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EHedger Report

RSS By: Dustin Johnson

Dustin works with a wide net of large producers throughout the Midwest. His analytical market approach and objective hedge strategy development is specific to the needs of every individual.

EHedger Afternoon Grain Commentary 5/11/12

May 11, 2012

Grains had a heavy selloff which can mainly be explained by liquidation.  Old crop July soybeans were sharply lower on the close settling at $14.06 (down 49 ¼ cents)!   November soybeans closed 37 ¾ cents lower at $13.21 ¼.  July corn closed 6 ½ cents lower at $5.81 and December closed 2 cents lower at $5.05 ¼.  December corn traded with a 4 in front of it for the first time since December 17th 2010!  July wheat dropped 4 ¼ cents to close at $5.97.

Liquidation seems to be the most obvious answer.  We had a bullish soybean report yesterday and yet July soybeans finished 72 ¼ cents lower on the week!  The key reversal from May 2nd has held and we settled below the 50 day moving average today (see chart).   

Chart: July Soybeans

July Soybeans

July corn closed 39 ¼ cents lower for the week as CIF basis is starting to come off its highs and we had a "bearish" USDA Supply and Demand report yesterday for old crop corn.  It looks as though all the grains are liquidating which could be the funds pulling out of the market.  This is especially a concern for soybeans given the amount of net longs the "managed money" is currently holding.  As of Tuesday they lowered their net long position by 23,561 contracts but are still holding a net 275,328 long contracts using futures and options! JP Morgan has lost $2 Billion in credit derivatives trading is adding to the fears that the funds may be in trouble.  JPM CEO Jamie Dimon even said the losses "could get worse" when talking about the recent error by JP Moran’s proprietary trading.  If this goes to a "risk off" situation we could easily see another washout in this mega long position the "funds" are currently holding and result in another sharp drop in price.

Monday we have crush, export inspections, and crop progress.  This summer is just getting started and we would not be surprised to see further choppiness next week.  If you would like to go over your positions again, please give us a call.  Have a great weekend!

USDA Report Comments:

The USDA report caught the market a little off guard after raising old crop corn carryout on the May report.  The average estimate for the 2011-12’ corn carryout was expected to be 749 million bu with a high guess of 801 from the analysts.  Instead the USDA raised the carryout to 851 million after lowering "Feed and Residual" demand by 50 million. 

The May Supply and Demand report is the first monthly report where we get to see the USDA’s new crop estimates (2012).  The USDA is estimating that the total ending corn carrout for the 2012-13’ marketing year to be 1.881 billion bu while the average analyst was calling for 1.714 billion (9.7% higher than the average guess).  Now there are a few that disagree with the USDA’s average corn yield of 166.  The USDA accounts for these numbers with the following statement:

Planted acres reported in the March 30, 2012, "Prospective Plantings."  For corn, harvested acres projected based on historical abandonment and derived demand for silage.  Projected corn yield based on the simple linear trend of the national average yield for 1990-2010 adjusted for 2012 planting progress.

Source: http://www.usda.gov/oce/commodity/wasde/latest.pdf

So basically the USDA accounted for the unseasonable planting pace.  Even if they dropped that a bushel to get to trendline yield we are still looking at a massive carryout for next year.  The real question to ask is: are we really going to use 1.125 billion bushels more than we did last year at these prices?  In our opinion this demand may come in if/after the price drops.  This of course is barring any weather concerns that could hinder production this summer.

On Thursday the Soybeans received a "bullish" reaction from the report but we were quickly overshadowed any enthusiasm with today’s liquidation trade.  The big surprise on the report was the new crop carryout estimate at 145 million bu (estimated 170).  To get this the USDA is using a 43.9 average yield and increasing exports by almost 200 million.  We have started off the new crop year with exceptionally high export sales.  We can add another 1.360 million MTS of new crop sales to the books after Thursday’s favorable export sales report.

