THE MARKET INSIDER NEWSLETTER

Transcription

1 THE MARKET INSIDER NEWSLETTER January 28, 2008 By: Brian Hoops, President Midwest Market Solutions, Inc. VISIT OUR WEBSITE AT FOR MORE INFORMATION. "ANALYSIS OF THE CATTLE ON FEED REPORT" On Friday, January 25, 2008; the USDA released the monthly cattle on feed report. The report gives traders and feedlot managers a monthly perspective of the amount of cattle that are currently on feed, the number of cattle that are being placed in the feedlots and the number of cattle that have been marketed since the last monthly report. The report is widely anticipated each month as the market will use the report s information for price discovery. In the report, the USDA reported cattle and calves on feed for slaughter in the United States for feedlots with capacity of 1,000 or more head totaled 12.1 million head on January 1, The inventory was 1 percent above January 1, 2007 and 2 percent above January 1, This is the highest January 1 inventory since the series began in The inventory included 7.65 million steers and steer calves, up 1 percent from the previous year. This group accounted for 63 percent of the total inventory. Heifers and heifer calves accounted for 4.38 million head, up 2 percent from Placements in feedlots during December totaled 1.70 million, 1 percent below 2007 and 10 percent below Net placements were 1.64 million head. During December, placements of cattle and calves weighing less than 600 pounds were 480,000, pounds were 505,000,

2 pounds were 420,000 and 800 pounds and greater were 296,000. Marketings of fed cattle during December totaled 1.65 million, 1 percent above 2007 but 4 percent below This is the second lowest fed cattle marketings for the month of December since the series began in Other disappearance totaled 58,000 during December, 34 percent below 2007 and 36 percent below I would have to say this report is bearish for the near term structure of the market. The report tells the industry that supplies of cattle will be plentiful enough to meet demand needs with the largest on feed inventory since 1996 at over 12 million head. Feedlot managers tell us they are trying to increase their marketing efforts due to high corn prices, so they will remain aggressive sellers of cash inventory levels. Placement levels are slowing due to the rising feed costs, however as deferred live cattle values have increased to new contract highs, this financial incentive has been enough for feedlot operators to lock in high corn costs and place cattle in feedlots. Based on the reports information, producers should be using rallies as a hedging opportunity for front month and deferred contracts. The USDA released the monthly cold storage report on January 22, Frozen food stocks in refrigerated warehouses as of December 31, 2007 were greater than year earlier levels for butter, turkey, pork, and beef. Total red meat supplies in freezers were up slightly from the previous month and up 2 percent from last year. Frozen pork supplies were down 2 percent from the previous month but up 5 percent from last year. Stocks of pork bellies were up 62 percent from last month and up 32 percent from last year. Total frozen poultry supplies on December 31, 2007 were up 9 percent from the previous month and up 1 percent from a year ago. Total stocks of chicken were up 7 percent from the previous month but down 1 percent from last year. Total pounds of turkey in freezers were up 15 percent from last month and up 9 percent from December 31, Beginning with the February 22, 2008 Cold Storage release, NASS will discontinue published estimates for government owned butter, cheese, beef and pork due to data quality. CORN Despite a wild rollercoaster week for corn which saw a limit down session followed by a limit up session, corn managed to close the week unchanged. Volatile trading in outside markets such as energies, metals and the stock market, produced widespread technical selling and long profit taking in corn early in the week, until commercial demand late in the week surfaced and helped to rally corn. Late in the week, the USDA reported private sales of corn of 296,000 mts to South Korea; 120,000mts to South Korea and 152,400 mts to Japan. This week's export sales report showed 62.8 mb of corn was sold last week, down from last week s marketing year high. Year to date sales stand at billion bushels, million bushels above last year or 31% larger than a year ago. This sales pace is 71% of the projected USDA forecast of billion bushels for this marketing year and nearly matches last year s export pace of 2.125bb. Next week's sales look to be strong as well due to the strong end user buying this week. The fundamentals remain strong for the corn market. Export demand is at the highest price level since 1996 and the highest

3 for the month of January in history. Livestock demand remains strong in the first quarter of 2008 and with the export pace remaining strong; it leaves the USDA little room to reduce the record demand that is forecasted. Unlike last year, corn doesn't need to "buy" acres from another commodity, but rather needs to maintain a price level that will ensure it doesn't "lose" and acres as a loss of acres will mean a reduction in corn ending stocks. Technically, prices remain in an uptrend and there is no evidence yet of the market accomplishing its chore of rationing. DECEMBER CORN

