wmeubank@ocp.kcmo.com
FORTUCAST
Grains
NOVEMBER SOYBEANS: Beans have been getting mixed news from the USDA regarding stocks and production. USDA's Quarterly Stocks report was bearish for beans, with old-crop stocks counted at 132 mbu, well above trade expectations of 110 mbu. However, on October 10, USDA delivered a bullish production estimate of 2.722 billion bushels, with a yield of 39.0 bushels per acres. Carryout was lowered to 270 mbu, compared to USDA's September estimate of 285 mbu. USDA also increased bean exports for 1997/98 by 10 million bushels due to sales running at nearly twice the pace of last year.
Strong farmer storage could push prices lower into the end of harvest, but this strategy is risky as it could set up an eventual bear market that would reduce domestic usage and encourage more South American plantings. South American planted acres for soybeans are expected to increase again this fall, resulting in estimates for a record 39-30 mmt crop for Brazil and a 14-15 mmt crop for Argentina. Barring El Nino weather problems, once this huge South American crop hits the market next spring, U.S. beans would lose any price advantage they would enjoy as the principle world supply for the next six months.
China looks to be a major importer of beans and products this year due to drought-lowered production. Both USDA and Oil World forsee large increase in Chinese imports of soymeal in 1997/98. USDA has estimated China meal imports at 3.75 mmt while Oil world projects imports of 5.9 mmt.
We see positive energy into October 14-16 and then possible corrective action into late October and possibly as late as November 3. If prices fail to get through the 727-730 region, weekly charts would allow an eventual low in 1998 toward the 530 region if the Farm Bill continues to increase acreage and production and no weather problems manifest next year. Cycles are friendly into January 1998 and after a harvest sell-off that is likely to hold the 650 region, the market could rally to 745-750 or 800 if new fundamentals emerge. If new fundamentals can develop and especially if drought hits South America we could be back to the 800 region into the January cycle high.
Longer term, fundamentally, if you focus on the supply side, the picture looks bleak, as U.S. and world stocks are both expected to increase by about 12% over last year. Plus, Brazil and Argentina plan to increase acreage by 15%, which would lead to record production levels. However, increased demand potentia should limit any downside. Brazil has no beans to crush and will need to import before their crop is ready early next year. Recent statements from Brazil suggest that they will back off of their ban of gene-altered beans. Moreover, the USDA expects China to import 3 million tons of soybeans this year, versus 2.2 million last year. Other Asian countries will likely need to increase imports due to drier than normal conditions, possibly from El Nino.
Longer term, we see a recovery on export demand into January, especially since drought chances are higher this year for South America with El Nino. But record planting approaching 45.86 million metric tonnes should still leave South America as a serious competitor. Longer- term weekly charts suggest at least 7.50 into January, and producers can probably do better if they wait. If you have 1997 tax-selling needs or have to sell in September, we recommend you cash contract or sell by October 14-16th or by late December.
Trading Strategy–We would add March calls and futures on pullbacks into the November 3 cycle low.
Weekly Chart Trend–Higher into January 1998.
Daily Chart Trend–Higher into October 14-16 and lower into November 3.
Support/Resistance<97>Breakout: Buy pullbacks into early November.
Breakdown: sell 5.97 stop with a 6.15 stop. Exit 5.75.
Turning Points–Major Entry/Exit Dates: October 14, November 3, December 26.
DECEMBER CORN: Recent USDA data has been bullish for corn, with quarterly stocks 840 million bushels and new-crop production estimated at 9.312 billion bushels, below the average trade guess of 9.393 bbu. USDA did not lower its export forecast as expected due to exports running almost 50% behind last year. This is especially surprising given that USDA raised the potential for Chines corn exports. But since the trade is still anticipating lower exports, the USDA numbers are somewhat less bullish. Other bullish factors include reports of excessive ear droppage and increased domestic feed usage. Moreover, USDA reported that world corn carryout has dropped significantly and is now tighter than in 1995/96. Based on current fundamentals, corn could rally to 308 or 320 basis December.
Linear cycles could support a recovery into as late as October 14-16. We doubt that we will rally above 3.08 and a harvest sell-off is still likely, but it may only take corn back to the 2.78-2.80 region unless excessive harvest pressure hits the market. At this point, fundamental support at 2.60 should prevent any major landslide.