The "bearish" corn and "bullish" soybean report has pushed the corn/soybean ratio to a new high of 2.68 to 1 and has backed off to 2.62 to 1 today.  The market has done all it can to encourage more soybean acres but we won’t get a definitive answer to exactly how many until the June acreage report.

November Soybeans to December Corn Price Ratio:

Nov Soybeans to Dec Corn

Total wheat production was slightly higher than the average analyst guess.  Old crop carryout was slightly lower than the average guess.  World carryout was reduced sharply after the USDA estimated a sharp increase in foreign feed usage.  The total "domestic feed" demand category went from 137.89 MMTs in April’s report to 147.64 MMTs in May’s report.  This brought ending world wheat carryout down to 197.03 MMTs (the estimate was 205.4).  Feed wheat has been a hot topic as it has traded at a discount to US corn for much of the year.  World corn ending stocks jumped to 127.56 MMTs (average guess 122) after corn feed usage dropped by 3.75 MMTs in large part from the switch to feed wheat around the world.  This large increase in feed wheat wasn’t expected due to the sharp difference in carryout from estimates. Since Thursday’s report the wheat has stayed supported against corn which could also be a sign of liquidation as the funds were "net short" wheat.

Going forward I expect new crop corn to continue finding resistance on rallies as long as weather remains favorable.  We like remaining with the current EHedger recommendations but we always encourage you to double check your positions in AMMO.  I have included a snapshot of today’s report in the table below.  To receive a free trial of the EHedger research including hedge recommendations, as well as a free trial of our farm management software AMMO, please sign up using the link below..  Have a great weekend!

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USDA Estimates:

 

USDA U.S. Wheat Production
  Thursday 2012-13 Estimate Average Range 2011 Production  
All Wheat 2.245 2.196 2.054-2.282 1.999  
All Winter Wheat 1.694 1.634 1.499-1.707 1.494  
Hard Red Winter 1.032 0.99 0.880-1.068 0.780  
Soft Red Winter 0.428 0.413 0.307-0.454 0.458  
White Winter 0.233 0.231 0.214-0.267 0.256  
           
USDA U.S. Grain, Cotton Carryout
  Thursday 2012-13 Estimate 2012-13 Analyst Estimate Thursday 2011-12 Estimate 2011-12 Analyst Estimate April 2011-12 USDA
Soybeans 0.145 0.170 0.210 0.221 0.250
Corn 1.881 1.704 0.851 0.758 0.801
Wheat 0.735 0.805 0.768 0.781 0.793
Soyoil 2.225 n/a 2.565 n/a 2.290
Soymeal 300,000 n/a 300,000 n/a 300,000
Cotton 4.90 n/a 3.40 3.40 3.40
Rice 27.0 n/a 34.0 n/a 39.0
           
USDA World Carryover      
  Thursday 2011-12 Estimate April 2011-12 Estimate      
Wheat 197.0 206.3      
Corn 127.6 122.7      
Soybeans 53.2 55.5      
Soymeal 7.50 6.89      
           
USDA World Grain Production      
  Thursday 2011-12 Estimate April 2011-12 Estimate      
China Corn 191.8 191.8      
South Africa Corn 11.5 11.5      
Argentina Corn 21.5 21.5      
Brazil Corn 67.0 62.0      
Australia Wheat 29.5 29.5      
Argentina Wheat 14.5 14.5      
EU 27 Wheat 137.4 137.5      
Canada Wheat 25.3 25.3      
China Wheat 117.9 117.9      
Russia Wheat 56.2 56.2      
Ukraine Wheat 22.1 22.0      
Brazil Soybeans 65.0 66.0      
Argentina Soybeans 42.5 45.0      
China Soybeans 13.5 13.5      

 

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Best Regards, 

EHedger 

866-433-4371

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Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. The market information contained in this message has been obtained from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. Market information may not be consistent with current or future market positions of EHedger LLC, its affiliates, officers, directors, employees or agents.

 
 
 
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