What Happened to the Grain Markets and Why?
Jan 07, 2011
I fielded a ton of calls the past few days from farmers who have been worried about the recent set-back in the grain prices. If you are getting our daily report, then you were privy to our timely "Cash Sales" that we made late last Friday and early Monday morning. These were small sales, but none the less very timely.
I followed that up with a small story on Tuesday that you can see below:
Farm Direction Daily Report (small section of the report)
Tuesday, Jan 4th 2011
I will call it a "Self Fulfilling Prophecy". A situation that evokes a particular behaviour that makes the original conception come true. That is what is happening right now in the commodity markets. This entire fund "reallocating" or "rebalancing" act has all of the new "bulls" spooked and scared to get in the water, while the "weak-kneed" longs are scrabbling to get to the sideline. You could argue that the weather in Argentina has improved dramatically or that increased farmer selling has pressured the markets lower, but you would only be kidding yourself. The facts are the Argentine weather story is still in tact (yes, some rains and cooler temps, but heat and more dry conditions on the way), farmers are still not moving much grain, the USDA could announce record highs in demand and record lows in supply in just five trading days, massive acreage battle, etc, etc, etc... I told you on Monday when I recommended the cash sales on the open that you needed to be leery of the trade. Not for the long-term, but rather to look for a short-term setback this week "prior" to the highly touted fund rebalancing. The "bulls" may get ready to run once we get past this bearish facade, until then I have to believe the "smart money" continues to sit and patiently wait to buy the breaks rather than chasing the rallies. The "outsides" are certainly not going to help stop the bleeding.
I then commented on the Informa data after it's release:
Farm Direction Daily (small section of the morning report)
Friday Morning, Jan 7th 2011
Our friends over at "Informa" continue to be the "Grinch" of the grains. It certainly has left the "bulls" scratching their head and a little rattled by their latest estimates. For those of you who didn't see the numbers yesterday, Informa basically released the following estimates:
- They raised their corn crop estimate for China by about 4.5 million metric tons. Essentially making their numbers very similar to the numbers China's government has been putting out (172.5 million metric tons).
- They estimated the Argentine soybean crop to be at 52.8 million metric tons... This is higher than the current USDA estimate of 52. The market had been looking at numbers well below these levels as of late.
- They estimated the Argentine corn crop at 23.75 million metric tons. While the Buenos Ares Grain Exchange recently estimated the crop at just 20.3 million metric tons
- They estimated the Brazilian corn crop at 53.2 million metric tons.
- They estimated the Brazilian soybean crop to be 69.3 million metric tons... This is close to 2 million metric tons higher than the USDA's estimate. The trade is seriously starting to worry that a larger Brazilian crop will offset any types of losses from the Argentine crop.
- They estimated Australian wheat production at 26 million metric tons....this is also higher than the current USDA estimate of 25.5. They do expect about 10 million metric tons to be downgraded to feed quality wheat.
- They raised their Argentine wheat forecast to 15 million metric tons... Once again a much higher number than the current USDA estimate of 13.5 million metric tons. As you can see from the numbers above this certainly was not what the market had in mind. Considering the massive wave of bearish news and tone of the market the past few days, I personally think we have hung in their fairly well. The Informa information certainly throws up a "red flag", especially if you consider their credentials.
There is also fear now that the massive global supply of "feed wheat" is really starting to weigh on corn exports. I am hearing that several countries are upping the imports of "feed wheat" rather than ponying up for the higher priced corn.
Despite the recent reports and bearish news I continue to remain extremely bullish long-term on thoughts that the Argentine corn crop may come in much lower than the USDA or Informa has estimated, and that record ethanol production and record demand will push the ending stocks to use ratio to record lows. I could go on and on listing my bullish convictions, but I think most of you have already heard them. Right now I would continue to use the breaks in the market to get yourself in position for the upcoming acreage battle and extremely tight ending stocks.
I hope this helps all of my friends and followers get a better feel for how the market sentiment quickly changed this week. Next week is certainly going to be one for the books. Almost every trader I know is predicting either "Limit-Up" or "Limit-Down" action off the news.
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