With a bumper U.S. corn crop in the making, export demand will become a critical market factor. So far, the export pace for corn is lagging behind USDA's projection for the marketing year. China continues to be the chief culprit here, as their exports to Asian destinations has taken a bite out of the U.S. market share. Bulls contend that China could find itself with a significant corn shortage sometime in 1998, forcing them to turn to the U.S. to help rebuild their stocks. Bears counter that plentiful wheat and cheap prices in China and around the world will make it a cost effective substitute as a feed grain. Also no one really knows how much corn China has in storage.
Our technical work still suggests that a rally to the 312-320 region is likely even if it takes until late December when our next cycle high is due. Downside risk is probably 2.60 if harvest pressure intensifies and exports slow cycle lows dominate into October 27-28 or November 3 at the latest.
Producer's Strategy–Producers who need to sell by October 30 should consider rallies into October 14 to cash contract. We would again look to be long by the end of harvest around October 27-28 and November 3rd into Christmas, and producers who need to sell in 1997 for tax purposes will need to sell by Christmas. We do not have enough information to forecast 1998 prices or cycles, but given the new Farm Act, the pressure will continue on the downside. Early estimates of the 1998 corn crop are extremely bearish, with acreage at more than 83 million resulting in production in excess of 10 billion bushels.
Trading Strategy–Speculators should buy March calls and futures at the harvest low around October 27-28 and November 3.
Weekly Chart Trend–Higher to 308.
Daily Chart Trend–Topping by October 14th-16th and lower into November 3rd.
Support/Resistance–Breakout: Buy 3.11 stop with a 2.94 stop. Exit 3.16
Breakdown: Sell 2.49 stop with a 2.65 stop. Exit 2.40.
Turning Points–Major Entry/Exit Dates: October 14, November 3, December 26.
DECEMBER CHICAGO WHEAT: Wheat has fallen to major support at the 350 region and needs a close above 378-380 to project higher prices. While some technical patterns would allow a rally to the 416-418 region into Thanksgiving, we are skeptical, unless some new fundamentals develop during harvest. We are more inclined to see consolidation and then new lows to 328 if we fail to close above 380. Cycles are due to top by October 14th and then push lower into at least October 28th. It is possible that harvest pressure will not affect wheat as much as linear prices suggest higher prices into November. We see no reason to position trade the long side of the market, but if we get a good rally into Thanksgiving, we would aggressively sell it and probably even hedge July 1998 wheat needs.
USDA Estimated wheat carryout at 665 million bushels, down from their September estimate of 671 mbu. However, they boosted world ending stocks due to increased production in Canada, Australia, and FSU.
Given no Farm Act protection, producers should keep an eye on 1998 contracts for hedging as cycles look bearish into at least November 1998 once topping is complete into seasonal demand.
Trading Strategy–Consider hedging July 1998 wheat put options from Thanksgiving.
Monthly Chart Trend–Lower to 282 into November 1998.
Weekly Chart Trend–Higher into Thanksgiving.
Daily Chart Trend–Consolidating between 3.50- 3.80.
Support/Resistance–Breakout: Buy December 409.50 with a 399 stop.
Breakdown: Sell December 3.46 stop with a 3.75 stop.
Turning Points–Major Entry/Exit Dates: October 14 (high), October 27-28.
Fiber
DECEMBER COTTON: Hurricane Nora created a temporary blip in the cotton market in late September, but linear cycles have turned weak, with only a minor picket of strength October 13-14. Harvest pressure will most likely continue to weigh on the market, but fundamentals have not continued to improve, both domestically and around the world.
USDA's October crop data was called neutral to bearish as they left the U.S. crop unchanged at 18.42 million bales, the fourth largest crop on record. Most analysts were expecting a cut of 100,000-400,000 bales. USDA increased world stocks to 35.83 million bales, compared to 35.18 last month. U.S. ending stocks were raised to 4.2 million, from 3.7 million last month. USDA lowered export projections to 6.9 million bales, versus 7.2 million last month.
Potential El Nino weather problems represent the biggest wild card for southern hemisphere cotton. While the Indian monsoon has turned out to be fairly normal and rainfall has increased in Australia, El Nino effects cannot be disregarded even in the U.S. as demonstrated by Hurricane Nora. We cannot rule out a much wider trading range if extreme weather does manifest.
Still, with near-record crops in India and Pakistan and improvements in China, lower cotton prices are inevitable. Growing export piles in Canada and the EU, while has resumed subsidies, will also exert downward pressure.
Prices have remained in tight ranges and fundamental value is currently in the 70.50 region. Weekly technical support is strong at the 70.25 region, with major support at 69.65. We would be surprised to see the market trade above 75.10.