4 Recommendations: Hedgers: Sold 30% at $ production. Long March $4.20 calls. Cash Marketers: Sold 50% of 2007 production at $4.10. Traders: Buy December 2008 at $4.65. SOYBEANS Extreme volatility and plunging world and U.S. equities markets forced long liquidation in the soy complex and soybeans closed the week 21 cents lower. The bearish technical reversal that occurred on January 14 led the way to fund and long liquidation in follow through technical selling. This week's export sales report showed net sales of 24.4 mb a very strong number although this number was below last week s sales. Year to date soybean sales are million bushels, up 13.4 mb from last year. The USDA is currently forecast annual exports at 995 mb as they anticipate a slowdown in U.S. exports once South American production becomes available in March, however this year s export pace has already reached 83% of the USDA projection. Rumors that China purchased 5-6 cargos of U.S. soybeans during the large price break last week, should produce another week of strong exports. Weather in Argentina remains drier than desired although the soybean crop in Brazil has seen beneficial rainfall. Technically, prices remain in a solid uptrend, although the bearish reversal from January 14 needs to be negated. I see very limited downside risk for new crop soybeans until the bidding war for acres is over this spring. NOVEMBER SOYBEANS

5 Recommendations: Hedgers: Hedged 40% at $ production. Long March $10.20 calls. Cash Marketers: Sold 60% of 2007 production at $8.76. Traders: Buy November at $11.30.

6 CHICAGO WHEAT For the week, Chicago wheat closed 29 ½ cents lower with Kansas City wheat 42 ¼ cents lower while Minneapolis wheat $.72 ¼ higher. Minneapolis wheat has been on an incredible run of late, gaining over $2.04 in the last two weeks alone. Commercial demand for spring milling wheat has driven Minneapolis higher along with spread trading by the speculative community as traders are buying the Minneapolis contract and selling either Kansas City or Chicago as the short leg. Milling wheat remains in short supply and there will be increased demand for milling wheat due to smaller acres in the U.S and Canada this spring. This week's export sales report showed net sales of 15.5 mb. Year to date sales now stand at billion bushels. Year to date sales are now mb larger compared to a year ago and are now only 62 mb below the current USDA forecasted export pace for this marketing year of billion bushels. The USDA is going to be forced to increase their forecast in upcoming supply/demand report. Seasonally, wheat begins to find a bottom in February as winter wheat begins to exit dormancy and a premium is forced into prices. Recommendations: Hedgers: Hedged 35% of 2008 production at $6.65 Kansas City. Long July $7.50 calls. Exit calls at the market and buy $8.00 puts on unhedged production if the market closes below the uptrend line.

7 Cash Marketers: Sold 35% of 2008 production at $6.65 Kansas City. Traders: Buy July KC wheat at $8.20. CHICAGO WHEAT JULY CHICAGO KANSAS CITY WHEAT JULY KANSAS CITY

8 MINNEAPOLIS WHEAT JULY MINNEAPOLIS LIVE CATTLE Live cattle ended the week $.40 higher while feeder cattle ended $.92 higher. Higher cash trade in the North to end the week, helped to rally the cattle market to a higher weekly close. Cash trade occurred in the North at $145, about $2 higher than the previous week, which is a bullish surprise for the trade. Cash trade in the South occurred at approximately $91, about steady with the previous week. A volatile stock market, spilled over to the cattle market as fears of an economic recession that weighed on the stock market also pressured cattle futures on fears of consumer slowdown in spending habits. A late week recovery in the stock market, helped live cattle futures to rally. Consider the bearish cattle on feed report which indicated record large feedlot supplies, any weather induced rallies in the next several weeks should be hedged by producers. Producers will also need to be hedging the deferred contracts once the corn market shows signs of establishing a top. Technical trends continue to trend lower in both feeder cattle and live cattle.

