Why Today's Move Up in the Grains is Short-Term
Oct 05, 2011
Today we saw a decent run up in grain prices as the trade digested a surprising corn number with yields dropping to 149.5 from 151 last month. They also reduced total harvested corn acres by 430,000. Be careful on this number, as many in the trade are actually hoping for an acreage reduction by the USDA of more than twice this amount. As for soybeans, Informa bumped their yield estimate from 41.5 to 41.8 (the same exact number the USDA is using), but actually raised their harvested soybean acres by 70,000. Yesterday, I thought we had a few more bullish numbers thrown at the trade than most of the analyst had been expecting. STATS CAN came out with lower Canola numbers than the trade was looking for, and slightly lower All-Wheat numbers. That was followed up by the US Grains Council (USGC) concluding its tour of China's key production area. After taking 300 plus samples their data actually concluded that China would have another record corn crop of 167 million metric tons, which is basically an increase of approximately 9 million tons over last year's crop. The good news is this was well below the 178 million metric tons the USDA currently has estimated. The specifics of the USGC survey projects a corn harvest area of just over 74 million acres and a yield of just under 86 bushels per acre. More good news was the fact the USGC still believes China’s production will be insufficient in meeting their projected domestic demand. The Grain Council's thoughts are that China has drawn down its corn stocks the past few years to areas well below its 25% comfort level. Therefore, China will need to import to fully satisfy domestic demand and rebuild their surpluses. Based on the new data the USGC is now estimating import demand from China will be somewhere between 5 and 10 million tons.
If we are talking about the "outside" markets you simply have to look at recent downgrades by Goldman Sachs, who just downgraded the economies in both Germany and France, thinking that they are both going to fallback into a recession. In addition, JPMorgan came out and downgraded their growth estimates in Brazil. Moody's decided they needed to get involved and has now downgraded Italy as well. The bottom line is that the US seems to be doing better, but the rest of the world is now "going to hell in a hand basket."
As I said in this morning’s report, we were due for some type of short-term bounce, which we got today. I still believe we are oversold, I am just not sold on the fact that the bottom is in. The winds in Europe may have shifted, but I promise that fire is still not out. Our best hope is for a better than expected US jobs report on Friday. If we can show that we have added 150,000 plus jobs the US stock market might really pop to the upside, US Treasuries could fall under some heavy pressure on reallocation, and we could end up with a little wind behind our sales. If the job data disappoints then all bets are off, and I would have to imagine we give back all of the short-term gains.
I continue to be hesitant trusting any rallies at this juncture. If you are a producer, I know your basis is beginning to jump, if you are thinking about selling some grain, I would get with your advisor and design a re-ownership strategy that fits your needs.