Cycles continue to project lower prices into at least December 26. We expect that prices will continue to consolidate lower with a downward bias. Should we reach up to the upper end of the trading range, producers may consider hedging or cash contracting.
Trading Strategy–Continue to favor shorts.
Weekly Chart Trend–Lower to 69.65 into December 26.
Daily Chart Trend–Consolidating and lower.
Support/Resistance–Breakout: Buy 75.96 stop with a 73.05 stop.
Breakdown: Sell 89.15 stop with a 71.10 stop. Exit 64.60.
Turning Points–Major Entry/Exit Dates: October 14, October 28, December 26.
Foods
DECEMBER COCOA: Cocoa continues to show topping action and we are still somewhat bearish toward this market, although a secondary high at 1761 still could manifest.
Hedging pressure from all three countries will probably be strongly felt as we go into the January cycle low. Recent pod counts in the Ivory Coast suggest a record 1.1 million ton crop, which is almost 10% above last year. Since pre-harvest estimates usually get understated, an even larger crop would invalidate all concerns for a shortfall in supply. Current fundamentals support prices in the $1400 region. El Nino dryness has been affecting crop areas of Malaysia and Indonesia which accounts for 26% of global cocoa production. Rainfall for Malaysia has been 40%-80% of normal since May, which should cut 1997/98 cocoa production by around 5%. Conditions are even worse in Indonesia, where no rain has fallen in most primary cocoa areas since June. However, in years following an El Nino, cocoa production usually rebounds. We cannot see fundamental value above $1800 and expect March 1998 puts will do well.
Trading Strategy–Use strength to scale in March 1998 1700 puts. Next entry is October 27.
Monthly Chart Trend–Higher to 1968 or 2048 into 1999.
Weekly Chart Trend–Lower into late January to 13.42-14.00.
Daily Chart Trend–Topping and lower.
Turning Points–Breakout: Buy 18.90 stop with a 17.89 stop. Exit 19.67.
Breakdown: Sell 15.89 stp with a 16.60 stop.
Support/Resistance–Major Entry/Exit Dates: October 27.
DECEMBER COFFEE: We are approaching a time window where we cannot short coffee any longer. While we could dip lower to support at 148.50, 154.50, and 156.50, we are skeptical and think that fundamentals will allow a rally into January or later. If that rally cannot get above key resistance at 181.00, the market may be vulnerable to a fall to the 154.00 region, with major technical support at the 140-144 region. Fundamentals support a global recovery into at least January and seasonal trends should also kick-in soon. Weekly stochastics have turned higher again for coffee, and monthly cycles are supportive to the upside until at least January, and probably even into June. Patterns suggest at least a recovery to 270, according to monthly chart patterns, with the first move higher projecting at least 197.45.
Fundamentally, Hurricane Pauline has taken a bite out of Mexican production as heavy flooding and mudslides lead to production losses approaching 400,000 bags. A dry September for the Ivory Coast, probably due to El Nino, made three consecutive months of dryness and will likely reduce production. October rainfall is usually more plentiful in El Nino years.
October 21 would appear to be the latest cycle low for coffee although worse downside would be the November 3rd time window. position traders can scale in March call options, as we are likely to do it in a jagged 3-3-5 or 5-3-5 series of waves. Current patterns are not clear enough to recommend position trades. Trading Strategy–Watch October 21, October 27 and November 3 for potential new longs.
Monthly Chart Trend–Lower to 85.00 into November 2001.
Weekly Chart Trend–Higher to 220 into 1998.
Daily Chart Trend–Bottoming and higher.
Turning Points–Breakout: Buy 225 stop with a 205 stop.
Breakdown: Sell 139.40 stop with a 144.50 stop. Exit 130.10.
Support/Resistance–Major Entry/Exit Dates: October 21 (low), October 27 (high), December 29 (high).
Meats
DECEMBER LIVE CATTLE: The September Cattle on Feed report was mildly bullish for the October contract due to marketings (106%) and bearish to the December contract due to placements (107%). February and April cattle are probably undervalued given the difficulty of placing cattle from October to December.
Seasonals are also on the side of buying cattle as they often bottom in late October and move higher into mid-November due to increased demand. This higher seasonal demand for beef will likely absorb the increased July and August placements, especially as packers will pull out all the stops to maintain their large share of the market. Moreover, packers are well aware that they are facing reduced fourth quarter beef production of about 40 million pounds per week compared to the third quarter due to reduced cow slaughter and timely marketing of finished cattle. The recent Excel plant closing in Colorado, which was processing 1,000 cows a day, reflects a down turn in production.
