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March 2012 Archive for Current Marketing Thoughts

RSS By: Kevin Van Trump, AgWeb.com

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

Are You Ready for the Big Report Tommorow?

Mar 29, 2012

   

As we head into Friday's highly anticipated USDA report, I find myself fielding multiple calls and questions about the planted acreage estimates and yields currently being thrown out by the USDA. As producers we want to argue that the estimates are too high, but be careful NOT to take on a speculative mindset or allow yourself to fall into the adversarial role of battling the USDA and their analysis. I am telling you now there is a very strong chance the USDA acreage estimates in all three major crops could be higher than many of us are willing to recognize. Obviously the large number of "preventive plant" acres from last year will be filtering back into the marketplace. Yes, we had 91.9 million acres of corn and 75 million acres of soybeans, but you have to remember we also had over 10.5 million acres that went into "preventive plant" because of extreme weather conditions and the inability for producers to get into the fields. If you look inside the numbers you will see the Northern Plains had over 7 million of those "preventive plant" acres. With very little snowfall and limited snowmelt up north, I have to imagine there will be a huge drop in "preventive plant" acres. Not to mention, I am hearing more talk about some additional pastureland and grassland moving into production. We also can not forget a small amount of CRP ground will also be coming back into production. Net-net, 96 million corn acres and 76 million plus soybean acres can NOT be ruled out of the equation.
 
The question we need to ask ourselves though is where will these extra acres be added? From my perspective corn acreage in Iowa and Illinois seems to be staying somewhat stagnant, while the jump in production will come from the Dakotas, Minnesota, Kansas, etc. Many sources actually show as a percentage of US corn production, states like Nebraska, Wisconsin, Indiana and Ohio have been slowly decreasing their corn production as a percentage of overall US corn. What I am trying to point out is that the corn yield estimate at 164 bushels per acre may actually be too high based on where the growth in planted acreage is going to occur. Something we need to realize though is that the USDA historically has a tendency to move yields even higher in the wake of early plantings. Therefore, the "bulls" may be highly surprised and left kicking and screaming when the yield estimates actually move higher (166-167bpa) in the next couple of months. If this play out, (higher acreage estimates and higher yields) producers will want to carefully monitor prices and may want to consider lifting hedges or re-owning bushels on the major price break, thinking that the overall yield may actually be significantly lower when the crop is finally harvested and the numbers totaled. Just for what it is worth, the past 10 years of US corn data shows an average yield of about 150 bushels per acre.
 
You have to understand, the way the USDA now equates yield estimates is somewhat different than it was several years ago. From what I have heard, the USDA had always used the previous 47 years of yields to determine their estimates, then in 2008 that all changed, as they chopped the data down by more than half. In fact there is talk circulating now that the USDA decided to throw out last year's corn production estimate (of 147.2 bushels per acre), because they deem it to be an extremely "abnormal" year. Now how in the world can you throw out the bad data while keeping the good data in the equation? I understand the triple-stack traits and improved genetics could produce a huge gain in yields, but we still have a lot of hurdles to clear, and lets not forget, some "old crop" bushels to find... of which many will argue do NOT even exist. The US Soy balance sheet may not hold as much influence over the markets as it once has, because of the massive growth in South American production, but I promise you the US corn balance sheet still holds the hammer for global corn pricing. All I am saying is be careful getting yourself overly bearish based on the fundamental "supply and demand" numbers that may be getting ready to come down the pipe. I would take on the attitude of becoming more of a bargain shopper, looking for extreme price breaks as an opportunity.
 
Soybeans continue to get a boost from lower production estimates being thrown around in South America. From what I hear yesterday an analyst with the farm-services company Lartirigoyen seems to be thinking the Argentine soybean crop may now be just 42.6 million metric tons. This is well below the USDA's current estimate of 46.5 million metric tons. Keep in mind we started out the year with the USDA estimating Argentine soybean production at 50.5 million metric tons. As you can see the market continues to chew on lower and lower South American soy estimates.
 
Here at home I have heard from several seed dealers who have been picking up corn seed and dropping of more soybean seed to producers who are making a few last minute changes. I am not sure how significant or widespread these changes are, but in parts of Illinois, Iowa, Missouri, etc... I am definitely seeing a few coaches make some last minuet adjustments to their lineup card. The biggest last minute change I have heard of so far comes from a producer in southern Illinois who is switching out 1,000 corn-on-corn acres back over into soybeans. I am also hearing from some producers who are going to flip a few rice acres over into soybeans. I took a lot of slack form a few of my trading buddies several months ago when I first threw out the thought of US producers planting 76 million acres, now I am starting to worry that number is too conservative. Unlike corn, I believe the shift in additional soybean acreage is occurring in areas that can produce good yields.
 
I am NOT turning bearish soybeans, I am just thinking fundamentally we might see a few bearish cards come out of the deck in the next couple of months that could produce a few breaks, and give spec's some additional buying opportunities. Money-flow is certainly behind this trade longer-term, but some of the funds may get cold-feet if the US balance sheet starts to look less "bullish" on more acreage and improved growing conditions. As I mentioned earlier in the report, I personally do not believe the US soy balance sheet carries nearly as big of a stick as it once did, therefore I would prefer to bargain hunt on any breaks, looking for the short supplies on the tail-end of 2012 to drive prices higher, before new crop South American production becomes a more pressing concern (that is an entirely different story).
 
There is definitely a chance the USDA report could turn out to be "bearish" for corn, wheat and even soybeans, but I am NOT going to make any hasty marketing or trading decisions on the break. If your a spec, there could be some definite bargains to be had. Producers should sit pat, this is why we have been selling into the rallies and have been reducing risk throughout the year. You have to be able to ride out the rapids when the river turns rough.
 
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather.  I know as a producer, you may have questions as to how this pertains to your farm and your marketing, especially ahead of Friday's USDA Report. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow."  Just click here -    
   


A Couple Surprises In the USDA Numbers

Mar 28, 2012

   

Many analyst are discounting the recent setbacks in both corn and wheat, but I urge you to pay close attention as volume has been brisk and both markets have now "technically" closed below their 50-day moving average. My point is, if we continue to break technical levels to the downside, the trend-following funds may start to shift more heavily to the "short-side" of the boat as the "technical" picture become more clear.
 
There are certainly some arguments that can be made by the bulls in regards to abnormally dry conditions in many parts of Europe and Ukraine, but for the most part "weather" is being construed in the market as somewhat neutral to bearish from my perspective. Here at home improved weather conditions prompted wheat conditions to move higher: In the weekly progress reports, Kansas winter wheat crops were rated 59% good to excellent which is up from 54% last week and just 31% last year. Oklahoma crops were rated at 75% good-to-excellent, up 5% from last week. While topsoil is short-to-very short on just 13% of the area vs. 84% last year. Nebraska crops are rated 71% good to excellent as compared with 40% last year.
 
Extreme "volatility" will be the norm over the next 5-7 trading days. Not only do we have the USDA "Quarterly Stocks Report" on Friday morning, which has produced a limit-move in six out of the last seven releases, but we also have the funds beginning their "roll" out of the front month as well. Talk in the trade is that "Rogers" will begin their roll this week with Deutsche Bank and Goldman ramping up next week.
 
Soybeans, in my opinion, will continue to be considered the darling of the trade, and any number released in Friday's USDA report will more than likely be spun by the funds as "bullish" to some degree. Keep in mind, we are already hearing talk that US soybean acres generally tend to fall short of the March USDA planting intentions. This gives the bulls a solid argument regardless of Friday's numbers. If the USDA comes out and says they estimate 76 million soybean acres, the bulls will be quick to point the actually number of acres planted is almost always lower than the USDA March estimate. There is also a strong tendency for the soybean stocks to be "overestimated" in the March report.
 