9 ARPIL LIVE CATTLE APRIL FEEDER CATTLE

10 Recommendations: Hedgers: Long 100 puts on 50% of February and April marketings. Lift puts on a close above $93.25 and $96.00 respectively. Hedged 50% of summer marketing at $96.50 August. Hedge 25% of fall marketings at $ Cash Marketers: Look to replace feeder cattle on price weakness. Traders: Long April/short June at $1.00 premium April. Use $2.00 stop. LEAN HOGS Lean hogs closed the week $1.23 higher pressure after cash trade began to rally. Commercial entities found themselves in need of supply ready hogs and were forced to pay up for the supplies as they had another 2 million head weekly kill planned. These 2 million head kill weeks are commonplace and if producer runs slow, packers will need to pay higher in the cash market to meet these large slaughter levels. The lean hog index gained $2.77 this week, a strong indication of the improving cash market. Deferred contracts will continue to find price direction from corn prices as higher feed costs will command deferred contracts maintain a premium to encourage

11 producers to feed out isoween or feeder pigs. Producers will need to hedge the deferred contracts once corn finds its maximum price level. APRIL LEAN HOGS Recommendations: Hedgers: Hedge 50% of marketings at $64.10 April and $77.50 June. Cash Marketers: Don t add extra weight.

12 Traders: Stand aside. NEWS *thanks to Bloomberg News *The Federal Reserve lowered interest rates in an emergency move for the first time since 2001 after tumbling global stock markets and a jump in the U.S. unemployment threatened to push the economy into recession. The central bank lowered the benchmark overnight lending rate to 3.5 percent from 4.25 percent, the Federal Open Market Committee said in a statement in Washington. Policy makers weren't scheduled to gather on rates until Jan ``While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate,'' the Fed said in a statement in Washington. *China, the world's biggest pork and cooking oil consumer, plans to sell food from state reserves before the Lunar New Year holidays next month to help control rising food costs and maintain social stability. Central and local authorities will act to ensure the needs of low-income earners, students, migrant workers and ethnic minority groups, the Ministry of Commerce said in a statement on its Web site today, citing Minister Chen Deming. Rising food costs pushed China's inflation to an 11-year high of 6.9 percent in November, as surging global agricultural commodity prices increased import costs. The government last week restricted food and fuel-price increases to curb speculation. *China capped increases in the price of fertilizer to aid farm output in the spring and boost incomes, the National Development and Reform Commission said. State-run producers won't raise prices of urea, and regional makers of other compound fertilizer must consult authorities before raising rates, the top economic planning body said in a statement on its Web site today. China has increased farming subsidies and reduced costs of shipping grain as it seeks to boost agricultural output and help ease surging food costs. Higher global grain prices and rising crude oil costs have led to a jump in fertilizer prices. *Societe Generale SA reported a 4.9 billion-euro ($7.1 billion) trading loss, the largest in European history, and accused an unidentified trader of fraud after wrong-way bets on stock index futures. France's second-largest bank by market value plans to raise 5.5 billion euros from investors after the trading loss and subprime-related writedowns depleted capital, the Paris-based company said today. The Bank of France, the country's banking regulator, said it's investigating the situation. The trading shortfall rivals the $6.6 billion Amaranth Advisors LLC lost in 2006, and is more than three times the $1.8 billion of losses by Nick Leeson that brought down Barings Plc in An offer by Chairman Daniel Bouton to resign after the trades were discovered this past weekend was refused by Societe Generale's board, the bank said.

