U.S. wheat exports expected to slow amid increased competition from the Black Sea region, wheat will remain a follower of corn.

SOYBEANS

Daily September Soybeans

Position Monitor ’10 crop Cash-only:

75%

50%

Hedgers (cash sales): 100% Futures/Options 0%

50% 0%

The long-standing pattern suggests the contract will test the top of the range after moving into the lower half of the range and bouncing. Tough resistance stands at the February high at $14.22 3/4.

Trend is choppy.

’11 crop

$14.22 3/4

Game plan: The established pattern argues futures should move back into the upper end of the extended choppy trading range soon. Hold off on getting current with advised sales for now. Cash-only marketers will finish old-crop sales soon. While our long-term bias is bullish, new-crop sales may be advanced if futures return to the upper end of the range but fail to post a breakout.

$12.56

$11.38

Key support lies at the March low at $12.56. Consecutive lower closes below that level would open downside risk to the Nov. 2010 low at $11.38.

Fundamental analysis

Basis Sept. futures

Tough resistance stands at the February high at $14.02 3/4. A close above that level after six months of trading below it would be potentially explosive. $14.02 3/4 Dec

Nov

Oct

Sep

Jul

Aug

2011

June

Apr

May

Mar

Jan

Feb

3-year avg.

Total Soybean Export Bookings

$12.38 Million metric tons

The spike of initial support at $12.87 3/4 attracted fresh buying. More critical support is at the March low at $12.38.

USDA

Daily Kansas City September Wheat

$7.70 $7.34 3/4 Failure to clear $8.88 1/2 would point toward a near-term test of support at $8.10 1/2.

-1.10 -1.30

40 35 30 25 20 15 10 5 0

Dec

Oct

Nov

Sep

Jul

Aug

Jun

Apr

May

-1.50

3-year HRW avg.

Basis Sept. futures

Total Wheat Export Bookings '10-11

'11-12

USDA

Million metric tons

Apr

$8.88 1/2

3-year SRW avg.

-0.90

May

$10.51 1/2

-0.70

Jan Feb Mar

Daily Minneapolis September Wheat

A close above the May low at $8.88 1/2 would open strong upside potential.

2011 HRW

-0.50

Aug Sept Oct Nov Dec

The March low at $7.90 3/4 is support again. Stronger support is at $6.95 1/4.

2011 SRW

-0.30

Mar

$8.68 $7.90 3/4

-0.10

July

$9.92

Average Wheat Basis 0.10

Jan

A bounce from $7.90 3/4 makes the May low at $8.68 bulls’ next upside target. Tough resistance is at $9.92.

$8.10 1/2

$12.87 3/4

July Aug

May Jun

'10-11

Mar Apr

Jan Feb

'09-10

Aug

45 40 35 30 25 20 15 10 5 0

Feb

HRS: USDA raised its spring wheat yield estimate by 0.8 bu. per acre from July but cut harvested acreage 950,000 acres. The result: The production forecast declined 29 million bu. from last month. The reduction in crop size came straight off the bottom line, with 2011-12 HRS ending stocks now projected at a tight 143 million bushels. That’s bullish, but not enough for wheat to lead a price rally.

Trend is choppy.

May Jun

HRW: Kansas and Oklahoma got some needed rains, but conditions remain very dry across the Plains. It’s way too early for traders to get concerned about dryness, but unless there’s a significant improvement in soil moisture, the HRW crop will be planted into very dry soils.

Daily November Soybeans

Average Soybean Basis 0.60 0.50 0.40 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30 -0.40 -0.50

Sept Oct Nov Dec

Just as soybean futures moved to the bottom of the extended choppy trading range, fresh bullish news surfaced to give the market a boost. USDA delivered a smaller-than-expected 2011-crop production estimate and tighter new-crop carryover projection in the Aug. 11 Crop Production and Supply & Demand Reports. That should be enough to trigger a move back into the upper end of the range, but it will be difficult to get an upside breakout unless there’s a poor finish to the growing season. While the Mid-South and Delta continue to bake under hot, dry conditions, August weather has been generally favorable across much of the Corn Belt. The established choppy trading pattern argues to hold off on making sales at the bottom of the range, but rallies to the top of the range should be seen as a selling opportunity.

August 13, 2011 / Analysis page 3

COTTON

Position Monitor

Trend is down.

The contract must clear old support at 113.00¢ for bulls to regain the upper hand.

