Market Insider Newsletter for 5/27/08 provided by Midwest Market

THE MARKET INSIDER NEWSLETTER
May 27, 2008
By: Brian Hoops, President
Midwest Market Solutions, Inc.
VISIT OUR WEBSITE AT www.midwestmarketsolutions.com FOR MORE INFORMATION.
Inside This Issue:
THE KEY TO THE FINANCIAL
2
KINGDOM
CORN OUTLOOK
3,4
SOYBEAN OUTLOOK
5-7
WHEAT OUTLOOK
8—11
LIVE CATTLE OUTLOOK
12
FEEDER CATTLE OUTLOOK
13
LEAN HOG OUTLOOK
14
NEWS
15
NEWS
16
WEATHER
17
CALENDAR OF EVENTS
18
MARGIN REQUIREMENTS
19
COMPANY INFO
20
DISCLAIMER
20
1
“The Key to the Financial Kingdom”
Anyone who has been in the commodity markets for any length of time, has searched for the secret that will
make them rich, fulfill their dreams or simply give them the answers they have been looking for. While these
searchers for this key to the financial kingdom, have looked at technicals, fundamentals, seasonals, system
trading or even a CTA or broker; I want to tell you they are looking in the wrong place. The “holy grail” they
have been looking for has been right in front of their eyes this whole time. It has been recommended by many
advisors for a long time, however most of the non-professional traders have ignored this “holy grail” in their
trading strategies and will remain non-professionals if they continue to do so. What is this secret you ask? It is
simply the ability to manage their money. In our society, the ability to handle your finances is what separates
the person who lives paycheck to paycheck from the person who retires early. In the world of commodity trading, if you don’t manage your money, the board will take it away from you. Conversely, with the incredible
leverage offered in the commodity markets, a wise trader can have the keys to the financial kingdom.
As long as I have been in this business, I have noticed one common trait of the traders that consistently lose
money, they overtrade their account. Simply, they will put the majority of their entire account at risk. When
they do this and they lose, the majority of their account balance is wiped out and they are forced to send in
more money or suspend trading.
Here is a simple equation to use to manage your account. This money management formula is available for
download on our website in Microsoft Excel. This formula will determine the amount of contracts to trade
relative to the risk tolerance and the amount of risk involved in the trade. Take your account equity, divided by
the amount you will risk on the trade, multiplied by the risk percentage. I would recommend you risk 5% to
10% of your account equity if you are a conservative trader and more if you are a more aggressive trader. As
an example, your account equity is $15,000, your risk percentage is 10% and your stop loss on a particular
trade is $800. The money management formula indicates you should trade 2 contracts. In order to trade more
than 2 contracts, you will need to increase your account balance to $20,000 or decrease your stop loss amount.
In theory, the more your account equity grows, the more contracts you should trade. Conversely, the smaller
your account equity, the less contracts you will trade.
I want to give you a real example of the power of this money management formula. I have managed account
trading program that I run for some clients. While this trading program has done a very good job this year, the
difference in trading this system using a money management system vs. not using a system is unbelievable. So
far this year, we have 28 closed trades with 19 winners, 9 losing trades for a winning percentage of 68%. If
you started with an account balance of $25,000 on January 1 of this year; and if you would have followed
every trade recommendation exactly as the program indicated; you would have a nice profit of $11,470 and an
account balance of $36,470 with a very respectable 87% per return for just over four months of trading. That
sure beats any mutual fund return over this year! This is assuming you only traded 1 contract for each trade
recommendation. However, read on to discover how a money management system would have done with the
trading program.
If you would have implemented the previously mentioned money management formula, and assumed a 5%
risk tolerance for trading the program, your account balance would be $54,111! Remember, as your account
equity grew, so would the amount of contracts you would trade based on the money management formula.
Your net profit after commission would be $29,122 for a 116% return in just over four months of trading. Yes,
proper money management really is the “key to the financial kingdom”; “the holy grail of commodity trading”.
Remember, a sound money management system will be the most important part of your trading program. Take
the time to develop a great system to unlock the “Key to the Financial Kingdom.”
