Bulls & Bears Attain Price Equilibrium
Nov 02, 2012
As a backdrop, the prior five weeks have provided more than ample fundamental input for the grain markets to align price with fundamentals. The price response following USDA’s Quarterly Grain Stocks report on September 28th and the October Crop Production and WASDE suggests a stand-off between the bulls and bears. Looking at the pre-Grain Stocks report price settlements on September 27th for - December corn $7.3650, January soybeans $15.2375, and December wheat $8.6975 – values are little changed over the course of the past five weeks.
On balance, corn and wheat values have displayed a subtly neutral/skittish bias. While incapable of sustaining, let alone building rallies of substance, both exhibit a reluctance to enlarge the lower end of recent trading ranges. That may change sooner rather than later. End stocks for corn are simply too tight to comfortably co-exist with sharply lower values. But the demand side of the corn ledger has chinks radiating from foreign end-users dawdling demand, contraction in corn grind for ethanol, and an unrelenting economic squeeze being placed on producers across the meat sector. Cobbled together these factors are keeping rallies in check.
Prospects for world wheat values, as well as availability, need to realign more decisively for foreign end-users to begin sourcing US wheat. For that to fully develop requires time. Nevertheless, that tangible prospect of foreign demand should keep a flexible net under values. The wheat market has been patiently biding its time, but the previously noted ‘skittishness’ opens the door to values gradually widening the lower end of the trading range.
Note that back-month charts for both corn and wheat display more price constructive features than what is apparent in nearby contracts. If what now appears as chinks in the demand side of the ledger evolve into irreversible fissures in demand, confirmation would ultimately appear in the back-months. If the bulls’ were to throw in the towel - that is where it would be most prominently on display.
A significant rise in soybean values appears being held in check, in part, by trade expectations for a larger production tally to be posted by the USDA in the upcoming crop reports on Thursday, November 9th. In addition, the ritualistic trade obsession with South American weather in this time-frame is an exercise in constructing a perception of crop potential. Since the reality of crop size is yet to far over the horizon, the adage that “perception is reality” will continually apply, in equal measure, to either a bullish or bearish price bias on soy values. Given the reality of a torrid export sales pace, some higher price levels would appear warranted.
Producers are encouraged to be pro-active in both mitigating risk on unsold production. A systemic price collapse does not appear on the horizon, but ‘black swans’ never do. Your individual circumstances and risk tolerance are the best guides as the most comfortable product – futures or options. The importance of tracking your local basis level cannot be understated. While there is universal attention to price spikes on the board, conditions are ripe for similar price spikes in local basis levels. Keeping daily track of your cash basis levels is indispensable in any marketing environment.