13 *Bank of France Governor Christian Noyer said he learned at least four days ago that Societe Generale SA had identified a rogue trader whose positions led to 4.9 billion euros ($7.2 billion) of losses, the largest in banking history. The bank disclosed the losses today after the trades were liquidated. The Bank of France, the banking regulator, also said today it was opening an investigation. ``We were immediately informed,'' Noyer told reporters in Paris. ``That means in real time.'' He said he kept abreast ``throughout the weekend,'' which began on Saturday, Jan. 19. ``In retrospect, the bank was in a very dangerous situation Friday night,'' Noyer said. ``And, in fact, it was for a certain time in a very dangerous situation.'' Now, he said he was confident that the bank was ``healthy and solid.'' France's second-largest bank by market value said it would raise 5.5 billion euros from shareholders after the trading loss and subprime-related writedowns depleted capital, the Paris-based company said today. An offer by Chairman Daniel Bouton to resign after the trades were discovered was refused by Societe Generale's board, the bank said. Noyer declined to disclose the timeline of his exchanges with Societe Generale. He also declined to say whether he notified the European Central Bank and the U.S. Federal Reserve. *A young trader blamed for losses that cost France's Societe Generale more than $7 billion hacked computers and used "several techniques of fraud," the bank said Sunday, as judicial officials said the man would remain in custody a further 24 hours. In a five-page document, Societe Generale also sought to counter the notion that it had disrupted markets by unwinding the massive positions built up by the 31-year-old trader. The bank took three days last week to sell off the contracts on the Eurostoxx, DAX and FTSE indices but said that it had done so in a "controlled" way. French judicial officials, speaking on condition of anonymity because the investigation is continuing, said Jerome Kerviel can be held until Monday afternoon. Kerviel was taken into custody on Saturday. Under French law, after 48 hours in custody, he must either be released or handed preliminary charges. Societe Generale said Kerviel misappropriated other people's computer access codes, falsified documents and employed other methods to cover his tracks helped by his previous experience working in offices that monitor traders. "He had a very good understanding of all of Societe Generale's processing and control procedures," the statement said. The bank said Kerviel had built up a position worth some $73.5 billion which was eventually closed or hedged by last Wednesday with a loss of $7.21 billion. "The position was unwound over three days in a controlled fashion," it said. Jean-Michel Aldebert, of the Paris prosecutors' office, told reporters Saturday that Kerviel gave himself up of his own free will. The trader had not been seen in public since the bank announced his unauthorized trades in a statement on Thursday. His motives remained a mystery, and the bank said it appeared that he did not gain personally from the trades. Acquaintances described Kerviel as reserved and considerate, a young man who once taught children judo and held the door for elderly neighbors. Kerviel had been investing the bank's money by hedging on European equity market indices, meaning he bet on how the markets would perform at a future date. Germany's Der Spiegel newsmagazine cited unnamed traders as saying Kerviel made a huge gamble on Germany's DAX stock exchange, buying some 140,000 DAX futures. When the exchange dropped, Kerviel racked up losses that amounted by mid-january to around $3 billion, said the report, posted on Der Spiegel's Web site. Societe Generale said it discovered the fraud last weekend and unwound the trader's losing bets starting Monday, when world markets tumbled. Some experts have suggested

14 Societe Generale may have exacerbated the fall and indirectly led to the U.S. Federal Reserve's subsequent decision to cut rates. In an interview published Saturday, Societe Generale's chief executive, Daniel Bouton, dismissed as "absurd" the notion that the bank's actions helped fuel the turmoil on world markets. Bouton said Kerviel had been betting throughout 2007 that markets would fall a winning position. But the trader had overstepped his authority and was wagering much more money than he should have, Bouton said. So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralize his earlier gains and cover his tracks. But this month's quickly dropping markets turned "this sad affair... into a Greek tragedy: His virtual losing position became huge," Bouton was quoted by Le Figaro was saying. Despite the bank's losses, which Bouton called "enormous and abnormal," he insisted Societe Generale's viability was not at risk. Experts and others, including France's prime minister, have questioned whether a single futures trader could have managed such large sums. Some have suggested Societe Generale might have used Kerviel as a scapegoat for other losses, like those related to the subprime crisis. The bank says the scale of the damage was so great only because of the bad timing of the discovery right before the worst day in world markets since Sept. 11, It also fired Kerviel's supervisors. 2008: French bank Societe Generale uncovers an alleged $7.21 billion fraud by a futures trader who fooled investors and overstepped his authority. 2002: Former currency trader accused of hiding $691 million in losses at Allfirst bank of Baltimore, at the time under parent Allied Irish Bank, pleads guilty to one of the largest bank fraud cases in U.S. history. 1995: Collapse of Britain s Barings Bank after a trader in Singapore, Nick Leeson, lost 860 million pounds (then worth $1.38 billion) on futures trades. The fraud prompted banks worldwide to tighten internal checks. 1991: Bank of Credit and Commerce International (BCCI), operating in nearly 70 countries, is seized by bank regulators, acting on auditors reports of huge losses from illegal loans to corporate insiders and from trading transactions. Some 250,000 depositors left without funds. Claims exceeded $10 billion. Source: The Associated Press *Argentina's soybean and corn crops may shrink this year as dry, hot weather reduces yields, La Nacion reported. This year's cereal harvest will be smaller than the 2006/2007 record of 94.4 million tons, La Nacion said, citing Diego Bancalari, a crop specialist at the Buenos Aires Cereals Exchange. Some farmers in the north of Santa Fe and Cordoba provinces have lost as much as 50 percent of their crops, the newspaper said. Corn is the worst affected crop, the newspaper said. Corn crops haven't received enough rainfall this month, the newspaper said. This year's corn harvest won't beat last year's output even though planting increased by almost 12 percent, the newspaper said. *China's economy expanded more than 11 percent for the fourth straight quarter, supporting global growth as a recession looms in the U.S. Gross domestic product rose 11.2 percent in the