2
CORN
Corn closed the week $.8 3/4 higher. Net sales of 507,200 MT were 7 percent below the previous week and 8 percent
under the prior 4-week average. Increases reported for Japan (204,900 MT), Mexico (166,500 MT, including 15,000
MT switched from unknown destinations), Venezuela (44,800 MT), Taiwan (36,000 MT), and Canada (22,700 MT),
were partially offset by decreases for unknown destinations (7,300 MT) and Colombia (3,600 MT). Net sales of
268,900 MT for delivery in 2008/09 were mainly for Japan (117,700 MT), Colombia (97,500 MT), and Costa Rica
(71,900 MT). Decreases were for unknown destinations (54,000 MT). Fundamentally, the trade will begin to focus on
the emergence of the crop as well as crop condition ratings. Early crop ratings should be good with all the subsoil
moisture. These crop ratings will not be indicative of the yield potential of the crop as that will be determined by
weather in the last half of June and during July. With the slow emergence, use weakness to re-own sales with options.
The upside potential probably is not that large until the June acreage report is released.
Recommendations:
Hedgers: Buy July puts on 80% of 2007 production on a close below $5.90 July. Buy puts on 80% of 2008 production
on a close below $5.98 December. Hedged 20% of 2007 production at $5.99 July and 20% of 2008 production at $6.01
December. Hedge 70% July at $6.20. Hedge 10% at $6.45 December.
Cash Marketers: Sold 50% of 2007 production at $4.10. Hedge 40% July at $6.20. Sold 20% of 2008 at $6.01 December. Sell 10% at $6.58 December.
Traders: Long December 2008 at $5.41. Use a $6.05 stop loss order.
WEEKLY CORN
3
JULY CORN
DECEMBER CORN
4
SOYBEANS
Soybeans closed the week $.10 cents lower. Net sales of 382,800 MT were up 90 percent from the previous week and 65
percent from the prior 4-week average. Increases reported for China (194,100 MT), Japan (101,600 MT), Mexico
(63,600 MT), Indonesia (12,000 MT), Taiwan (5,300 MT), and Colombia (3,500 MT), were partially offset by decreases
for Vietnam (1,000 MT). Net sales of 486,500 MT for 2008/09 delivery were for China (429,000MT), Canada (32,000
MT), and Costa Rica (25,500 MT). Soybeans have tried to rally due to stronger demand, stemming from the farmers
strike in Argentina. Soybean seedings remain slow as does the maturity pace of the winter wheat crop. Warmers weather
in the winter wheat belt is desired as it will make it harder to double crop soybeans behind these acres if harvest is later.
Thus, I look for new crop soybean values to rally to add a premium to values to encourage producers to double crop soybeans behind wheat. Assuming these acres will get seeded, the larger acres compared to a year ago should translate into a
larger crop this fall and increased ending stocks. Summer weather will be the wild card. Use put options for downside
protection and to guarantee high price levels.
Recommendations:
Hedgers: Long July $13.00 puts on 80% of 2007 production and $12.00 November puts on 70% of 2008 production.
Hedged 20% of 2007 production at $14.62 and 30% of 2008 at $13.60. Hedge 70% of 2007 at $14.00. Hedge 20% of
2008 at $14.00 November.
Cash Marketers: Sold 70% of 2007 production at $11.05. Sell 30% of 2007 at $14.00. Sold 30% of 2008 at $13.60.
Sell 20% of 2008 at $14.00 November.
Traders: Stand aside.
WEEKLY SOYBEANS
5
JULY SOYBEANS
NOVEMBER SOYBEANS
6
JULY SOYBEAN MEAL
JULY SOYBEAN OIL
7
WHEAT
For the week, Chicago wheat closed $.23 lower with Kansas City wheat $.26 1/2 lower and Minneapolis wheat $.26
higher. Net sales of 98,300 metric tons were 19 percent below the previous week and 38 percent under the prior 4week average. Increases reported for Japan (42,900 MT), Nigeria (37,000 MT, including 30,000 MT switched from
unknown destinations and decreases of 30,000 MT), South Africa (27,500 MT, including 30,000 MT switched from
unknown destinations and decreases of 2,500 MT), Israel (24,200 MT), and Panama (20,400 MT), were partially offset
by decreases for unknown destinations (60,600 MT). Net sales of 394,100 MT for delivery in 2008/09 were mainly for
Brazil (130,500 MT), Mexico (87,000 MT), unknown destinations (66,000 MT), and Nigeria (60,000 MT). Decreases
were for Algeria (25,000 MT). The USDA reported crop ratings at 45% good to excellent last week 2% lower compared with the previous week and well below the 59% that was reported at this time last year. Key states read like this:
Kansas at 43% g/e; Oklahoma at 56%; Nebraska at 59% and Texas at 23%. Spring wheat emergence stand at 54% of
the spring wheat crop in the ground compared to 62% on average. Early harvested wheat in Texas is coming in very
poor in terms of yields, reportedly at 10-15 bpa. Kansas is badly in need of rain to help with the filling stage. The market has widely anticipated a big harvest and if yields are disappointing, look for a large short-covering rally to develop.
