Bullish Fundamentals; Bearish Outside Markets
May 23, 2011
Bullish Fundamentals vs Bearish Outside Markets! The markets were quick to add additional weather premium as we opened the session Sunday night, but those premiums quickly faded as more bearish news and continued evidence of a global economic slowdown were unveiled. The question has to be when will the "fundamentals" in the Ag markets prove to be too much. When will the Ags bust free from "outside" pressures and take a leadership roll. I have to believe we are getting extremely close, as several specific contracts have been able to gain ground despite the negative influence of the outside markets. Just take a look at the July corn contract. This contract has exploded higher the past few days despite the weight of the US Dollar. You have to believe July corn would be even higher if it were not for the outsides weighing on the trade. I believe the US corn market is questioning the USDA ending stock numbers right now. The trade seems very content on building more premium into the price as many inside the industry contend that the strong domestic corn basis means that corn demand is still surging higher, and that we may actually be seeing first hand confirmation that last year’s corn crop was actually overstated by the USDA. Extremely poor grazing conditions have now placed an abnormally high amount of cattle on feed also sending into question the USDA's assumption that corn being used for feed would fall substantially during the March-August time frame. With wheat feeding no longer an option, you would have to think the USDA might be forced to rework a few numbers. You also have to figure that with July corn trading within $0.25 cents of its highs and end-users willing to pay $0.50 to $0.60 over in some areas, that $8.00 corn in fact will pencil for many of them. With that being the case you would think the July contract will try its darnedest to reach those levels. A print of $8 might also prompt a little more selling by the producers and pressure the market some short-term. Obviously, I have no crystal ball, but if you take the current flat price and add the basis premium being paid in most parts, you have to believe fair value is somewhere close by.
* I would imagine soybeans may become extremely volatile these next couple of weeks as traders try and figure out if producers are going to take "preventive plant" or make the switch to more bean acres.
* If rain is added to the forecast for Northern Europe or Russia you may see these grain markets set back, however I highly doubt we stay their very long considering the recent demand and surge in the both the corn and bean basis. Short-term set backs from outside market pressure and weather adjustments should be anticipated, but the overall fundamental direction for corn still seems to be much higher. Look for the "outsides" to have some bearing and effect on determining overall direction, however bullish fundamentals should eventually win out. As long as the "cash" markets continue to pace the field I feel much more comfortable about longer-term price direction. Remember, it is when the cash starts to drastically diverge from the futures that you have to start wondering about a "bubble."
* Many in the trade now believe that "old crop" corn is undervalued at or below the $7.25 level, and "new crop" is undervalued at or below the $6.45 level. Thoughts are that "wheat" may be undervalued or a hypothetical floor may be in place close to the $7.50 level based on current global weather conditions. If weather issues continue a wheat run closer to $10 would not surprise me. Aggressive producers may want to consider re-owning at or below these levels mentioned above with some type of limited risk strategy. I continue to preach not buying into the rallies. Only use the rallies to buy puts if needed.
* Despite the recent rally, many of the big boys are still deeply concerned that most recent US macro numbers have suggested a significant deceleration in US growth, further confirming a belief that the flow of "new" capital into the commodity markets maybe start to ease in the months ahead. There is also further confirmation that this may be happening as well in the emerging economies.
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