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January 2013 Archive for Recon Ag Marketing

RSS By: Greg Wagner, AgWeb.com

Greg Wagner is president of GWX – Ag Advisors. For over 25 years, he has specialized in advising agricultural producers and end-users on marketing and risk management decisions. GWX Ag Advisors integrates fundamental and technical analysis, combined with experienced historic perspectives of agricultural markets in the decision-making process.

 

Near-term Row Crop Markets Price Prospects

Jan 25, 2013

CORN

Old crop corn contracts appear to be losing patience. There are two main fronts.  First, there is an absolute necessity for export demand to start showing some sign of gaining traction. Old crop weekly export sales, once again posted sub-par volume (5.1 Mil Bu). The abysmal export sales pace begs the question of what is going to emerge as a catalyst to change the dynamic. If South American FOB offers continue to track .50-.70 cents under the Gulf, keeping freight differentials covered, the focus shifts availability of Brazilian supply. It’s necessary for any substantive shift to foreign end-users returning to source US corn to become evident within the next 4-6 weeks. If not, the ability of price to maintain current price levels will be increasingly strained.

Secondly, corn grind for ethanol continues to vex the market. The trade’s attention this past week has centered on shuttering of capacity. However, those headlines are history. The story going forward is whether or not the worst is behind slumping ethanol production. However, a glimmer of recovery in this demand sector was presented with the EIA reporting on Thursday a modest increase in ethanol production. If margins are more likely than not to be in a bottoming plateau, as I believe is the case, then a general recovery from break-even to profitability should evolve. Perhaps gradually, but a signaled recovery is all that is required.

These are the two demand line items that remain front and center stage for the market. And if positively realized will contribute to a fundamental resiliency to restrain values from "leaking" lower. Overall, physical supply remains far too tight for bears to aggressively push prices to extremely lower levels. So, a wholesale collapse does not appear in the cards - nor does a stellar rally. A best case near-term scenario would have March corn work up into the $7.45-$7.50 Bu level over the course of the next 4-6 weeks. Support appears in the $6.90 Bu area – about $.12 Bu above the pre- Jan 11th crop reports low. 

Note: Lotsa trade chatter about corn and the 50 day moving average – it’s above the 50 DMA, it’s below the 50 DMA. For the time being, this is one technical indicator that has receded as a meaningful technical pivot point.    

At this juncture, producers retaining ownership of old crop production still have a viable marketing window. In regards to making new crop sales right now – that appears premature. The observation is made fully aware that a formidable array of resistance is aligned in the $6.00 Bu level vicinity in the Dec 2013 corn contract.

SOYBEANS

The soybean market continues to display more strength than what it is generally being credit. That’s my humble observation. Consider the pervasive trade heebie-jeebies regarding the impending massive South American soy crop. However, soy strength is being continually reinforced by a strong old-crop export pace, the robust domestic crush pace, and uncertainty surrounding the still unfinished crop in South America. In no small measure, add into this mix some very real question marks regarding logistical ability of the soy crop to be shipped in a timely fashion once the SA export pace ramps up in the March/April time-frame.   

Now setting aside old-crop soy fundamentals for a moment, the technical picture provides a glimpse of both the challenges and potential pricing opportunities ahead. Presently, March soybeans are trading within a "descending triangle" chart formation.  This formation is defined by a descending trendline originating from a high of $15.45 Bu posted on Nov 1st and a secondary high posted at $15.01 Bu posted on Dec 17th. In the past week prices, rallied up to $14.6075 Bu and tapped against the established down trend resistance on Tuesday, Jan 22nd. The subsequent price retreat was modest – a break of 45 cents Bu to $14.15 on Thursday, Jan 24th- roughly a 3% decline.

The second element of the formation, the area of support, is in place at approximately $13.50 Bu. This is a level of price support that extends back to June 25, 2012. It coincides with the upside "breakout" that marked the start of the drought rally of 2012. In the intervening 7 month period this $13.50 Bu level in March soybeans level has been tested and successfully held on a handful of occasions. Most recently, on Jan 11th – the day USDA released a quartet of major reports. Noteworthy, this most recent test was accompanied by a huge spike in volume. High volume sessions accompanied by price/trend reversals are significant reference points. The volume surge serves to reinforce the $13.50 Bu level as one of major support.

Trendline resistance presently at $14.52 Bu and support at $13.50 provides a large window in which prices can navigate. So, this classic chart pattern defines the major price parameters to expect near-term.  However, the range in which price can maneuver within this pattern will progressively narrow.  Consequently, a breakout of the range is assured – whether up or down. An upside breakout projects the next major resistance at $15.00 Bu basis March. A violation of the $13.50 Bu area, points to values to gravitate to the next major area of support at $13.20.

March 2013 Soybean Contract

SH13 Chart

With due consideration of known fundamentals, a move through resistance at $14.52 Bu is a more plausible scenario than a descent beneath $13.50 Bu. Bottom-line for producers is that patience should be rewarded.  And while you wait, it is wise and advised to get some short-term risk insurance on in the form of short-dated soybean put options.