Recommendations:
Hedgers: Hedged 55% of 2008 production at $10.05 Kansas City and 30% of September Minneapolis $10.90. Long
July KC $11.00 puts or September Minneapolis $11.00 puts on 45% of 2008 production. Cover all hedges on a close
above $8.52 July KC.
Cash Marketers: Sold 55% of 2008 production at $8.50 Kansas City. Sold 30% of 2008 spring wheat at $10.90
Minneapolis.
Traders: Buy September Minneapolis at $9.19 stop.
WEEKLY CHICAGO
8
JULY CHICAGO
DECEMBER CHICAGO
9
JULY KANSAS CITY
WEEKLY KANSAS CITY
10
JULY MINNEAPOLIS
WEEKLY MINNEAPOLIS
11
LIVE CATTLE
Live cattle ended the week $2.30 higher while feeder cattle ended $6.75 higher. The cash trade this week developed
on Thursday with cattle trading steady to $1 higher in the Souther Plains at $94-95 while dressed prices in
Nebraska were in a range of $148-150, steady with last week. rade. Beef prices have stalled at the $156 area,
which has historically offered major resistance. Considering this resistance and the slow movement of cutouts due to
the poor economy; cutout prices are likely to turn lower. Huge premiums, $10 to $12 are offered in the deferred contracts compared to the current cash levels. Given the weak economy, the high gas prices and rising feed costs; the big
question the market must answer is will the cash market be able to overcome the negative news items and rally to meet
the futures, or will futures drop to meet the cash market? Producers have an opportunity to lock in profitable positions
and should be encouraged to do so.
Recommendations:
Hedgers: Hedged 100% of summer marketing at $98.00 August. Hedged 50% of October marketings at $103.00.
Hedged 25% of December marketings at $105.00. Hedge 25% of December marketings at $109.40.
Feed Costs: Producers need to have coverage through harvest in the cash market or at the money December corn and
call options.
Traders: Stand aside
AUGUST LIVE CATTLE
WEEKLY LIVE CATTLE
12
AUGUST FEEDER CATTLE
WEEKLY FEEDER CATTLE
13
LEAN HOGS
Lean hogs closed the week $1.50 higher. Over the last several weeks, the futures market has been led by a surging cash market. Seasonally, the futures market normally rallies until the second week of May. From a seasonal
standpoint, the futures market should peak about now and turn lower. This is exactly what the cash market is
doing as it rallied early in the week, but fell into the end of the week. If the cash market does soften and turn
lower, look for the futures market to also loose its steam and turn lower. A look at the weekly charts, indicates
the front month futures have rallied into major long term resistance. Producers are strongly encouraged to begin
a solid hedging program to take advantage of the chart resistance.
Recommendations:
Hedgers: Hedged 100% of summer marketings at $80.00 August. Hedged 50% of fall marketings at $75.50
December.
Feed Costs: Producers need to have coverage through harvest in the cash market or at the money December
corn and meal call options.
Traders: Stand aside.
AUGUSTS LEAN HOGS
WEEKLY LEAN HOGS
14
NEWS
Thanks to Bloomberg News and
Dow Jones News
*China Grain Reserves Corp. said it has allocated since last Friday 164,000 metric tons of grains and edible
oils from central reserves to Sichuan province, which was hit by a massive earthquake on May 12. The company’s local branches will also allocate around 700 tons of rice to these regions by next week, the state-run
corporation said in statements published on its Web site Monday. The Chinese government has been sending
essential commodities to quake-hit areas to stabilize local prices.