Dec

Oct

2011

Nov

Sep

Jul

Aug

Jun

Apr

May

The Aug. 2 high at 108.62¢ is initial resistance.

113.00¢

Total Cotton Export Bookings

108.62¢

100.62¢ ’000 running bales July

June

Apr

USDA

May

'10-11

March

Jan

'11-12

Feb

USDA unexpectedly raised the size of the cotton crop from July and estimated yields to be 10 lbs. per acre higher than last year. But given extreme drought across much of the South, especially in Texas, traders feel USDA’s crop estimate will come down — potentially sharply — in coming months.

17000 15000 13000 11000 9000 7000 5000 3000 1000

Dec

Fundamental analysis

3-year avg.

Mar

Game plan: All 2010-crop inventory should be sold. Be prepared to make initial 2011-crop sales on extended price strength.

Oct

0% 0%

Nov

100% 0%

Jan

Futures/Options

Feb

Hedgers (cash sales):

Daily December Cotton

Basis Oct. futures

Aug

Cash-only:

Average Cotton Basis 900.00 700.00 500.00 300.00 100.00 -100.00 -300.00 -500.00 -700.00 -900.00

Sept

’10 crop ’11 crop 100% 0%

82.82¢

A sharp close below the July low at 100.62¢ would leave the Nov. 2010 low at 82.82¢ as the next level of strong chart support.

GENERAL OUTLOOK Bonds: The Fed made an unprecedented move following the Aug. 9 Federal Open Market Committee (FOMC) meeting in announcing it would keep interest rates at virtually zero through mid-2013. But the decision wasn’t unanimous as three voting members opposed the specific date language. The post-meeting statement also acknowledged the Fed “discussed the range of policy tools available to promote a stronger economic recovery.” That open-ended statement has many

FROM

THE

investors targeting the Fed’s Aug. 26 summit at Jackson Hole, Wyoming, as a potential date for when Fed Chairman Ben Bernanke may unveil another round of quantitative easing — QE3. One idea floating around is the Fed will try to drive down the long end of the yield curve (buy 10- and 30-year bonds) in an attempt to kick start the economy. With hopes for QE3 building, the Aug. 26 summit could turn into a disappointment as some wonder if the Fed has any real “bullets” left to fire.

Weekly Yield on a 10-year U.S. Note Trend is down.

The all-time low of 2.038% was posted in Dec. 2008.

The yield on the 10-year U.S. note could rally to the downtrend without it being more than a correction.

2.038%

BULLPEN by Senior Market Analyst, Brian Grete

USDA painted a highly bullish picture for the corn market in its Aug. 11 Crop Production and Supply & Demand Reports. While the initial 2011 crop estimate came in well below the average trade guess and the new-crop carryover projection was reduced more than anticipated, the most bullish number was USDA’s cash price projection. USDA now forecasts an average on-farm cash price of $6.20 to $7.20 per bu. for 2011-12. USDA is counting on higher prices to slow the usage pace enough to keep ending stocks at “pipeline” levels during 2011-12. Total corn use for 2011-12 is now projected to decline by 85 million bu. from 2010-11 and is now forecast up only 94 million bu. from 2009-10. Dramatically slowing use would reduce the number one reason we have historic corn prices today. And therein lies the problem down the road.

Because of USDA’s strong fundamental outlook, we maintain our bullish long-term bias. But we are not more bullish now than before. If anything, we will be more conscientious about selling a strong rally now. After all, the corn market saw a marked slowdown in demand on the move above $7.50 in nearby futures in early June and a similar reaction is likely if futures move above that level again. Plus, the U.S. and global economic situation has weakened since then. No matter how bullish the fundamental situation is, it would be very hard for the corn market to maintain current (or higher) price levels if the economic situation continues to deteriorate and there’s a strong outflow of speculative money. The price outlook for corn is bullish, but avoid getting more bullish as prices rise.

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Key Market Items on My ‘To Watch’ List 1) USDA Crop Progress/Condition Rpt. — Monday, Aug. 15, 3:00 p.m. CT Milder temps last week should have improved corn and bean condition ratings. If not, the level of concern will rise. 2) USDA Weekly Export Sales Report — Thursday, Aug. 18, 7:30 a.m. CT Most of the fundamental focus is on crop prospects, but traders continue to watch for Chinese purchases. 3) USDA Cattle on Feed Reports — Friday, Aug. 19, 2:00 p.m. CT Traders are expecting another heavy wave of Placements during July to be reported. That will keep On Feed numbers above year-ago.

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