Alaron Grains and Oilseeds Comment

CHICAGO - Sep 1/06 - SNS -- Following is the grain and oilseed futures comment from Alaron Trading Corp.

Corn- Thursday's weekly export sales report showed a total old and new marketing year sales of 1.6 million metric tons. The new corn marketing year begins today Sept. 1 This is a good sales number and shows demand continues at a robust pace. 11 of the last 18 weeks have had sales over 1 m.m.t. while a year ago we saw only 2 wwks over 1 m.m.t. On my August 18th and 22nd reports I said get ready for buying back of short positions ahead of month end as funds cover shorts for month end bonuses. On the 18th Dec. corn hit our low for the month at 2.34, a Tuesday Aug. 22nd close of 2.36 and a month end high of 2.48. We had a 31 cent break off our Aug. high. We usually see a 30 to 35% retracement of our move. That would mean potential for a move to 2.52 best case scenario. We have a short week next week as markets are closed Monday for our Labor Day Holiday. When we return Tuesday much of the talk will shift to the expectations of the Sept. 12th USDA monthly crop report. The current thinking is the government may lower the production of this year's crop just slightly and lower ending stocks for next year as well. This should keep the trade from becoming heavy sellers especially late week. If the downside is to be visited it would have to be Tuesday and Wednesday. There is still a good chance to see new lows under 2.34 basis Dec. futures as harvest begins in earnest mid Sept. and continues into late October. With talk of good yields in the eastern belt states and better than expected in the western belt we could price in a supply side harvest low of around 2.25 to 2.20. This would be a dream price area to begin buying long term for what could be a decent demand driven rally into spring. Of course if the Sept. 12th report gives us a bullish surprise it is not unthinkable that our current 2.34 low could hold as our season's low. The long term bull trend on demand comes mainly on the thinking that ethanol production is on a unlimited expansion and will continue to deplete corn reserves. We came into 2006 with 92 operational ethanol plants and 60 under construction to come on line before year's end and in need of corn reserves for inventory. The government projects 2 billion bushels of corn to be used for ethanol in our 2006-2007 period. Up 37% from this past season but the key is not usage as much as it is buying of this year's crop at harvest to build plant reserves at cheaper prices than what is expected later. In other words a huge shift from stocks held on farms and into private hands for use later. Note, ethanol users do not buy corn for feed where protein levels are important and have a shelf life, while corn for ethanol can be years old. It could be a situation by next spring that this year's big crop has people saying there is corn everywhere but you can not buy it. The last USDA report put ending stocks for the start of this year's harvest at 2.062 billion bushels. Next year's ending stocks at 1.232 million bushels. disappearance into private inventory could see ending stocks down well under 1. b.b. before planting next year. Note, on a bearish thought, higher fall spring prices could bring talk a 2 to 4 million more acres to be planted come May 2007 followed by higher ending stocks in 2008 but we will deal with that, then. Do not be caught by surprise if corn posts a hugh rally into spring planting, there is much brewing under the surface.

Bean- Thursday's weekly export sales report put a combined old and new crop season sales number at 5.90 t.m.t. It is not a bullish number but at least a friendly number. Seasonally, sales of beans pick up in October. Last week's short covering rally we called for end up at 5.69 basis Nov. futures before falling to 5.50 this week on further selling as the crop condition report improved from the week prior and this week's rains look to bring further improvement on next week's Tuesday crop condition report. This is the last week for weather to have any real effect on bean production as our pod setting stage is ending. The last three weeks have seen good rains and expectations of a larger crop and yield on our Sept. 12th crop production update is expected. there is plenty of room for further fund profit taking as we have dropped more than 90 cents since our summer high. If beans are finished we could see 5.64 near term then 5.73 but a bigger production number on our Sept. 12th crop report could set us up for a test of the 5.30.

Wheat- Thursday's weekly export sales report showed 435 t.m.t. up 11% from the week prior and 1% under our weak four week average. Not a good demand number considering last week saw three days with lows on prices that were 40 cents lower than the first week of august. If we could not sell it at the 3.80 area, we will not sell it at the 4.20 area. Interesting week. We saw a short covering rally off last week's low to 4.08 basis Dec. CBT. futures before pulling down. This past Monday saw a high of 4.08 again, then more sellers and 4.07 on Tuesday's high with sellers pushing down to 4.00 but when Wednesday rolled around the bulls slowly bought pushing us up to that 4.07, 4.08 price range only to find no sellers as sellers decided they sold enough and would wait for Thursday's weekly export sales report to see if any bullish numbers would surface. This then left locals to travel the path of least resistance, which was higher up to our resistance of 4.12. When we pushed through 4.12 we shot to 4.19 in 90 seconds as all the buy stops were hit from those who had been selling for three days at 4.08 put their stops over resistance. We called for a month end short covering rally on our Aug. 18th and 22nd report when Dec. wheat was at 3.78 to 3.81 with potential of 4.02 as about as high as we might expect but they covered right through the 4.02 and 4.12 major resistance as month end short covering was not all the trade traded. What surfaced on the rally was concern over export competing countries production being in jeopardy and talk of India's need to import large quantities of wheat at a time when global stocks are low. Australia's wheat looks to come in much lower this year on drought conditions and they compete for US business as well as Canada and selected European countries experiencing smaller crops. The question remains will demand turn to the US to fill needs or other ports of origin leaving demand here flat. Demand drives the market and as the old saying goes a bull must be fed everyday and without demand we can not sustain the rally, or can we? The wild card is, what if the large equity funds decide that they have so much money they will ignore traditional supply demand trading fundamental and bring in new rules. They may decide to price in production problems elsewhere on our markets here as if it is our production. The thinking that an exporting country having some production problems would have them turn away regular buying customers and lose business they spent decades getting is ridiculous but fund monies are at record trading levels and markets are showing they will trade fear before facts. Bulls can consider buying the Dec. 4.30 call and sell the 5.00 call for 16 cents or $800. You have 70 cents profit potential. But watch out for the downside. The spread between corn and wheat is at near record levels. Last time we were 1.72 wheat over corn we saw the spread reverse dramatically. Funds have bought back their short positions this week leaving commercial grain companies heavily long over 45 thousand contracts. Failure of demand to surface and recent hard red winter wheat state rains replenishing soil moisture as planting of this winter crop begins next week and could lead to a huge increase of planted acres, could see commercial grain companies selling futures with the corn. wheat spread too narrow 50 to 75 cents. Option players that are bears can consider buying the 4.10 put for 16 cents or $800. Downside potential on futures if this scenario occurs is to 3.68.

Tim Hannagan

Alaron Research Team

800.563.9510

thannagan@alaron.com

www.alaron.com

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