Why the Outside Markets Have Me Concerned
Mar 14, 2012
The "outside" markets were a little concerning this morning. There were some comments made in closing session by Chinese Premier Wen Jiabao that has the trade thinking the Chinese government will NOT ease policy terms in order to help out their falling housing sector. Keep in mind, many analyst believe the Chinese housing sector is in the beginning stages of a "bubble" similar to what we have recently experienced here in the US. Without help from the Chinese government, many money-managers will deem the short-term risk of an economic slowdown more likely. Money-flow may also become more concerned about the interim short term Chinese consumption of raw materials like copper, lumber, cotton, etc... Ultimately set-backs in these sectors could spill over forcing fund managers to scale back long positions in both corn and soybeans. Wen Jiabao also said "reform is urgent." I have come to learn through the years the markets generally do not like the term "urgent," as it tends to make traders a little nervous.
We are also seeing some renewed strength in the US dollar, after the Federal Reserve failed to indicate any additional signs of QE3 ahead. This will continue to be a major debate as many analyst are thinking the US Central bank will infuse some $500 billion plus in stimulus this year. Remember, the $600 billion stimulus package back in 2010 helped propel commodity prices to new all-time highs in many markets.
In a strange twist, JP Morgan jumped the gun yesterday an announced to the world the results of their Fed "stress test." If you remember these results were not going to be released by the Fed until Thursday. Supposedly after JP Morgan put out the press release, waving their passing grade, the Fed simply felt they had no choice but to release all of the numbers. There was nothing real exciting to report, but I find it odd these parties had gotten their wires crossed so badly in regards to the release.
Here at home Rick Santorum won primaries in the two southern states of Alabama and Mississippi. The biggest loser on the night had to be Newt Gingrich, who has the deepest ties to the South, but failed to win either state. You have to believe this put Newt one step closer to dropping out of the race. Mitt Romney, came in third in both states. The trade seems to be thinking this gives the edge back to Obama as the Republicans fail to find a nominee that can pull the party together. Romney leads the Republican race with 454 delegates, more than double Mr Santorum’s, but there is still lack of conviction against a broad majority of the party.
As you can tell, I have become a little more apprehensive about the "outside" markets. Rather than believing QE3 is a definite and that the US Dollar is going to weaken I now have more mixed emotions. If the funds start to worry as well we could start to see more longs pulling risk off the table, electing to wait for more bullish waters and a more clear signal before jumping back in the pool. I am not saying it will happen in the blink of an eye here in the grain and soy markets (because of the bullish fundamentals), but spill-over liquidation in many commodities could start to weigh on our Ag prices near-term. I encourage all producers to get your sales caught up heading into the March 30th USDA report as the waters seem to shifting to some degree.
All March CBOT Ag futures are set to expire today at noon. Something I am having a hard time getting my hands around and a first for as far back as I can remember is that all three major markets (CH, WH, SH) could actually go off the board today at an inverse. If this doesn't "scream" something is wrong, I don't know what does.
I couldn't tell you if China will be buying more US corn tomorrow, next week or next month, but I can tell you something absolutely doesn't smell right. The markets are acting extremely odd and confidence in the USDA is waning by the moment. Obviously all eyes are awaiting what is expected to be a highly controversial March 30th stocks report. Some very well respected traders continue to believe we may see some "bullish" type surprises. The hope is that the USDA will admit corn exports are understated due to miscalculations of the Chinese crop and overall Chinese domestic demand. There is also hope the USDA will come clean and admit the US stocks are overestimated as well. The "bulls" are now trying hard to run with thoughts that instead of this years corn carryout being the 2nd tightest in history, it may in fact be THE tightest in history. I personally doubt the USDA will make any large adjustments or admit some type of wrong doing, therefore I am siding with "caution" and using the hype as an opportunity to "reduce" risk. Producers need to remember we grow a crop to "sell." For this reason I continue to encourage "old" crop sales followed by re-owning the board with some type of limited risk strategy in order to reduce our overall market exposure.
As for new crop corn, it seems to be all about the weather and potential to meet USDA yield estimates. There is no doubt the 164 bushel per acre corn yield that is being estimated by the USDA will be the subject of great debate as we move forward on the new crop production roller coaster ride. Many are starting to believe with already tight 2011 ending corn stocks and 13.2 to 13.4 billion bushels of usage this year it will take a yield of at least 155 bushels per acre to keep ending stocks neutral. Anything less than a yield of 155 bushels per acre and we may see an extremely nervous market. Yields north of 160 and we more than likely ease to some degree. North of 164 and we may be in for a significant setback. Anything below 155 and we continue to push to higher ground. By chance we fall below 150 bushels per acre, I am guessing we push the $8.00 print once again, maybe even higher if the "outside" markets can continue to provide strong tailwinds.
The "weather" continues to take on a slightly more bearish tone. Certainly thoughts of an extremely early and fast planting season here in the US has the the "bears" excited, but also reports about more rain in China's northeastern growing region is providing some additional resistance to corn prices. The only real "bullish" talk circulating in regards to weather this morning seems to be concerns about dry conditions having more adverse effects on some of the late soybeans in many parts of South America especially southern Brazil and the eastern parts of Argentina. This is just adding to thoughts of additional production cuts coming down the pipe.
Soybeans seem to be running into a little "technical" resistance up in the $13.55-$13.56 area. It seems like every time the May contract trades up into that area it struggles. I am going to assume it will take a close above this mark to confirm the next bullish leg, that could ultimately take the May contract up closer to $13.90. My point is don't chase this rally, wait for technical confirmation on a close above $13.56 to confirm further upside potential. For now specs should simply look for setbacks to secure any additional long positions.
We may have gotten a bit of positive news in the Wheat market yesterday as Ukraine’s government now estimates their 2012/13 wheat crop at 14 million metric tons compared to 16 million metric tons last. This could now lower Ukraine exports from 6 million to 3 million metric tons.
*As for today, I am split between two fronts. The more "traditional" grain and soy fundamentals have me leaning to the bullish side of the boat on thoughts of explosive demand from China, falling soy production in South America, and uncertainty still in regards to a US crop that the world desperately needs. On the flip side, the slight "macro" changes have me somewhat apprehensive adding to any length up in this area. I am concerned that renewed strength in the US dollar may soon start to weigh on the trade, with this in mind I believe profitable longs should liquidate and move to the sideline until a more clear "political" flag is waved. I also encourage producers to get sales made and hedges in place that will allow you to remain comfortable on a slight setback. To summarize I would say I am longer-term bullish, but believe the "outside" markets could provide a few setbacks in the interim.
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