*Farmers can expect to harvest 2.3% less soy in the 2007-08 season than was estimated in March, according to
farm consultancy AgRural. The newest estimate calls for a 61.581-million-ton harvest, down from the previous
forecast of 63.003 million tons. The lowered estimate is due to a reduction in both the planted area of soybeans
and the average yield for the crop season, AgRural said.Soy crops in the southern states were hit hard by the
effects of La Nina, a weather phenomenon characterized by cooler-than-normal sea-surface temperatures in the
Pacific. It affects weather patterns and caused uncharacteristically dry weather early on in the soy planting period, last October. Rio Grande do Sul crops will likely yield 34 60-kilogram bags per hectare, compared with a
previous estimate of 40 bags. Parana and Mato Grosso do Sul suffered the greatest reduction in planted area.
Crop areas are expected to be 4.2 million and 1.78 million hectares, respectively, against the 4.38 million and
1.82 million hectares AgRural had projected in March. Mato Grosso, Minas Gerais and Bahia, all located further north, are expected to establish new productivity records in the 2007-08 season. Mato Grosso farmers are
expected to harvest 53 60-kilogram bags per hectare, two bags over the March estimate, and in Minas Gerais,
farmers are expected to reap an average 48 bags per hectare, up from the 47 bags AgRural had previously forecast. Bahian farmers are expected to harvest 50 bags per hectare in the 2007-08 season.
*Prices paid to U.S. producers excluding food and fuel rose more than forecast in April, reflecting gains in
automobile and furniture costs and indicate inflationary pressures will continue to be a concern. The 0.4 percent gain in so-called core prices was twice as big as anticipated and followed a 0.2 percent increase in March,
the Labor Department said today in Washington. A drop in energy costs and unchanged food expenses held
overall prices to a 0.2 percent gain. Soaring raw material costs may force companies to raise prices to protect
profits. The increases may heighten concern among Federal Reserve policy makers that prior increases in food
and fuel costs will filter through the economy even as growth slows.
*Direct payment participants will take a two percent cut for the base acres covered during the middle three
years of the five-year farm program. Money went out of the commodity title to fund nutrition programs. When
it comes to Farm Bills, National Farmers Union President Tom Buis says timing means everything. "Right
now, with higher commodity prices, a budget climate, where the federal budget is in a sea of red ink, and the
fact that we had a smaller budget baseline, it was a pretty tough sell to do what needed to be done; it's pretty
tough argument to increase the commodity safety net in this climate."
*Frozen food stocks in refrigerated warehouses on April 30, 2008 were greater than year earlier levels for turkey, chicken, pork, eggs, butter and beef. Butter stocks were up 13 percent from last month and up 3 percent
from a year ago. Total red meat supplies in freezers were up 1 percent from the previous month and up 14 percent from last year. Frozen pork supplies were down slightly from the previous month but up 23 percent from
last year. Stocks of pork bellies were up 1 percent from last month and up 62 percent from last year. Total
frozen poultry supplies on April 30, 2008 were up 4 percent from the previous month and up 28 percent from a
year ago. Total stocks of chicken were down 1 percent from the previous month but up 24 percent from last
year. Total pounds of turkey in freezers were up 15 percent from last month and up 37 percent from April 30,
2007.
15
NEWS
Thanks to Bloomberg News and
Dow Jones News
*President George W. Bush vetoed the massive U.S. farm bill, saying the measure lacks agriculture reform and
uses “budget gimmicks” to mask big spending increases. “It is inconsistent with our objectives in international
trade negotiations, which include securing greater market access for American farmers and ranchers,” Bush
said in a message to Congress. “It would needlessly expand the size and scope of government.” The administration says the bill includes unnecessary subsidies for farmers at a time when agriculture income is booming
and commodity prices are at record highs. Yet, the measure received strong enough support in Congress to
override a presidential veto. “If you look at the vote count, an override is probably likely,” White House
spokeswoman Dana Perino said earlier Wednesday. “I do think members are going to have to think about how
they will explain these votes back in their districts at a time when prices are on the rise.”