A Rising Tide Lifts All Boats

Jan 18, 2013

There was nothing contained in the Jan crop reports that signal the dawn of a new bull market in corn, soybeans, or wheat. However, price action following the numbers presented by the USDA has been more than enough to confirm that the market has fundamentally shifted its price bias posture from negative to a neutral/positive. Now that the reports have established a working benchmark for the trade going forward, the most compelling questions for producers and end-users alike is the magnitude and endurance of the strength seen in values, thus far. It’s important to recognize that it is corn that has firmly established itself the value leader for the next several weeks – it will set the price tone. Soybean price prospects hinge on a finish to SA production, the extent in which the pace of exports can be modestly sustained with the advent of SA soy crop availability, and whether the exceptional US crush pace continues. While wheat has some intrinsic price positive fundamentals in place, its prospects will be in no small measure tethered to that of the row crops.
 
Necessary Backdrop
Given known fundamentals prior to the report’s release - prices were out of line. Leading up to the report’s release March corn had traded down to levels not seen since July 11, 2012, March soybeans were trading where they were at on June 19, 2012, and Chicago March wheat, June 26, 2012. All represent the lowest levels since their respective contract highs were posted amid the Drought of 2012.
 
Had USDA’s numbers reasonably fallen in line with trade expectations, in other words been deemed "neutral", then the  expectation of seeing some kind of price strength, however meager, was well within reason. So, while it can’t be quantified, a modest part of this rally can be attributed to markets simply responding to oversold conditions. The proverbial "dead cat bounce" was in the offing. If futures markets are anticipatory, then this is one in which it already appeared to be leaning just a tad too far ahead of its skis going into the Jan report.
 
While all the grains were coming out of the gate of the reports in an oversold condition, it is the corn market trumped both soybeans and wheat. And it’s fitting, since it also received the keenest focus by the trade leading up to the report. Neither soybeans nor wheat had the quantity and potentially extreme quality of variables up for grabs in the supply/demand balance sheets.
 
Corn Fundamentals Now Positively Alter Price Dynamics
Keep in mind that  USDA’s Dec 1 stocks numbers of corn, soybeans, and wheat all fell below average trade expectations – by 180 Mil Bu, 14 Mil Bu, and 18 Mb respectively. And it was corn that displayed the widest divergence from expectations versus actual in the most critical metric – percentages. At 8.030 Bil Bu the number dropped out of the low end of the range of trade expectations - off by 2.2% (180 Mil Bu). Despite Final 2012 row crop production numbers exceeding expectations, they are now a moot point in the price discovery process.
 
The rubber hits the road at the bottom-line of the S&D balance sheet – end stocks. Once again, intolerably tight corn end stocks are now even more so. After incorporating the 300 Mil Bu surge in Feed & Residual generated from the grain stocks report, USDA’s forecasted 2012/2013 corn end-stocks level of 602 MB represents an extreme drop of 6.95% from the Dec report. And results in stocks-to-usage ration dipping to 5.3%. What was an intolerably tight end stocks level, is even more so. Available corn supply is below pipeline levels and demand rationing must occur.
 
Candidates and Non-Candidates for Rationing Corn Demand
Trade expectations for demand rationing are focused on two line items on the demand side of the ledger - corn grind for ethanol and exports. The issue of exports was addressed in the Jan WASDE with USDA’s aggressive and not unwarranted 200 Mil Bu cut in corn exports from 1.150 Bil Bu to 950 Mil Bu. Do not look for another corn export forecast reduction in the USDA’s Feb WASDE report scheduled for release on Friday, February 8. Been there, done that, and there is every reason to believe that the forecast incorporates both the abysmal export sales pace to date, while allowing for the fact that there remains too much time remaining in the marketing year to further force export sales prospects even lower.
 
However, what has moved to center stage as the primary vehicle for reducing the pace of corn consumption is corn grind for ethanol. Despite a pronounced reduction in ethanol production, in tandem with profitability, and a ramping up of Brazilian sugar cane based imports – USDA’s forecasted 4.500 Bil Bu corn grind for ethanol has proven resilient to any downward adjustment. The extent that blenders utilize an estimated 1.9 Bil Gals of banked RIN’s in lieu of actual physical ethanol purchases/consumption is yet unknown. And it is of the greatest consequence to the ultimate level of ethanol production. The fact that gasoline consumption is tracking in a pronounced downward trend aggravates ethanol use prospects in 2013. It’s a rather, er shall we dare say, a fluid situation.
 
The "straw man" – residing on the supply-side of the balance sheets is corn imports. I have run out of fingers and toes to count the number of news items attributing some day-to-day corn price weakness to real or imagined increased corn imports to the US from Brazil.  Despite the fact that this is likely the most outsized bogeyman of the US S&D corn dynamics, it may return, with even less credence that it was being presented in the past.
 
Corn - Near-term Price Prospects     
March corn has technically transitioned out of its pre-crop reports oversold condition. Given the fundamental shift of the Jan crop reports, price breaks look to be supported ABOVE the $7 Bu. I wouldn’t look for March corn to print a sub-$7 Bu price near-term. Strong resistance is clustered in the $7.60 Bu-$7.70 Bu area. It’s going to take the introduction of some constructive demand news to get through these areas. Producers need to keep daily track of their local basis levels to optimize cash sales of old crop corn. As always, some reasonable downside price protection on unsold production should be in place. Options, short-term, provide the most attractive approach, in my humble opinion.

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