What the Outside Markets Are Telling Us
Mar 20, 2012
The "Macro" traders seem to be a little more concerned about overall Chinese "demand" after seeing reductions in auto sales, some less than anticipated housing and mortgage numbers, BHP warning that demand may be slipping, and rumors of more Chinese protest. This has obviously caused a few larger traders to pause briefly in order to rethink overall Chinese growth and commodity demand moving forward. As we progress this week here at home traders will eagerly await additional manufacturing data out of China (PMI), along with more detailed data from the US housing sector. Some analyst want to suggest a more concerted effort is being put forth by the funds to square up positions ahead of next weeks potentially highly volatile USDA report. As you would suspect, a move of this nature could cause some long liquidation to be seen in both corn and soybeans.
Talk that managed-money has added about 135,000 long soybean contracts in the past six weeks, does have me a little concerned, and may be the best argument for downward price action. Keep in mind the largest "managed-money" net long position ever reported was back in 2006 at just under 180,000 contracts. It certainly makes you wonder how much more "dry-powder" the funds are willing to risk and throw into the soybean market. If they push to the upper limits of 180,000 long we could see prices approach $14.50 or maybe even higher down the road. On the flip side though, if they get spooked prices will struggle to show additional gains and could break under lack of additional money-flow. Our best hope is for the "outside" markets to signal some additional thoughts of "QE3" and a weaker US dollar in hopes of further enticing the funds to enter the water.
In regards to money-flow, I thought it was interesting and should note just yesterday morning there were several analyst waving the bearish flag in regards to Friday's reported drop in "Open Interest," only to have those ideas squashed by the CME Monday afternoon when they corrected the misguided numbers. From what I am told it was first reported that open interest in corn had fallen by -13,000 contracts on Friday...yesterday that number was revised to correctly show a positive gain of +7,600 contracts in corn open interest. Similar data was reported in soybeans, where traders were at first told open interest fell by some -5,000 contracts only to find out it had jumped higher by +2,000 contracts. Wheat was thought to be down some -10,000 contracts, but was actually off by less than 1,000. My guess is following this break the CME will now be able to lower "open interest" with much more confidence.
*As for today however the "bulls" are being sidelined by thoughts of a potentially rougher landing in China along with a possible reduction in overall Chinese demand. Some improved weather conditions are also being digested as additional rains in many previously dry US growing regions provide the "bears" with something to cheer about. Backing up these thoughts the USDA recently reported the Kansas winter wheat crop at 54% "good-to-excellent," which is much better than the 27% rating seen last year. While in Texas, where some areas received close to two-inches of rain last week, the ratings improved one-notch to 34% "good-to-excellent," while Oklahoma reported wheat 70% "good-to-excellent" compared to 66% last week. Some analyst are even going as far a as saying an early harvest of soft red wheat while help ease the extremely tight corn balance sheet. Texas (33% planted), Georgia (19% planted) and Louisiana (39% planted) all reporting corn planting well ahead of their historical pace. I am not saying things are perfect out there, but the trade certainly wants to believe things are improving to some degree. Producers should remain patient and let the Funds catch their breath. We have made good cash sales on the rallies and have adequate hedges in place. My thoughts are as farmer selling dries up on the break we may see the basis in both corn and soy make another push higher.
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