15 three months ended Dec. 31, compared with 11.5 percent in the third quarter, the statistics bureau said in Beijing today. Inflation cooled to a 6.5 percent pace in December, still double the central bank's annual target, from an 11-year high of 6.9 percent in November. China, poised to become the biggest contributor to global growth this year, risks triggering a sudden slowdown by curbing lending to tame prices just as export demand weakens. WEATHER

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17 CALENDER OF EVENTS Date Reports Expiration & Notices 01/28/08 9:00 AM CST - New Home Sales(Dec) LT: Feb E-mini Natural Gas(NYM) Feb Heating Oil Options(NYM) Feb RBOB Gasoline Options(NYM) Feb Natural Gas Options(NYM) 01/29/08 7:30 AM CST - Durable Orders(Dec) 9:00 AM CST - Consumer Confidence(Jan) LT: Feb Natural Gas(NYM) Jan Copper Options(CMX)

18 Jan Platinum Options(NYM) Jan Palladium Options(NYM) Jan Silver Options(CMX) Jan Gold Options(CMX) 01/30/08 7:15 AM CST - ADP Employment(Jan) 7:30 AM CST - GDP- Adv(Q4) 7:30 AM CST - Chain Deflator-Adv(Q4) 9:30 AM CST - API & DOE Energy Stats 1:15 PM CST - FOMC Policy Statement FN: Feb Natural Gas(NYM) 01/31/08 7:30 AM CST - Personal Income & Spending(Dec) 7:30 AM CST - USDA Weekly Export Sales 7:30 AM CST - Initial Claims-Weekly 8:45 AM CST - Chicago PMI(Jan) 9:30 AM CST - EIA Gas Storage 3:30 PM CST - Money Supply FN: Feb Gold(CMX) Feb Silver(CMX) Feb Copper(CMX) LT: Jan Feeder Cattle Options(CME) Jan Feeder Cattle(CME) Feb Heating Oil(NYM) Feb RBOB Gasoline(NYM) 02/01/08 7:30 AM CST - Nonfarm Payrolls & Unemploy Rate(Jan) 7:30 AM CST - Average Workweek & Hourly Earnings(Jan) 9:00 AM CST - Construction Spending(Dec) 9:00 AM CST - ISM Index(Jan) 9:00 AM CST - Michigan Sentiment-Rev(Jan) Auto & Truck Sales LT: Feb Live Cattle Options(CME) Feb Pork Belly Options(CME) 02/04/08 9:00 AM CST - Factory Orders(Dec) FN: Feb Live Cattle(CME) Feb Pork Bellies(CME) 02/05/08 LT: Feb Gas Oil Options(ICE) 02/06/07 7:30 AM CST - Productivity- Prelim(Q4) 9:30 AM CST - API & DOE Energy Stats 02/07/08 7:30 AM CST - USDA Weekly Export Sales 7:30 AM CST - Initial Claims-Weekly 9:00 AM CST - Pending

19 Home Sales(Dec) 9:30 AM CST - EIA Gas Storage 2:00 PM CST - Consumer Credit(Dec) 3:30 PM CST - Money Supply MARGIN REQUIREMENTS Hedge Rates Speculative Rates Corn $950 $1,283 Oats $450 $608 Rough Rice $500 $675 Soybeans $2,000 $2,700 Soybean Meal $1,350 $1,823 Soybean Oil $900 $1,215 Wheat $1,500 $2,025 KC Wheat $1,500 $1,875 Minneapolis Wheat $1,300 $1,690 Treasury Bonds $1,500 $2,025 Live Cattle $800 $1,080 Feeder Cattle $1,150 $1,553 Lean Hogs $700 $945 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.

20 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.