On the flip side, corn acres generally tend to end up being a little higher than the March planted acreage estimates, so the bears may end up holding the upper-hand in corn. There is also talk that because of the "early planting" of corn that is taking place across the US we may see the USDA continue to bump the early corn yield estimates higher, some talking the May WASDE could pencil in US corn yields up in the 166 to 167 area. Obviously this could be a little extreme, but with early planting and fairly good weather conditions, the USDA tends to quickly push yields higher. I still contend with a standard deviation for error somewhere between 8 and 11 bushels producers and traders alike can not be too quick to buy into these estimates. All I am saying is do NOT be surprised or get caught off guard by the USDA throwing extremely high yield estimates into the mix early on. I also have to believe early corn plantings will ultimately take away from soybean acres and create an even more bullish situation for soy.
 
I am not looking for any real big surprises out of the wheat numbers.  If you talk to producers up north I guess you would need to question the 13.3 million average trade guess for Spring Wheat acres. Most seem to feel it is too high, and that we will be lucky to plant much over 12.3 million Spring Wheat acres, with more and more producers opting to plant more corn, soybeans, barley or canola this year. 
 
South American soy production continues to be the talk of the trade.  Many source now thinking the USDA is 4-6 million metric tons too high in regards to their South American estimates.  Brazilian production seem to feel like 64.5-66.5 million metric tons depending on who you talk to, while Argentine production seems to feel like 44.5-46.5 million metric tons. 
 
I listed below a few of the bigger surprises that I have heard floating around in regards to the USDA numbers:
 
  • Linn Group estimating 76.7 million soybean acres, the highest in the trade. While Macquarie is on the low end at just 74 million. both of these are very well respected firms and seem to be miles apart in  their estimates. 
  • Doane throwing out the highest corn acreage estimate at 95.6 million acres. While firms like AgResource, CitiGroup and Newedge are all throwing out corn acreage estimates between 93.6 and 93.75, which is considered to be extremely low. 
  • ADM throwing out the highest All Wheat acreage estimates at 58.2 million, while McKeany is around 55.5 million.
  • Northstar Commodity is throwing out the lowest soybean quarterly stocks estimate at 1.270 billion bushels. 
  • CitiGroup is throwing out the lowest quarterly corn stocks estimate at 5.925 billion bushels. While ADM, Jefferies and McKeany are all thinking corn stocks will be over 6.2 billion bushels.  
 
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather.  I know as a producer, you may have questions as to how this pertains to your farm and your marketing, especially ahead of Friday's USDA Report. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow."  Just click here -   


 

What's the Trade Watching? "Fundmanetals" or "Macros"

Mar 27, 2012

   

The 'Macros" and the importance of the "outside" markets, as many of you know, have had a huge influence on Agricultural prices as of late. If you think for one minute soybean prices would be at this level without the funds now holding an all-time record long position you are sadly mistaken. Yes, there is a bullish fundamental story, but "money-flow" in my opinion still trumps all.
 
I like to start the report each morning with the event or events that I believe have most influenced the trade. Certainly you do not believe the few funds woke up Monday morning and found out that South American soybean production had ran into a few stumbling blocks, or that some analyst who now thinks we may go to $14 or $15 per bushel in soybeans by late May is what moved the markets. My bet is the funds took a look at the renewed strength in the euro, some better than expected economic data out of Germany, talk that the EU would continue increasing and allocating more funds to the bailout, talk from Bernanke that "QE3" is still alive and that more quantitative easing maybe needed to help stabilize the US employment situation, essentially thoughts of higher inflation and a weaker US dollar caused many managers to tweak their portfolios and take on more "risk."
 
Understand when I say, "risk on," I mean the funds are looking to add to their current "risk assets." At any given time a fund may have a certain percentage of their entire value invested in the markets. Basically a percentage will be on the sideline in cash and a percentage invested and at work in the markets. "Risk on" simply means they are adding to their riskier assets. Taking money out of cash and putting it to work in the markets. "Risk Off" therefore means they are liquidating positions and moving more money to the sidelines and or back into cash.
 
Sure analyst can sit here now and tell me the "fundamental" data is what is moving soybean prices higher, but where were you in late December or early January when you were telling me the "fundamentals" were going to drive the US stock market lower, drive soybean price down below $9 and corn below $4. Following my logic, we have remained bullish the US stock market from the Dec lows. As for soybeans, all you have to do is look back at the previous reports.  You will see on Dec 2nd I was conservatively bearish soybeans, by December 5th I became slightly more negative, and in fact, made a small cash sale down close to $11.60. However, by Dec 16th I had moved back to "neutral" soybeans, and by Dec 27th I was completely back to "bullish." At that point the traditional "fundamental" traders were telling me I was nuts. How about last year when corn prices topped $7.50 and I became bearish on the dynamics of the "outside" markets, tinkling the funds were starting to change their tune and were wanting to focus more on the European debt situation. While the "fundamentals" where still ragingly bullish, the market broke and broke hard. As one of my long time mentors has taught me "perception" is everything. The "fundamentals" can be wildly bullish, but if the people controlling the most volume perceive more downside risk than upside potential we are going to break regardless.
 
We all know that in today's world, many funds want to be invested in agriculture in some capacity. Therefore, when the "Risk On" bell is rung, the best bet on the Ag board right now looks to be long soybeans. Since many funds have been having good luck spreading soybeans against corn, we continue to see soybean prices rally and corn take a tumble on the "Risk On" type days. How long will this trend last...that I couldn't tell you, but I do know the funds tend to stick with whatever is working.  Look at what they did when they started spreading crude oil against natural gas, they drove natural gas prices right into the cellar.  
 
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather.  I know as a producer, you may have questions as to how this pertains to your farm and your marketing, especially ahead of Firday's USDA Report. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow."  Just click here -  


 

Last Chance to Bid On the Chopper!

Mar 26, 2012

 Many of us have seen the DeKalb "Chooper" that has been strolling around at a lot of the winter farm shows. As most of you know, the bike was built to commemorate the brand’s 100th Anniversary. From what I was told DeKalb teamed up with Paul Jr. Designs (of the hit TV show "American Chopper"), who crafted a custom, one-of-a-kind chopper modeled after the board-tracker style popularized a century ago. In a further tribute to American agriculture, the bike itself is powered with E-85 fuel. The iconic representation of the brand’s 100th anniversary was unveiled at the 2011 Farm Progress Show and showcased on American Chopper: Senior vs Junior on the Discovery Channel. Now, DEKALB is auctioning the chopper off, with all of the proceeds benefitting the American Red Cross. The auction is open until April 1st. As of right now the bidding has gone from $150 posted back on January 20th to $57,300 as of today. I was hoping I could count on one of our readers or subscribers to post the winning bid. If you happen to be the lucky winner, please let me know so I can run a featured story about another US producer donating to such a worthwhile cause as the American Red Cross. It's been a tough year, as rural America has been hit hard with numerous natural disasters like tornadoes and floods. That’s why I think it's nice to see DeKalb team up with the American Red Cross in order to help provide support for those in need. Even if you are not able to actually bid on the chopper, all purchases and proceeds of DEKALB and Paul Jr memorabilia from the campaign will be benefiting the American Red Cross as well. Bid On The DeKalb Chopper Today 

 

The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather.  I know as a producer, you may have questions as to how this pertains to your farm and your marketing.  You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow."  Just click here -      
     


 

Today in the Grains and a Look Ahead to Friday

Mar 26, 2012

    

The grain and soy markets are preparing for a big week, ending in a final crescendo on Friday with one of the most highly anticipated USDA reports of the year. Like many traders, I am of the belief this report will set the tone for the remainder of growing season. There are a lot of questions up in the air right now, and I would assume this report will give the trade a better idea of where the USDA is headed. Here are a couple of the more popular questions the trade is looking to have answered, I will be giving more highlights through out the week: 
 
  • Corn Acreage Estimate - The USDA Outlook number of 94 million is probably too low. I am guessing we are closer to 95 million corn acres or maybe even a hair higher.
  • Corn Stocks - Now here is a real "wild-card," I guess if I had to throw out a number I would be around 6.2 to 6.3 billion bushels, certainly tighter than last year, but not as extreme as in 06/07. There are many now talking about a sub-6 billion number, but I am not in this camp. I am thinking the average guess is just over 6.2 billion. 
  • Soybean Acreage Estimates - I am still thinking we push higher than the 75 million acres from last year. 76 million soybean acres would not surprise me. 
  • Soybean Stocks - We were at 1.25 billion last year, it seems like now most are looking for a jump to 1.35 or even 1.40 billion bushels 
  • Wheat Stocks - It sounds like we should see a number between 1.2 and 1.3 billion bushels no big surprise thought to be coming down the pipe. 
 