Meanwhile, the demand side of the equation continues to be influenced by the E-coli scare. A grand jury investigating the Hudson Foods E-coli beef recall may be featured on a network news program. Rumors of an E-coli recall in Virginia has yet to be confirmed, but still has the effect of eroding consumer confidence.
Our cycles suggest higher prices into October 13, a pullback into October 28, and continued higher prices into December and February 1998.
Since our long-term work is suggesting only a 26% chance of seeing 79.00, we have to recalculate potential for December and April cattle. December should at least recover to the 73.00 region, and the best new spread should be long February/short June cattle. We need to look at the next Cattle on Feed report before determining potential fundamental prices for spring cattle.
Overall, because data on this market is mixed, we would recommend consulting our daily service as events unfold.
Trading Strategy–Speculators can buy February call options or long February short June spreads. Best entry should be around October 21-22nd.
Monthly Chart Trend–Higher.
Weekly Chart Trend–Higher to February 1998 toward 74.50.
Daily Chart Trend–Lower.
Support/Resistance–Breakout: Buy 70.10 stop with a 69.45 stop.
Breakdown: Sell 67.10 stop with a 68.55 stop. Exit 65.00.
Turning Points–Major Entry/Exit Dates: October 13, October 27 (low).
DECEMBER LIVE HOGS: USDA's quarterly Hogs & Pigs report was pretty much a non-event, as trade expectations for herd expansion were confirmed. Still, analysts look for better demand in 1998, partly due to tighter cattle supplies and more interest from Japan. Hog production should be up 7-9% in the second, third, and fourth quarters of 1998, but these increases are mostly in the market already.
Current fundamentals are mostly bearish, including large live supplies, perceptions of higher cattle supplies near term, stiff broiler competition, and heavy ham stocks in the freezer. These fundamentals could push cash prices into the low 40's.
The trade still holds out hope that Japan will step in as a major buyer. Unfortunately, lack of Japanese buying this summer led to artificially high prices and an oversold market. At this point, if Japan ever does buy, the market will pick up value. But this is a big if, given that Japan has continued to confound the trade since May when Taiwanese pork became unavailable due to disease problems.
Japan responded by increasing its own pork supplies and by tapping into its large pork reserves. They now seem content with maintaining smaller reserves, a policy that has been viable due to lower demand for pork. Moreover, other nations have been able to capture more of Japan's frozen pork market by providing the desired cuts at competitive prices.
Our cycle work suggest that prices will probably not dip below 59.50 and this friendly energy could have a fundamental basis in more Japanese business.
Monthly Chart Trend–Lower into April 1998 toward 65.00.
Weekly Chart Trend–Higher to December 26 toward 74.45.
Support/Resistance–Breakout: Buy 69.40 stop with a 65.90 stop.
Breakdown: Sell 65.10 stop with a 66.30 stop. Exit 63.65.
Turning Points–Major Entry/Exit Dates: October 13 (high), October 28 (low), December 26 (high).
FEBRUARY PORK BELLIES: Bellies cycle appear weaker into November 17, and while seasonals are supportive after that, longer- term linear cycles are still potential weak into the winter. While we could bottom sooner by November 3 at 56.74, rallies are not likely to go much above 64.00-65.50 into the seasonal holiday season.
We expect by November that some Japanese buying will finally come into this market and lift it higher, but if we cannot close above the 70.00 region, we cannot rule out a new low to the 46.50 region if the bears continue to take control. We would continue to favor shorts.
Major Dates–October 21-22, November 3, November 17, December 8 (high).
NOVEMBER FEEDER CATTLE: With feeder cattle cycles bottoming in October and corn topping, we may finally get a break from the nasty fall that we have had. Major support on the weekly chart is at the 75.30 and 74.90 regions and the market may start consolidating. Because corn is likely to continue higher into the end of the year, we may only get a brief rally on feeders and until we close above the 81.00 region, we are probably going to congest between 75.50-79.60 and then make new lows into Thanksgiving and that could even take us to the 66.00 region if support at 70.00 gives way. We do see higher prices in December into at least February, but fundamentals are not as supportive for feeders. Buying the March contract may be the safest and even then we would wait until at least Thanksgiving.
If you have questions or comments about this article, please e-mail Berry Rosen at: fortcast@lisco.comOctober 13, 199 7 Barry Rosen
Fortucast Market Timing, Inc.
P.O. Box 2066, Fairfield, Iowa
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