Broad Sell-Off in Commodities and Grains
Mar 06, 2012
The "Macro" traders continue to focus on yesterday's news out of China, as their economic growth estimates fall to levels not seen since 2004. This was also confirmed by reports that new car sales in China have now fallen by 3% during the first two months of the new year, and that home values have fallen to new 19 month lows. I would suspect the Chinese slowdowns will continue to be the topic of discussion and on the minds of many traders, at least until we see more pressing news from the European Central Banks and details about the Greek bond swap deadline set for Thursday. After that we have the US employment data and USDA numbers on Friday.
In a nutshell I am thinking the "outside" markets may continue to take on a more negative tone at least until later in the week. Keep in mind Apple stock continues to control the overall price direction of the S&P500. With the "iPad 3" scheduled for release this Wednesday we could start to see some more volatility, especially if fund traders try their hand at a "buy the rumor / sell the fact" type trade strategy. Just something to think about! In any regards the "outside" markets are providing a strong headwind, unless the US dollar comes under pressure I would suspect we will spend most of the day in the "red" across the commodity sector. It has eased back some off its overnight highs so there is hope.
Many Ag traders are now eyeballing more specific remarks made yesterday by China's National Development and Reform Commission. From what I heard their top economic planner said China would expand imports of agricultural commodities deemed to be in short supply, and highlighted the need for stockpiling corn, cotton, rapeseed, pork, soybeans and sugar. There was also talk from China’s top producer of livestock feed (New Hope Group) who seems to be pushing for China to reform their corn "import" program by dropping shipment quotas and raising the amount Chinese importers are allowed to purchase. Obviously the magic question is "WHEN"... Remember China's minister of agriculture, just last week, reported by state radio that he expects total grain production in China to fall from 571 million tons in 2011 to just 525 million tons in 2012, basically because of poor weather conditions, as well as higher labor and fertilizer costs. In a nutshell the funds seem excited about the thought of China more aggressively importing corn and may soon take on a more bullish tone.
In light of the news, we maybe start to see some unwinding of the highly popular "long Soybean vs. short Corn" trade that had been producing nice profits. At this juncture, I do NOT like the thought of being long soy over corn. That strategy has performed nicely as of late, but I feel it may have temporarily ran its course. "IF" some additional Chinese corn purchases are announced in the next few weeks, I think will start to pop. I am not taking anything away from the extremely tight soy carryover, I am just thinking the soy trade might have gotten a little ahead of itself. I am also thinking we may see some profit taking as we head into Friday's USDA report. The funds have added some length as of late and the soybean markets have produced some nice gains, the funds might feel it is time to bank some profits.
There has also been a ton of talk as of late about about the recent run up in soybean prices and how we desperately need to buy more US soybean acres. As I reported last week, gross margins in many parts of the corn belt are now extremely close for both crops. Obviously many producers have already completed early field work, and many have been applying fertilizer and prepping the fields to plant corn, therefore I doubt we will see any real significant flip-flopping of acres. Several producers I have spoken with though are seriously considering making the switch to more soybean acres on fields that have not been prepared, especially since there is the belief we are once again going to see some extremely volatile wether conditions this growing season here in the US. If this is the case planting soybeans seems to be a lot less risky in regards to yield and certainly less of an investment. Below is a simple cost of production model that has been circulating, as you can see profitability on each crop is now extremely close to one another. These are just broad range estimates based on yesterday's close:
Estimated Corn Profitability (Illinois/Iowa)
Cost per Acre = Between $800 - $900
Yield per Acre = 170 - 190
Cost per Bushel = around $4.70
DEC12 Corn Price = $5.70
Avg New Crop Basis = minus $0.30 cents
Flat Cash Price = $5.40
Profit per Bushel = +$0.70
Profit per Acre = around $126
Estimated Soybean Profitability
Cost per Acre = $450 - $520
Yield per Acre = 40-50
Cost per Bushel = around $9.70
NOV12 Bean Price = $12.90
Avg New Crop Basis = same as corn, minus $0.30 cents
Cash Price = $12.60
Profit per Bushel = +$2.90
Profit per Acre = $130.50
Money-flow certainly doesn't seem to be a problem as of late, in fact many in the trade are talking about how so called "hot money" purchased 100,000 plus Ag contracts last week...this is leading several analyst to report "Ag Investing" is back in "vogue." More specific data from the CFTC showed that "Managed Money" actually increased their bullish bets on the agri-commodity complex by pushing their total net long position to 639,688 contracts for the week ending February 28th, up 123,717 contracts from last week, making it the largest week-on-week increase since August of 2011. It was good to see that Managed Money actually reduce their net short CBOT wheat positions by over 9,200 contracts last week, even though they are still thought to be net-short about 48,000 contracts, it was actually the biggest weekly reduction in short positions in over four months. I also thought it was interesting to see Managed Money increased their net long position in Soybean Oil by almost 35%. They are now net long over 37,200 contracts, their largest long position since late this past summer. There is also now talk that Managed Money has increased their net long soybean position by almost 200% this past month...WOW!
I am hearing more talk as of late that world wheat ending stocks may actually start slipping in the months ahead. Here at home some reliable sources are talking about more "spring wheat" acres being taken out of production in order to plant more corn. There is also some speculation that "winter wheat" acres in a few areas will be plowed under in order to prep fields for more corn planting. The bottom line is even though we are currently sitting on record supplies we may soon start to see more wheat acres switching to more profitable crops in all areas of the world. Along these same lines I am also hearing that US rice producers may be entertaining thoughts about switching some rice acres over to soybeans.
The trade seems to have tired of the South American weather story as of late, but seems much more interested in "DRY" conditions in select parts of China, Canada, Europe, Ukraine, Russia, Kazakstan, South Africa, Mexico, etc... On the flip side, recent heavy rains in parts of Minnesota and the Dakota's are improving the soil moisture levels and increasing the odds of a good crop.
*As for today's price action, it seems that after hearing confirmation from China that they are in fact slowing, along with horrible Service PMI reports yesterday out of Europe maybe slowing global economic growth does actually matter. You certainly have to believe the momentum traders might be caught "offsides" here, the question is will the big money continue to buy the breaks. My gut tells that trend might be ending as well. For weeks every dip was met with heavy buy paper, I am not so sure that will be the theme moving forward. We are definitely at a fork in the road, I encourage you to continue watching the US dollar as it will dictate long-term price direction. We made some good soybean sales yesterday in the $12.98-$12.99 range and will be looking to pull the trigger on a few more bushels on a move towards $13.20. Several producers also made new crop cash corn sales against the Sept delivery around the $6.00 level. These seem to be good early sales if you can get theme booked. I would suspect most of the day will be spent on the negative side of the fence so be patient.
*There seems to be some more rumblings and rumors circulating in regard to corn seed availability. A couple of good sources have now told me that Monsanto's seed has arrived and there seems to be very little shortage in their supply line. On the flip side I have heard Pioneer corn seed supply out of Argentine maybe short by 30-40%. I couldn't confirm the accuracy of these remarks, but thought I should pass along what is starting to circulate in the trade.
*It looks as if the Argentine dock worker strike has ended, but now I am hearing talk that the truck drivers will be going on strike next week...What a mess!
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