Soybeans continue to play the lead role. Because of the South American production losses, the world wants to see more US soybean acres. The trade believes 75 million acres simply will NOT do the job. 76 million is certainly a possibility, just as I have insinuated all along, but 78-79 million, in my opinion, is out of the question. Therefore the trade is trying to find the magic price that will actually encourage more acres and at the same time ration back demand. How high will prices need to push to entice China to dump more domestic supplies on their marketplace? How soon before they try and cool export demand? The trade continues to throw out ideas that soybeans could eventually push to a 3:1 ratio to corn. That could be something like $15 soybeans and $5.00 corn. Beans have certainly done an amazing job of gaining on corn the past several weeks, in fact the Long SX vs. Short (2) CZ corn has returned about $1.80 ($9,000) per unit since the end of January. My gut tells me we may be in for a little setback or profit taking ahead of the report on Friday, but I would suspect after the release we should start to see some renewed and extended interest jumping back into the the long soy vs. short corn type strategies.
 
*With the funds now holding a record large long position in soybeans and almost a record long short position in CBOT wheat, we are certain to see some extreme volatility this week.  If you look back to last years' charts you will see that both corn and soybeans rallied big off the USDA's end of March numbers. Personally, I believe we will see some extensive position squaring this week heading into the numbers and I am afraid it may produce some extremely wild rides in the "spreads." The weather forecast here in the US should soon start gaining more attention, but for this week all eyes firmly remain on Friday's USDA data.  As producers make certain you are comfortable with the risk you have on the table heading into the report.  Get caught up with your sales and have appropriate hedges in place.  Specs should scale back in size and prepare for extreme equity swings. 
 
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather.  I know as a producer, you may have questions as to how this pertains to your farm and your marketing.  You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow."  Just click here -     
    


 

Looking To Next Week and the USDA Report

Mar 23, 2012

   

One thing you have to remember, just because I have a more "neutral" opinion about "money-flow" it doesn't mean the Ag markets are going to take an immediate hit. I just want to make sure you understand we can still work higher, I just don't think we can work dramatically higher without the "risk-on" flag being waved across the entire commodity sector. Point being, ending-stocks could in fact move significantly lower while prices may not reach levels obtained in 2008 or 2011.  Remember, the stars must ALL align to get the extreme moves to new highs, right now I just don't see that being the case. 
 
Not only is the fund interest not firing on all cylinders, but we also have to realize, when considering total marketing year sales for each crop we are still running behind pace. Essentially meaning we could see strong US sales in the weeks ahead, but in the end see no real adjustments by the USDA in regards to the current balance sheet levels. Therefore smart money may view the "upside potential" as somewhat limited when compared to the "downside risk" that could be associated with disappointing sales numbers. 
 
It is not that I am bearish, because there are still some bullish "wild-cards" in the deck that could push us higher, I am just thinking there is more and more limited upside potential as big money repositions itself. 
 
As you can see from my ratings I have dropped back to "neutral" corn. Based on yesterday's close the May corn contract had given up over $0.28 cents from last Friday. This is probably a big enough set-back considering the size and possible implications of the USDA report next Friday. But without the help of the "outsides" and little in the way of political easing we may see the markets turn to more "traditional" type analysis. With new crop ending stock pushing closer to 2 billion, it's tougher to argue from the bullish corner, especially if many of the funds elect to sit idle. Without some bullish help form the USDA, China or the US Fed, we are left staring at 95 million plus acres of corn being planted at a record pace, and being farmed by the best producers in the world, who own the best technology in the world, and have been able to prep fields better than ever...you do the math.  I am not bearish as of yet, but we are going to need to get some help or I should say some "problems" to pop up if we are going to push significantly higher. The economy is going to have to get worse, the weather is going to have to get worse, China or the USDA will need to admit shortages, etc...
 
On a side note, I thought it was interesting that only 24-hours after Ukraine's Ag Minister announced the country will plant a record 11 million plus acres of corn, Interfax-Ukraine came out and said they think corn acres could jump some 35-40% to almost 12.5 million acres. If true this means the Ukraine could end up with a corn crop of around 32 million metric tons, or about half the production of all of Europe. Obviously that would allow Ukraine to be be extremely aggressive sellers of corn on the back end of 2012. With South America's corn production looking to have stabilized as of late on the recent rounds of rain, the world may soon have increasing supplies. It certainly all hinges on US weather conditions moving forward, so stay on your toes...
 
I am ever so slightly bullish wheat, just because the funds are leaning over the short-side of the boat and we have some near-term potential for a quick weather induce rally, especially with US price remaining very competitive. Based on the balance sheets or true fundamentals there is absolutely no reason I should be playing this market on this side of the court. With everyone leaning over one-side of the boat though and some volatile weather ahead, I am thinking the rough waters could quickly change everyones positioning.  
 
I continue to remain the most bullish soybeans for a litany of reason that I have explained in great detail as of late, so I will spare you the long winded explanation. I would however caution you about being outright long large doses of flat price soy with the unknowns taking place right now in the outside markets. I prefer being spread against either corn or wheat, and only buying on the breaks, just my two-cents, and a way to hopefully limit longer-term risk. 
 
With the major soy production problems in South America and what seems to be some type of bid beneath the corn market due to Chinese demand or miscounted bushels, I am choosing NOT to hit the panic button and I am NOT recommending any additional sales at this time. I just want to merely point out the waters are shifting to some degree and as producers and speculators we need to make sure we are taking notice, and preparing ourselves to make a move if need be. 
 
I am predicting we will get some type of US weather related rally at some point during the next several weeks, the question is where do we rally from...and how long will it last. In any regards be prepared to pull the trigger when the weather premium starts being added. I learned a long time ago, you have to be able to hit the easy pitches in order to get on base. Forget about the "cutters," the "split finger" or "knuckle ball," right now we are looking for a simple "two-seam fastball" right down the center of the plate that we can take yard in order to lock in another 20-30% of our estimated new crop production. It's baseball season folks...Cheer Up! Be patient, we will get pitch we can hit, just make sure you are ready to swing the bat when it comes... 
 
A few bright spots that could help support higher crop prices: 
 
  • Farmers moving into the fields to plant, therefore limiting farmer sales and possible strengthening the basis from here.
  • US wheat staying extremely competitive on a global scale. Much cheaper than EU wheat and right on track with Aussie feed wheat.
  • Chinese soybean imports continue to look strong.  If March import totals come in where Chinese insiders are predicting, bean imports over the past six months will be up about 10% compared to last year. 
  • Continued talk in China about a shortage of quality corn, many now estimating a bid beneath the US corn market for both old and new crop bushels. 
  • If 1Q US GDP numbers come in extremely soft (say 1.5% rather than 3%) we might see some renewed interest in QE3 talks, therefore prompting the funds to get a little more aggressive. Not the case right now, but could be down the road so pay close attention to the GDP numbers.

 

The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather.  I know as a producer, you may have questions as to how this pertains to your farm and your marketing.  You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow."  Just click here -    
   

    

 

Short Term Impact of "Money-Flow" On the Grains

Mar 23, 2012

    

As I am sure you have noticed the past few days, I have become more concerned about the "short-term" growth prospects in the commodity sector due to a lack of interest coming from "money-flow." Obviously longer-term there is still the increasing demand for food, water, energy, raw materials, etc., that can not be forgotten... Unfortunately, from my perspective there is starting to be some mounting concern or a couple of speed bumps ahead that we need to acknowledge.  
 