*The Grain Board of Iraq has bought some 600,000 metric tons of hard red winter wheat from the U.S., Iraqi
traders said Wednesday. The wheat was bought in a tender announced by the state run Grain Board of Iraq that
closed May 18, the traders said. Prices of the purchased wheat are not known. Iraqi trade officials are not
available to comment on the new purchase.Last week, traders said that Iraq bought 450,000 tons of hard wheat
from the U.S., Canada and Australia. A trader familiar with the Iraqi Grain Board said that the new wheat purchase would bring total Iraq’s purchases of wheat since the beginning of 2008 up to now to three million metric tons; two million tons out of which were bought from the U.S. The remaining one million tons of wheat
were bought from Canada and Australia, he said. Iraq’s Grain Board and Trade Ministry officials have been
reluctant to comment on the country’s wheat and rice purchases. Iraqi trade officials had said that Iraq would
need to buy up to 4.5 million tons of wheat in 2008.
*Global rice output last year rose to a record 652 million metric tons, 9 million more than a previous forecast,
the Food and Agriculture Organization of the United Nations said. The 1.5 percent increase from 2006 should
make production ``sufficient to meet world demand,'' the Rome-based FAO said in a report on its Web site.
*Argentine farm leaders said a new round of talks with the government aimed at ending a two-month dispute
over export taxes failed last night. They warned it will be ``harder'' to resume talks without more signs of progress. ``The meeting went badly,'' Eduardo Buzzi, president of the Agrarian Federation, told reporters after the
talks ended at the Argentine economy ministry in Buenos Aires. ``The government is dragging things out.
They're disappointing a lot of people.'' Cabinet Chief Alberto Fernandez earlier described the talks as
``productive'' and said negotiations will resume next week. Buzzi said the outcome of yesterday's meeting
makes it harder to continue talks and he called for a strong showing at a rally this weekend. The failure threatens to worsen a dispute that halted grain exports, led to food shortages across Argentina and undermined support for President Cristina Fernandez de Kirchner's five-month-old government. Farmers lifted roadblocks
against cargo trucks carrying grain and oilseed exports on May 21 to revive talks that had stalled for the second time in as many months. The tax system announced March 11 levies soybeans and sunflower seeds at
more than 40 percent, depending on market prices, compared with a previous fixed rate of 35 percent. The top
tax rate is 95 percent. President Fernandez said the taxes will curtail inflation and allow the government to redistribute wealth to poorer regions and people.
16
WEATHER
17
CALENDER OF EVENTS
06/02/08 9:00 AM CDT - Construction Spending
(Apr)
9:00 AM CDT - ISM Index(May)
05/26/08 Memorial Day Holiday
05/27/08 LT: May Frozen Pork Bellies(CME)
Jun Heating Oil Options(NYM)
Jun RB Gasoline Options(NYM)
Jun Natural Gas Options(NYM)
Jun Silver Options(CMX)
Jun Gold Options(CMX)
Jun Copper Options(CMX)
FN: Jun Heating Oil(NYM)
Jun Unleaded Gas(NYM)
06/03/08 9:00 AM CDT - Factory Orders
Auto & Truck Sales
FN: Jun Heating Oil(NYM)
Jun RB Gasoline(NYM)
05/28/08 LT: May Copper(CMX)
May Platinum(NYM)
May Silver(CMX)
May Gold(CMX)
06/04/08 7:15 AM CDT - ADP Employment(May)
7:30 AM CDT - Productivity-Rev.(Q1)
9:00 AM CDT - ISM Services(May)
9:30 AM CDT - API & DOE Energy Stats
05/29/08 7:30 AM CDT - USDA Weekly Export
Sales
7:30 AM CDT - Initial Claims-Weekly
9:30 AM CDT - API & DOE Energy Stats
3:30 PM CDT - Money Supply
06/05/08 7:30 AM CDT - USDA Weekly Export
Sales
7:30 AM CDT - Initial Claims-Weekly
9:30 AM CDT - EIA Gas Storage
3:30 PM CDT - Money Supply
05/30/08 7:30 AM CDT - Dairy Products Prices
9:30 AM CDT - EIA Gas Storage
2:00 PM CDT - Agricultural Prices
06/06/08 7:30 AM CDT - Nonfarm Payrolls & Unemploy. Rate(May)
7:30 AM CDT - Ave. Workweek & Hourly
Earnings(May)
7:30 AM CDT - Dairy Products Prices
9:00 AM CDT - Wholesale Inventories(Apr)
2:00 PM CDT - Consumer Credit(Apr)
FN: Jun 2,5,10 Yr Notes(CBT)
Jun Copper(CMX)
Jun Platinum(CMX)
Jun Palladium(NYM)
