Commodity Wrap-Up For June 6,1997

To the Point: After a 47.5-cent rally in the beans last week, the market was set to move higher this week until news circulated that CRGL will import 5 to 7 million bushels of South American beans. As a result, the beans "crashed" 45.25 cents and meal plummeted $14.20 for the week with heavy fund and commission house selling. This pressured the other grains as margin call selling kicked in. ALDL released an article to the press that received national attention and the market began to recover. Traders soon realized that producers were not selling to CRGL in response to their actions.

Since most other U.S. firms are not willing to experience the negative consequences as CRGL did, these firms would only buy U.S. beans regardless of price.

Furthermore, because the market fell, strong demand was locked in at great value which has created a huge good weather gamble.

Tonight's 6- to 10-day suggests extended poor weather for the eastern cornbelt. July corn closed at 274, +3.2 cents for the week and completed a weekly reversal to the upside when ALDL announced expectations for a downward yield revision in the June 12 report towards 128 bushel/acre due to continued adverse growing conditions. July wheat recovered most of its losses closing down 1.0 cents for the week. Support from dry spring wheatbelt conditions, disease in the spring red wheat and combines closing in on the hard red wheat freeze affected fields. Additionally huge demand from Egypt helped the market recovered losses. Like many, ALDL was stopped out on wheat and meal. We will bought back wheat calls and anticipate a move towards 375. ALDL is holding long corn and beans and will rebuy meal as cash remains near $40 to $50 over the August futures.

A Special Report: Due to the importance of the content discussed, ALDL is repeating Thursday's wrap up as it explains the volatility we might expect, and the keys to watch for in the upcoming market. The irony of the market: Yesterday's lead story was that Cargill announced plans to import 5 to 7 million bushels of Brazilian beans. This "castrated the bull" market as one trader said and "changed the fundamentals" as another suggested. Rather than rationing, we are simply shifting supply around...so why rally!

Another cash trader said "CRGL is selling U.S. beans CIF the gulf, and importing Brazilian beans! Trading volume!" However, this very same news that caused yesterday's market to crash, was the "cause" for today's market rally.

Who is zooming who?: CRGL's actions are bearish as they solve their own supply problem and pull out of the U.S. market. But CRGL has created a great opportunity for many U.S. firms that compete with CRGL. ALDL expects the following scenario to play out:

1.) several U.S. bean buying firms have gone into the futures and bought this huge CRGL related break that took beans towards major economic value.

2.) These companies will make sure the public understands that they will not be importing any (or more) beans from South America. That they will buy U.S. beans...not like their competitor!

(We confirmed with 3 U.S. firms today that this will be their approach.) Well, I have to say that we have heard customers who are ticked about the events of the last 72 hours and will only do business with the firm buying U.S. beans even if it means a lightly less price.

3.) These firms know they will not buy many beans in the country because of the shortage. Thus they might bid 30-35 over and then announce...and if we cannot get the beans bought at a reasonable basis in the country, then we will take delivery! (Since they are long hedged, they really don't care if prices rally.) Well, as an informed Allendale subscriber, you know that there are 407 million bushels in the July open interest and only 5.18 million bushels of beans in deliverable positions of which only 4.8 is deliverable grade. Thus you know that whoever is short is either going to have to buy back their futures or buy cash beans in the country so they can delivery against their shorts. And the farmer has little to sell. And the commercial who is long will remain long until the futures move up enough so basis is reasonable. Once it is no longer "economically justifiable" to take delivery, then they'll buy their cash needs at a reasonable basis and offset their long hedge. Now I have to say these U.S. bean buying firms have won my heart. Not only are they buying U.S. beans (unlike their competitor) but are willing to make futures rally to fair value (where it belongs). Thus we will be watching who is buying and selling July futures and where the cash is. Yesterday we saw ADM buy 10 million bushels July on the close (Friday another 4). Our sources said that was to establish ownership. CRGL even bought about 3 million bushels today! We'll keep you informed.

A real gamble! CRGL's importing beans solved the old-crop supply shortage for them. But in doing so, may have created a huge gamble for the world as the market broke to levels which has brought in new demand. Crush exceeded all expectations and new crop exports are piling up at a record clip. Since the aggregate supply has not changed, i.e., the world stocks are still at a record low and only a 28-day supply, keeping demand strong has actually increased the intensity of the market. According to three of our South American clients, two say they will need to begin importing from the U.S. in September and one said November. What if our supply is not available in September? Or an even bigger question is total supply. If we have kept world demand at a slightly higher pace than the original rationing theory, and then the U.S. has a hiccup in the weather, then what? Simply put, with a 28-day supply, we need every bushel. That doesn't mean the market will go higher tonight. But it does mean that if there is any bad weather, a 200 to 400 move is possible.

A cheap out of the money call might make a great Christmas present!

What are your thoughts? Will the industry sell to CRGL after this debacle? Is your crop is great shape? Will you sell beans in the fall to CRGL so they can ship to Brazil $3.00 cheaper than Brazil was paid to meet our demand? Please feel free to call us, we want to hear your opinion!

June 6, 1997
Allendale, Inc.
4506 Prime Parkway,
McHenry, Illinois

Relocated 06-13-97
Last updated on 06-13-97

Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com

wmeubank@ocp.kcmo.com