My thoughts are we might be able to attribute a large portion of the setbacks in "money-flow" to a change in global "leadership" that is scheduled to take place within the next 30 weeks. Not only do we have a US presidential election coming in November, but in October, China will head into a time of major transition as vice-premier Li Keqiang is expected to take over for the current Premier, Wen Jiabao, and the vice-president, Xi Jinping is expected to succeed President Hu Jintao as the party leader. Most tend to believe when a country goes through a transition of power from one person to the next, it can be fraught with tension and instability. History however generally shows that "new" party leaders tend to be focused on getting out of the gates quickly, suggesting that policies will move towards a position of growth once the new leaders are in place, but probably not before. It would be at this point that monetary policy may in fact shift towards lower interest rates and more aggressive growth. As you can imagine this environment could certainly be what the funds are eyeballing, as it would spark a fresh wave of fund buying and a push of "money-flow" into commodities. In the interim though we might see them singing a different tune. 
 
A couple of analysts from Australia & New Zealand Bank seem to be on the same page, and actually doubt the Chinese government will launch any major initiatives to spur domestic demand by helping rural migrant workers or by reforming the big state industries that dominate energy, telecommunications and other fields. Instead, they expect a few programs here and there geared toward helping small business obtain loans, create jobs in the service industry and raise workers’ wages. Basically, the "bigger" stuff would have to wait until the new leadership settles in or the campaigns and elections have passed. 
 
As leadership around the world starts to change hands, the funds may soon feel safer moving closer to the shore. Once all government guards and hired guns are perched back atop their "lifeguard" lookout stations, we may see money-managers moving back out into the deeper waters. As of right now, I am just not sure there is a ton of incentive for them to be swimming in the deeper rougher waters. From where I sit, the funds seem to be thinking there are plenty of fish to catch in much safer waters closer to shore!  Especially since the government lifeguards look to be climbing down and taking a little break from their economic watch, essentially leaving no one to throw the markets a lifeline should the waters become violent. 
 
One thing you have to remember, just because I have a more "neutral" opinion about "money-flow" it doesn't mean the Ag markets are going to take an immediate hit. I just want to make sure you understand we can still work higher, I just don't think we can work dramatically higher without the "risk-on" flag being waved across the entire commodity sector. Point being, ending-stocks could in fact move significantly lower while prices may not reach levels obtained in 2008 or 2011.  Remember, the stars must ALL align to get the extreme moves to new highs, right now I just don't see that being the case. 
 
Not only is the fund interest not firing on all cylinders, but we also have to realize, when considering total marketing year sales for each crop we are still running behind pace. Essentially meaning we could see strong US sales in the weeks ahead, but in the end see no real adjustments by the USDA in regards to the current balance sheet levels. Therefore smart money may view the "upside potential" as somewhat limited when compared to the "downside risk" that could be associated with disappointing sales numbers. 
 
It is not that I am bearish, because there are still some bullish "wild-cards" in the deck that could push us higher, I am just thinking there is more and more limited upside potential as big money repositions itself. 
 
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather.  I know as a producer, you may have questions as to how this pertains to your farm and your marketing.  You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow."  Just click here -   


 
 

Chinese Demand Really Slowing?

Mar 21, 2012

   

The market yesterday really wanted to talk about the Chinese government elected to hike their domestic fuel prices by 7%. This was their second fuel price hike in the past six weeks, and many are reporting fuel prices in China have now risen by 40% since 2008. The worry is with the Chinese economy somewhat stumbling, this will only apply further economic pressure to Chinese consumers, and in the long-run adversely affect overall commodity demand. I am not in the same camp however. I believe the Chinese government is much smarter than this, and feels the economy has strengthened enough to handle the recent price increases. I am sure they have held off on the price hikes until they were certain the economy could handle it. From where I sit, I am thinking the Chinese government has been waiting to announce the rate hikes at a time it could be best handled. What you have to always understand though is it doesn't matter what you or I think, it only matters what the market thinks, and right now the market seems to be digesting the news as negative for growth and negative for overall commodity demand. Therefore, a more "risk-off" environment has taken hold the past couple of days, prompting those who were aggressively long to throttle back some of their exposure. 
 
 
Something else we need to consider is that global fertilizer demand might be picking back up. The major fertilizer stocks were all higher yesterday despite the stock market being considerably lower. One interesting note is that Canpotex, the world's largest North American potash exporter, revealed it had signed a contract to supply between 500,000 and 700,000 tons of fertilizer to China's largest integrated agricultural company "Sinofert" in the April-to-June quarter. This announcement comes after many analyst reported demand out of China and India had been slowing significantly...I guess not.  I should also point out a recent report from Potash Corp, showed that North America's inventories actually shrank in February by more than 16,000 tons. Why I mention this is because most analyst were expecting supplies to move higher...not lower.
 
 
Also, thought it interesting to note the Heilongjiang government (in extreme North Eastern China), the largest corn producing area in China, recently reported close to 15 million acres of corn is expected to be planted this Spring. If their estimates are correct this would be about a 25% jump form last year's corn acreage numbers. There is talk that rice acreage could also expand by 25-30% as well. The thoughts are both of these crops are going to grow primarily at the expense of soybeans acres, further confirming beliefs that soybean acres in China are aggressively being reduced in an effort to increase corn, rice and wheat production.
 

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Ethanol Blend Rates and What That Could Mean To Corn Prices

Mar 21, 2012

   

There have been some rumors circulating the past couple of days that the USDA maybe getting ready to bump the ethanol/corn conversion rate higher. I have heard no confirmation, but talk has been circulating for sometime that the current USDA conversion rate of about 2.7 gallons of ethanol per bushel of corn is simply too low and is going to soon be adjusted higher. The higher quality of last year’s corn crop, and more efficient ethanol plant practices seem to be causing the trade to think the conversion rate could actually be as high as 2.9 gallons per bushel. Essentially giving you a much bigger bang per bushel. Some will tell you we could actually be producing the same number of gallons the USDA is currently estimating, but we have in fact used 400 million fewer bushels of corn to do it. As you can imagine this would certainly be considered a major curve ball to the old crop balance sheets and would dramatically change the song and dance the trade has been marching to as of late. Make sure you are in a position to handle a pitch of this magnitude. I am afraid it could be a real game changer if it were to be thrown at just the right time. Remember, the name of our position on the field is "risk manager." Our primary job is to eliminate and reduce unnecessary "risk." Be smart and constantly be searching for ways to reduce your exposure and to avoid unexpected sharp objects that might find their way onto our marketing path.
 
 

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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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Is China Really a "Smoking Gun?"

Mar 19, 2012

   

Morning Summary: The "outside" markets seem to be rather subdued, as there were very few exciting "macro" type headlines reported over this past weekend. Moving forward the trade will focus primarily on a glut of US housing data scheduled to hit the markets throughout the week. We have the Home Builders survey out today, housing start numbers out on Tuesday, existing home sales released Wednesday, housing prices reported Thursday, and new home sales out on Friday. 
 
The only real "wild cards" I see this week could come as several members of the US Fed will be speaking in various locations, and I am sure the topic of QE3 will be of primary interest. I am also thinking we might start to hear more serious concerns and debate regarding an Iranian attack of some sort. The Wall Street Journal is already projecting fuel prices out east will reach $5.00 per gallon in the next few weeks as refineries start to experience some tightness. It will be interesting to see if our economy can keep the train moving down the tracks with fuel prices surging higher! 
 
Grain and Soy traders continue to talk about "early planting" here in the US, but the trade seems to be even more concerned about whether US producers will get enough soybean acres in the ground to pick up the South American slack. To put it in simply terms, in years when US corn planting gets under way early, US producers tend to just keep on rolling out the corn acres. This has the trade worried and concerned there will NOT be nearly enough soybean acres following the unexpected production failures in South America. As I mentioned on Friday, the trade seems to be thinking we will plant between 74.5 and 75.5 million soybean acres. The analyst though are thinking, with the recent South American losses the world needs the US to plant 3-4 million more acres of soybeans. Many in the trade seem to believe this only happens if soybeans prices can rapidly gain in comparison to every other crop, prompting producers to make the switch. 
 