Jun Silver(CMX)
Jun Gold(CMX)
Jun Natural Gas(NYM)
Jun US 30 Yr Bonds(CBT)
LT: May Fed Funds(CBT)
Jun Heating Oil(NYM)
Jun RB Gasoline(NYM)
Jun Lumber Options(CME)
LT: Jun LC Options(CME)
Jun US Dollar Index Options(ICE)
Jun Canadian Dollar Options(CME)
Jun Currencies Options(CME)
Jul Cocoa Options(ICE)
18
MARGIN REQUIREMENTS
Hedge Rates
Speculative Rates
Corn
$1,000
$1,350
Oats
$1,000
$1,350
Rough Rice
$2,300
$3,105
Soybeans
$3,500
$4,725
Soybean Meal
$2,000
$2,700
Soybean Oil
$1,700
$2,295
Wheat
$4,000
$5,400
KC Wheat
$2,000
$2,500
Minneapolis Wheat
$2,500
$3,250
Treasury Bonds
$2,000
$2,700
$800
$1,080
$1,150
$1,553
$700
$945
Live Cattle
Feeder Cattle
Lean Hogs
19
COMPANY INFORMATION
Midwest Market Solutions is the leading edge in commodity marketing and trading. Midwest Market Solutions was established in March of 2002 and is a full-service commodity brokerage and marketing advisory service, clearing through R.J.
O’Brien. The firm specializes in individual trading strategies for the investor, personalized marketing programs for individual farm operations as well as full-service and discount broker services. The firm is located in Yankton, South Dakota
and is committed to providing clients with the best information and service as possible. Midwest Market Solutions provides clients with written newsletters, trade research and hedging as well as trading advice.
Brian Hoops is President and Senior Market Analyst of Midwest Market Solutions, Inc. Brian can frequently be heard on
radio stations across the country including: WNAX, WHO, and the Red River Farm Network.. Brian can also be heard
daily on the DTN doing his own grain market commentary program as well as the Minneapolis Grain Exchange marketing
hotline and the University of Illinois commodity wrap up program. Brian also writes several newsletters that are published
throughout the Plains and the Midwest, covering the states of Iowa, Minnesota, North and South Dakota, Nebraska, Kansas, Montana, Wyoming and Idaho. Brian has been quoted in the Wall Street Journal, Dow Jones newswires and U.S. Farm
Report.
Services available at Midwest Market Solutions:
•
Full Service Brokerage
•
Daily market commentary
•
Daily trade recommendations
•
Market Insider Newsletter
•
Market Solutions Hedge Program
•
Managed Trading Account
•
Professional Trading Systems
The Market Insider Newsletter is an opinion only; expressed with the best intentions, but not guaranteed. The thoughts expressed and
the data from which they are drawn are believed to be reliable but cannot be guaranteed because of their complexities and their reference to the future. Neither the information presented nor any of the opinions expressed constitute a solicitation by Midwest Market
Solutions, Inc. for the purchase or sale of any commodities. Any opinions expressed herein are subject to change without notice. Any
republication or use of this information without the express written permission of Midwest Market Solutions, Inc. is strictly prohibited.
The risk of loss in trading commodity futures may be substantial and therefore may not be suitable for the recipients of this information. Those acting on this information are responsible for their own actions. Midwest Market Solutions reserves the right to change
orders, stops or take profits as market conditions warrant during the trading session.
Midwest Market Solutions does not necessarily take every trade recommendation listed herein. Hypothetical performance results have
many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to
achieve profits or losses similar to those shown in fact there are frequently sharp differences between hypothetical performance results
and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance
results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk
and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to
withstand losses or adhere to a particular trading program in spite of trading losses is material points which can also adversely affect
actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance, results and all of which can adversely
affect actual trading results.
Copyright 2008 Midwest Market Solutions, Inc.
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