Personally, I am hearing very little in the way of producers switching more acres over to soybeans (I think it is too late), therefore you have to imagine the job of the market may soon be "rationing" demand rather than encouraging more acres. Either way soy prices seem as if they need to trend higher, at least until the world feels more comfortable about US production and longer-term supplies. The question then becomes how much higher will soybean prices need to travel longer-term in order to ration demand? How much higher will prices need to travel before the Chinese government starts to dump soy reserves on the marketplace? How much higher will prices need to travel if the Brazil soybean crop actually drops to 64-65 million metric tons like many in the trade are now estimating?  Is that $14, is that $15 or even $16 per bushel...who knows, but I would be willing to bet if the upcoming USDA report on March 30th doesn't show increasingly more soybean acres prices will continue to push higher. 
 
Looking deeper into corn prices, one may be scratching their head. Traditional thinking would lead you to believe with US planters starting to fire up early and talk of planting running well ahead of schedule, the market should be breaking on fears of additional corn acres and near perfect planting conditions in many high yielding locations. Obviously this has not been the case. 
 
I believe the trade is grossly discounting the improved US growing conditions in many parts of the Corn belt and choosing to focus more attention on the "Smoking Gun" in China which may be much worse than most analyst had anticipated. I have spoken in great detail about the possibilities of miscounted bushels in China. I have also included a more detailed story in today's "Perspective" section that details Chinese misrepresentation in several other major industries. It is not a matter of "IF" the crop was misrepresented, in my opinion, it is more a matter of by "How Much" it was misrepresented. Some additional rumors starting to circulate are that Chinese farmers, following last years  harvest, were forced in many locations to put corn in the bins much wetter than normal. As you and I know, this could be forcing Chinese producers to fight a much more serious "quality" battle than the trade maybe reporting.  
 

As of last week corn prices in China had surged to new all-time highs just north of $10.00. Meaning domestic Chinese corn was trading at just over $390 per ton. US corn on there on the other hand (reported by most cash sources) is trading at round $265 per ton. Delivered to the dock, or what many call the landed cost of US corn in China is said to be running about $340 per ton. As you can see, with US corn being cheaper than domestic Chinese corn, every "buying" rumor started is extremely hard for the bears to dispute considering the possibilities. There is some propaganda starting to circulate in the trade however that shows US corn prices trading at a significant premium to corn out of Argentina and Brazil and much higher than corn out of Ukraine. My point is, even though there is a "Smoking Gun" in China, they may be eyeballing or waiting on some other alternatives. Don't fool yourself into believing we are the ONLY game in town. I am still not 100% sold on the "old" crop premium and continue to encourage producers to take advantage of the premium in Sept when making "new" crop sales.                                                                   

Wheat has picked about $0.30 cents in the past couple of weeks as there continues to be some moderate weather concerns both here int eh US and globally.  US wheat continues to remain highly competitive in the global marketplace, and there is starting to be more talk in the trade about the upcoming USDA report showing a much larger wheat "feeding" number. Net-net, despite a glut of world supplies there should be enough bullish news (at least short-term ) to help keep wheat prices somewhat supported through the end of March. Dry conditions in Western Europe continue to be monitored, as well Black Sea wheat becoming more readily available and possibly more competitive in the days and weeks ahead. I continue to look for strong upside resistance in the $6.80 to $6.90 range, and would be thoroughly surprised to see us break through these levels without some very serious "weather" related premium being added.  

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Bullish and Bearish Rumors in the Corn Market

Mar 16, 2012

    

In my opinion, the corn market is also starting to be driven more aggressively by  money-flow (funds now thought to be long close to 300,000 contracts). There are valid fundamental arguments being waged by both the bears and the bulls right now, and in my opinion, both seem to have realistic defenses. Personally, I will continue to lean to the bullish side on thoughts of record tight supplies and a smoking gun in China. As I continue to reiterate, I am not wildly bullish, simply because all of the stars are not yet aligned, but I certainly prefer to play the game from the long side of the fence as opposed to the short side. 
 
Keep in mind, we are starting to get up towards the absolute high-end of our most recent technical range. I suspect the nay sayers will start aggressively adding to their short positions in a last ditch attempt to pressure the trade. I would also have to imagine some of the short-term longs will be aggressively banking profits as we approach heavy resistance in the $6.80 range. If your a spec and looking to get long I would remain patient, preferring a technical pull-back or breakout to be a buyer.
 
The rumor mills are ripe with corn stories this week, below are a few of the highlights and ones that have gained some of the most attention as of late:
 
Bull Rumor - China's corn shortages are more severe than anyone has been reporting. Government reserves are well below the current USDA levels and China is hiding a major problem. This is obviously evident by domestic Chinese corn surging to new all-time highs even though an estimated 20-25 million metric tons of feed wheat has already been substituted for corn. 
 
Bull Rumor - Reports yesterday were that Sino grain had only bought 1.2 million metric tons of corn from local crops to build reserves. Far less than what they had purchased last year at this time. This stoked the flames in regards to possibly Chinese corn imports, and the further possibility of a miscounted Chinese corn crop last year. 
 
Bull Rumor - Many sources now thinking Chinese corn situation is much worse than broadcasted. Rabobank and many others now thinking Chinese corn imports could reach 10-15 million metric tons in just the next three years. 
 
Bull Rumor - Talk of US ethanol plants out east paying over $7.00 now for corn, several sources thinking despite higher stocks the USDA is still underestimating US ethanol production. As we know this is highly debated.
 
Bear Rumor - US corn quality is so good that the USDA will soon be forced to lower ethanol usage and feed usage numbers because end-users have been able to get so much more bang for their busk out of each bushel. 
 
Bear Rumor - More talk about La Nina shifting to El Nino and possibly producing much better yields than many analyst are anticipating.  Hearing confirming talk from weather guru Elwin Taylor, even hearing some sources now throwing out national yield averages north of 170 bushels per acre.  A yield of this size would throw ending stocks over 2 billion. 
 
Bear Rumor - Talk of a warmer winter weather has the bears talking about lower corn feed usage for livestock.
 
Bear Rumor - Talk of near perfect field conditions in a large portion of the corn belt allowing many producers to impeccable groom and prep fields for what looks to be an early and fast planting. Most generally an early planting leads to a large increase in total planted corn acres. 
 
What does this mean to Producers?  As for today, the markets seem as if they will trade on both sides of the fence. It wouldn't surprise me to see a little profit taking, but I have to believe each and every break, especially in soy, will be met with additional buying interest. Look for soy to continue gaining on corn in the days ahead as the world believes US farmers desperately need to plant more soybean acres. As producers we continue to hold and patiently wait for higher prices in new crop corn. We are now about 50% sold in new crop soy and now feel extremely comfortable about waiting for a significant rally to price more bushels. Corn end-users should be covered through late summer, at which point early corn should be available to help ease any shortage that might arise. Be patient locking anything in beyond August.      
 
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Are the Funds Willing to Push the Grains Higher?

Mar 15, 2012

    

The S&P500 will take another run at psychological resistance up at the 1400 level. If you look back to the late winter and early spring of 2009 you will see it was the last time the S&P500 ever traded in the 1400 range, right before the big US stock market crash. What I find different this time around is the fact we are NOT being lead higher by the "inflationary" stocks like Potash, Mosaic, etc.., but instead by the rah-rah "tech" and "banking" sector stocks. If you remember back to the US stock market rallies of the past few decades, it seems the banking and tech sectors were definitely in play. Therefore I believe this rally is going to attract a ton of market participants and should be able to sustain some longer-term growth.
 
My concern though as of late has to do with the steep sell-off in Treasuries, Currencies, Gold, Silver, Cotton, etc., I am worried that we could start to see some "allocation" type trades or ripples in the commodity markets, eventually evoking a short-term "risk-off" type environment (not today, but possibly coming around the corner). As I mentioned yesterday, the "bullish" fundamental story in soy should help keep it insulated to some degree, but both wheat and corn could prove to be more vulnerable to harsh "outside" market influences. As more investors become comfortable with the current stock market rally we may see more liquidation in alternative type riskier asset classes (i.e. gold, cotton, treasuries, etc...), let's just hope the Ag markets don't get caught up in the "reshuffling" of the cards.
 
Any type of QE3 confirmation would help to ensure the "outside" market winds will stay behind our sails. My fear is that as each day goes by we move one step closer to the US Presidential election. My guess is the Fed will not want their hand in the election process and therefore will do everything in their power to stay out of the limelight. The takeaway is, either the Fed makes a move in the next couple of months or QE3 will be off the table. Traders will get nervous about future growth and worry that any government stimulus premium that has been added to the markets will quickly be removed. The "outside" markets will shift and we will in turn be sailing directly into a headwind. If the US stock market can keep traction and continues to move higher, the commodity markets might find themselves fighting a money-flow battle on that as well. What you need to is this, if QE3 goes down in the next few months this "risk on" rally could really start to gain momentum and push the Ag markets even higher. If QE3 is shelved we may start to fight much more serious headwinds, and the AG markets will be left trying to support the current prices on their own fundamental merits. In simple terms, there will be a lot less fund horse power available to help us push this increasing "price rock" up the hill.
 
Remember last year's analogy I used once corn prices pushed through $7.50. Commodities is a zero-sum-game, meaning for every buyer there has to be a seller. Go ask the Hunt brothers some time about what this means if you doubt may analogy. You can be absolutely dead right your theory or analysis, but if there is no one else in line to buy then price will NOT be going higher. Another way I like to look at it is like this: we started with a medium sized snowball back when soy prices were trading at around $11.50. We started pushing the snowball higher back in late December. As you can see from the chart below we have been steadily moving up the mountain. Keep in mind, as we move higher the snowball becomes much larger and much harder to push up the mountain side. In order to keep it moving we need new man-power and more guys jumping into help. This additional man-power comes not just from traditional specs, but more importantly from the "funds." As you can imagine the funds are able to bring a lot of helping hands to the party, helping us push the snowball further up the mountain. The problem is once the snowball gets extremely large and the price-mountain starts to become extremely steep we can not afford to loose a single helping hand. Understand what I am saying here, if some one gets spooked, or catches wind of a party somewhere else that looks better and leaves us high and dry, then pushing the snowball further up the hill will become next to impossible. Just understand we have to have new manpower jumping on board to keep pushing us higher. At these prices it is imperative we have to have the helping hands of the "funds." If they get spooked by NO quantitative easing or a shift in the strength of the US dollar, our traditional "fundamental" Ag traders may find themselves steam rolled and left simply scratching their head as nothing changed fundamentally from a bean or corn perspective.
 
I am certainly not saying we have reached the end of rainbow, but I am having a hard time getting overly bullish on fears that the "funds" could pull out their troops at any time. They just do not seem to be 100% convicted or sold on the Ag markets (remember, they have gotten burned as of late in Ag's). There is definitely money flow picking back up and coming into the markets, but we are no where close to seeing the environment we had last year. Until I am certain we are going to have the helping hands show up to push this baby higher, I will be apprehensive to bet on an explosive upside move. I can tell you if we see confirmation of further quantitative easing and weakness in the US dollar, there is a strong chance soybean prices could eclipse last year's high of $14.68^4, and possibly even make a run towards the '08 highs of $16.63. The fundamental story is ripe, now we just need to make sure the funds are going to jump on board. This is why I have been carefully monitoring and reporting on every move in the "outside" markets as of late, and will continue to do so in order for us to get a more clear picture. 
 
Smart traders continue to talk about the strong upside "potential" in soybeans. Be extremely cautious if you are "long corn vs short soybeans," from where I sit, you could be in for a very rocky ride. As I have been mentioning the past couple of weeks the trade all of a sudden seems to be excited about the "protein" story.  
 
Analyst continue to stick with the theme of lowering South American production. The latest reports circulating show "Agroconsult" reduced their production estimates for Brazil from 69.9 million metric tons down to 67.1 million. With lower production out of South America, US soybean prices may have limited downside risk until more is know about the upcoming US crop. Along these same lines, I thought it was interesting to hear Rabobank predicting India may soon flip form a net exporter of 4mmt of soybean meal per year, to a net importer of 4mmt in just the next five years. There is no doubting the "fundamental" soybean story is gaining momentum amongst the more traditional players. 
 
Corn on the other hand seems to still be a mixed bag of nuts. I should note that even though weekly US ethanol production fell to a five-month low in yesterdays report, output of 892,000 barrels per day is still more than I figured we would be producing   considering the poor margins and record 22 million barrels in excess supply. What is important is the fact we are still using over 95 million bushels of corn per week to produce ethanol, which is allowing many of the bulls to argue the current 5.0 billion bushels of corn the USDA is estimating may still be too low. Now we have a large group of traders who believe the ethanol number is too high because of the improvements in the grind and the ability for producers to more efficiently produce ethanol.  On the other side of the fence we now have those who believe the USDA number is too low and must be raised higher, due to the continued strength in production. My bet is the USDA leaves the number "unchanged."  
 
In what I consider somewhat of a turn around, highly acclaimed and well followed Iowa State meteorologist Elwynn Taylor went on record saying he believes the odds favor a much better than average corn yield this growing season. He also went on to reportedly say he truly believes the odds of the US having above trend line yields this season are now better than 60% in both corn and soybeans. His logic seems to be that "La Nina" appears to be turning into to "El Nino," which has the strong potential to bring much higher yields and lower prices than the previous two seasons. 
 
Despite the fear of more corn bushels being produced in the US this season, the trade seems very certain about "limited" downside risk in new crop corn. I would have to agree for the time being, but I have also learned through the years to respect the markets and never...say never.  The crowd continues to talk about huge upside potential now in new crop soy, and very limited downside risk in new crop corn. I continue to urge you to pay close attention to this shift. 
 
Wheat may gain a little strength from continued "weather" concerns in Western Europe and North Africa. "Strategie Grains" out of Europe has now cut their soft wheat production estimates by 1.6 million tons to 131.1 million. Supposedly there are extremely dry conditions spreading through Spain, Portugal, France, parts of the UK, and in ares of Norway. As I mentioned last week, we need to throw this on our radar screen, if the drought continues to intensify it will become a much bigger headline. Here at home however wetter conditions in several key wheat growing areas should help to improve overall wheat conditions. Net-net very little news to report in the wheat world, it should continue to remain a follower. 
 
*The economic calendar of events is fairly quiet for the rest of this week, so I would suspect the grain and soy markets will be able to trade on their own merit. The theme out of the gates is certainly higher as continued bullish interest in soybeans will pull the markets. With better than expected export sales the soybean market should remain strong. The May corn contract will likely take another run at the dreaded $6.66^6 resistance level, which it has had problems with on several occasions as of late. I continue to remain conservatively bullish giving the edge obviously to soy, but I am NOT chasing rallies, and I refuse to get wildly bullish until I see more confirmation of a weaker US dollar and overall increased "fund" support across the commodity sector. Producers should continue to hold waiting for higher new crop prices.   
 
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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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Rumors of Chinese Buys and Other Bullish News

Mar 13, 2012

    

An important hurdle the market will be looking to clear will come on Thursday as the Fed is scheduled to release the results of their latest bank "stress test." If the good doctors give a thumbs-up and a healthy report, we might just start to see the banks get more aggressive with their investments, once again a more bullish tone could be coming our direction. Obviously if the "stress test" results are poor the more riskier asset classes will be forced to take a few steps back and reevaluate. Personally, I am thinking the "stress test" is going to be better than anticipated.  
 
As long as the "political" picture and government "policies" continue to provide a nice tail-wind, I see no reason to turn our "bullish" ship around. Make sure you understand what the markets are focused on and more importantly what "defensive scheme" they are running. 
 
Corn traders yesterday were reporting lower volume than what you might expect on a double digit rally, but massive call buying was seen in the May contract.  I was surprised to hear talk that over 15,000 corn a calls had been purchased in the $7.00 to $7.60 range... certainly makes you wonder who knows what??? 
 
Respected analyst John MacIntosh of the Rand Corporation and long-time grain market consultant published an extremely bullish report over the weekend that seemed to carry a lot of weight. John has been extremely bullish for months now and continues to argue that the USDA has erroneously miscounted the US corn crop. For years John has done an excellent job of predicting the crop, and I would think twice about second guessing his efforts.  In the end though, the trade will be left to decide if John is correct in arguing the crop has been widely misrepresented or the USDA has properly assed the production.  
 
The trade seems to be divided into two camps.  The "bears," who believe corn ending stocks are heading higher based on better than expected corn quality out of last years' crop and less ethanol grind than expected.  On the flip side the "bulls," who continue to talk about limited corn supplies and the unusual strength in the cash market. The question the "bulls" desperately need answered though is whether there is actually any of last years' crop left (meaning the USDA underestimated it), or are the bushels here at home simply being held tightly by the cash flush farmers.  If you are asking me, my bet is on a combination of the two. Yes, I would suspect the USDA mixed-up last years early harvested bushels, but I would also suspect this years early harvested acres will be counted towards "old" crop bushels as well (hence no "major" shortage will occur). I also believe the US farmer has increased their storage capacity and would rather have their money sitting at home in the bin than with a firm like MF Global where they have the chance of loosing it. Money in the bank right now is earning zero interest, and I have a strong feeling no one has a lot of confidence in the "value" of the US dollar in light of our mounting debt and "propensity-to-print" more greenbacks. My guess is enough bushels are around to get us through, but it is obviously going to take higher prices to smoke out the bushels from the tight fisted farmers.     
 
The boys over at Goldman seem to be thinking corn may actually have some room to work towards the upside as well in the "old" crop.  I heard talk circulating yesterday, they also believe the recent run up in soybean prices will encourage more last minute acres to move into soy and possibly put a damper on a few of the extra corn acres that were going to go in the ground.  Can't say I disagree with them, but I am apprehensive to believe it will be any type of significant shift. Encouraging though to hear talk from a few of the bigger players that they are once again turning "bullish."
 
There continues to be more rumors circulating in regards to surging domestic Chinese corn prices and how private Chinese importers and mills will soon start importing more corn.  From what I have heard, end users in China are now paying closer to $400 a ton for domestic corn, when they could get US corn, freight included, for closer to $325 or $350 per ton. As you can imagine, this is causing the trade to give more weight to the Chinese buying rumors.   
 
Really the only major "new" negative talk floating around this morning in regards to corn is the fact Argentina has reportedly sold 5-7 million metric tons of new crop corn to China, and the fact the Indonesian government believes their corn imports will fall from 3.5 million tons to just 1.5 million this year because of a much better crop.  
 
Soybeans in my opinion should remain firm until the trade can get a better handle on 12/13 ending stocks.  As we sit here right now the trade is trying to digest numbers between 50 and 150 million bushels while the USDA is closer to 205 million. I still think there may be a little let down soon as the infrastructure situation in South America improves and some Chinese purchases shift back their direction.  Remember the trade seemed a little disappointed after hearing a few cargoes of Argentine soybeans were sold to China last week.  I would have to imagine as we start to hear more talk like this along with larger South American sales the "bulls" may temporarily start to question their faith. I would suggest remaining patient, and not getting overly bearish, as there seems to be good sources indicating some additional cuts may be coming down the pipe, along with reports of increased domestic demand in South America, ultimately cutting back on the number of available soybean bushels for export. I also like the fact Chinese insiders yesterday were throwing out talk of 56 million in total soybean imports for this marketing year in comparison to the 52 million they imported last year. 
 
Export inspections for wheat were certainly a pleasant surprise yesterday, basically doubling what many in the trade were looking for. There also seems to be higher hopes that US wheat exports will continue to stay competitive. I would like to say I am in this camp, but I continue to be worried about what lies around the next corner, especially in the way of global competition.  I believe we have to keep our eyes on the cash market, and in particular what is happening with the Russian and Argentine wheat exports. I did hear reports yesterday from Ken Morrison that Matif Wheat premium over KC Wheat is now the widest it has been since August 2010, this may actually mean US wheat will stay competitive longer than I am currently anticipating.  If we can get through the next couple of months with adequate demand then we could start to see the funds take on a more bullish tone... I wouldn't hold your breath. I am also thinking growing conditions for US wheat are improving as of late, so we may see some weather premium taken out of the market. On a more global scale there are some dry weather conditions and concerns occurring in Western Europe and Northern Africa that we need to put on our radar screens.       
 
As I continue to preach, wheat and corn have made a shift. Every time we see wheat make a move to higher ground it is met with heavy sell pressure and trades right back down to a more competitive level with corn. Until something drastic changes with supplies you have to believe wheats primary job will be to act as an alternative feed grain source to corn, therefore staying highly competitive or even trading at a slight discount in order to encourage more demand.  

A Few Quick Thoughts on Old Crop Corn

Mar 12, 2012

   

Even though my guess is "old" crop corn will stay stuck in a range between $6.20 and $6.80, it continues to be the topic of many interesting debates. I thought I would touch on a few of the more intriguing thoughts that have been floating around this past week. I hope this helps give you some additional insight as to what several seasoned professionals in the trade seem to be thinking: 
 
  • In regards to Chinese demand - Obviously something is seriously wrong in China. Their domestic prices are soaring to new all-time highs, while many Chinese analyst are starting to point fingers at the Chinese government and the USDA, thinking this past years' corn crop was overestimated by anywhere from 7-24 million metric tons. There are also rumors flying around about Chinese importers buying corn off of the PNW (Pacific Northwest). There has been no confirmation of this, but there are confirmed reports of China buying at least 5 cargoes of DDGs over the past couple of weeks. Supposedly importers are worried the Chinese government will soon be raising their DDG import taxes, so they have ramped up their purchases trying to front run the changes. 
  • In regards to the 95 million plus corn acreage estimate thrown out by Informa. Just remember, last year we had 96 million in "planting intentions," but the massive floods and levy breaks rapidly decreased the planted acreage number. Therefore 96 million can not simply be thrown out of the equation. Personally, I think soybeans will push to 76 million, leaving corn closer to 95 million. 
  • In regards to the 164 per acre corn yield estimate. Yes corn traits continue to improve, but we have to ask were the additional corn acres are going to come from this year. My guess is up in the Dakota's, and on less than ideal corn growing ground that was flooded last season. In the end, this number maybe too high. You also have to believe this early in the game the USDA number has at least a 10% degree of deviation. The take-away is DO NOT rule out anything, be a good "risk-manager." Just as I personally believe the yield number is too high, I could be completely wrong. You can't afford the liberty of betting your entire crop on a hunch, be smart and continue to eliminate risk.
  • In regards to "Usage" - Right now the world "stocks-to-usage" ratio is the lowest it has been in over 30 years at just about 52 days. Here at home we are running around 6.3% which is extremely tight. Just keep in mind even if we were to produce a massive crop and push ending stocks up closer to 1.7 billion our stocks-to-uage ratio would be only 13% which is actually still in the lower end of our 20 year range. The point is corn "usage" continues to rise and demand remains strong. In fact, many believe the corn market will remaining in a "rationing" type mode until monthly stocks reach an excess of 1.1 billion bushels. There is no debating the fact our "pipeline" usage number has vastly expanded. The trade is not going to feel comfortable until it is 100% sure we have at least one months supply on hand and available at all times. I am of the belief this will take at least a yield of 155 bushels per acre... and unfortunately that --my friends-- can NOT be "guaranteed" as of yet. 

 

 

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USDA Report, Jobs Numbers and Grain Prices

Mar 09, 2012

    

The trade will obviously be digesting this morning USDA numbers. As expected nothing too exciting. Somewhat bullish soybeans, neutral to bullish wheat, while neutral to bearish corn. My guess is we trade lower out of the gates, but as the market starts to re-focus on the March 30th USDA stocks report we might start to see a more bullish tone come back into favor. Producers need to remain patient, specs can look to buy soybeans on the breaks.  
 
The questions being raised early about the report are: How can world soybean production numbers be cut by another 235 million bushels, but the USDA sees no additional demand for US exports? How is Argentine corn production left "unchanged" at 22 million metric tons?  How is Brazil's corn production raised to 62 million metric tons? How did the USDA increase Argentina's 2010-11 corn crop by 1.25 million metric tons with no explanation? The highlights are as follows:
 
  • Lowers Brazil bean crop 3.5 million metric tons to 68.5 million  
  • Lowers Argentine bean crop 1.5 million metric tons to 46.5 million.
  • Lowers World soy stocks to 57.3 million tons vs 60.28 million last month.   
  • Lowers World corn stocks to 124.5 million tons vs 125.4 million last month.
  • Leaves Argentine corn production at 22 million tons the same as last month. 
  • Raises Brazil's corn production by 1 million metric tons to 62 million. 
  • World wheat crop raised to 694 million metric tons vs 692.9 million last month, while stocks drop to 209.6 million vs 213.1 last month
  • US soybean stocks unchanged at 275 million bushels 
  • US corn stocks unchanged at 801 million bushels
  • US wheat stocks down 20 million to 825 million bushels, on a 25 million bushel increase in exports and a 5 million bushel reduction in food usage.

 

Regardless of the numbers, there seems to be a little more buzz starting to circulate in the trade in regards to a paradigm shift that could be taking place in wheat, corn and soybeans. For years corn was regarded exclusively as a feed grain, while wheat on the other hand was traded at a premium because of its demand for human consumption. Now all of a sudden corn becomes a prominent player in the fuel industry and its economic importance, or should I say "value" seems to be equal or maybe even greater than that of wheat. We have seen this transition take place right before our eyes. No longer can we assume or guarantee that CBOT wheat is going to trade at a premium to CBOT corn.

 
The "corn vs. soybean" ratio may be the next major shift taking place. Some well respected sources are thinking we may soon see a major adjustment made in the "corn vs soybean" ratio. In this instance though the argument is being waged that soybeans need to gain in value compared to corn because of soy's exclusive "protein" qualities. With the world demand for beef increasing, along with a continued push for a higher protein diet there is definitely an argument that can be made defending the importance and premium for soy. In other words, if "protein" becomes King, then corn may soon loose it's crown.
 
I have no idea how long a shift of this magnitude could take to play out, but with extremely tight supplies being forecast by many large firms and analyst, I strongly urge you NOT to bet against the "corn vs soybean" ratio extending out even further in the weeks and months ahead. I know beans have rapidly gained on corn as of late, but "smart" money believes we might just be seeing the tip of the iceberg, as we are due for a massive shift in "value" that favors soy, especially as ethanol production looks as if it may have flattened out. In fact I am starting to hear more talk that bigger traders are building longer term positions that consist of "long meal against short corn positions," or long SX12 vs short CZ12 or short CU12. If protein demand becomes of primary importance, like some are now betting, the job of the markets will be to encourage more soybean acres here in the US and in South America... You and I both know it will take higher prices in relationship to corn to make this happen. Just something to think about moving forward, and certainly good reason NOT to be caught long "corn vs short" soy in this environment.
 
US wheat continues to remain competitive despite all of the talk about "Black Sea" wheat coming back onto the scene. This was confirmed as US exporters won their third straight Egyptian grain tender, selling Egypt an estimated 60,000 tons of US soft red winter wheat at around $259 a ton. From what I hear the US price was cheaper than wheat being offered by Ukraine ($277), Canada ($268) and France ($287). The problem moving forward is that "Black Sea" exporters are thought to be coming back online in a more prominent manner and talks of wheat soon being offered at sub $250 per ton are starting to circulate. It will certainly be interesting to see if we can stay competitive as more bushels hit the marketplace.
 
Lets also not forget Informa will be out at 10:30am CST giving us updated 2012 US acreage numbers...could be interesting, my bet is for more soybean acres.
 
As for the "outside" markets... All eyes are focused on monthly US employment numbers. The data showed we created 227,000 total jobs in February. Most in the trade were looking for the number to be around 215,000 new jobs being created, so we were slightly better than expected. The unemployment rate was unchanged at 8.3%. Some are arguing at least 10-20% of the jobs we have seen created this winter are due to the abnormally warm weather conditions. I was in a Quick Trip convenience store in early Feb while out on the speaking circuit, the store was essentially bare, I asked the store manager what was going on and he told me the abnormally warm weather had been bringing in the construction workers in much larger numbers than in the years past. Since their ordering and stocking levels are pre-arranged based on previous years buying patterns the store had been left in short supply. My point is, I wonder how much of this recent economic boost has been due to the extremely friendly winter weather conditions?
 
The markets can also breath a slight sigh of relief after most reports indicate that nearly 95% of Greece's private bond holders will agree to the debt swap deal. Rather than forcing a disorderly default, investors now agree to receive just a fraction of their investment. Most thinking Greek bond holders will take a hit of about 74%.
 
There was also bevy of Chinese economic data released overnight (CPI/PPI, retail sales, industrial production, etc...). One of the biggest surprises might have been China's "Consumer Price Index" coming in at a weaker-than-expected rate of 3.2%. This is the lowest consumer inflation rate in 20 months, sharply lower than the 4.5% seen in January, and well below July's rate of 6.5%. The producer price index for February fell as well, coming in at 0%, also weaker than expected and slowing from January's 0.7% year-on-year increase. The trade believes numbers like this should give China the opportunity to boost their economy and make them more inclined to ease monetary policy moving forward. It does however confirm that the Chinese economy is continuing to slide.
 

March 2012 USDA / WASDE Data Included Below:

USDA Grain Carryout 2011/12 (billions of bushels)
 
Range of Guesses
 
 
USDA #s
Mar. Guess
Low Guess
High Guess
Feb. USDA #s
Corn
0.801
0.785
0.746
0.825
0.801
Soybeans
0.275
0.260
0.225
0.275
0.275
Wheat
0.825
0.840
0.811
0.898
0.845

Global Ending Stock Numbers
 
Range of Guesses
 
 
USDA #s
Mar. Guess
Low Guess
High Guess
Feb. USDA #s
Corn
124.5
123.470
122.000
125.00
125.350
Soybeans
57.3
57.760
56.000
59.950
60.280
Wheat
209.58
212.610
210.000
216.000
213.100

Main South American Numbers (in million metric tons)
 
Range of Guesses
 
 
USDA #s
Mar. Guess
Low Guess
High Guess
Feb. USDA #s
ARG Corn
22
21.250
20.000
22.000
22.000
ARG Soy
46.5
46.825
46.000
48.000
48.000
BRZ Corn
62
60.195
59.000
61.500
61.000
SOY Corn
68.5
69.400
68.000
71.000
72.000

 

 

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To QE3, Or Not to QE3?

Mar 07, 2012

   

The "outside" markets continue to be of concern. I get the feeling the funds are more worried than ever about the recent turn around in the US dollar, in fact it seems there maybe a little rotation occurring as some investors seem to be looking to safer havens as opposed to those with a higher-beta. 
 
 
Let's not forget we saw a ton of money flood out of the commodity sector last year when investors started to bank profits and quickly looked for less riskier type plays. I am not saying the commodity bull run is anywhere close to being over, I just think we have to more accurately identify when the "outflows" are going to hit us, and when the money-flow is going to temporarily look for shelter in safer asset classes. If they feel they have banked good profits in the riskier arenas they may look to ride out a portion of the storm in a more sheltered environment in order to hang onto the recent gains. 
 
I continue to be asked by many of the "old-school" fundamental grain traders why I put so much emphasis on the US dollar these days. Rather than going into an elaborate rant or in-depth formula I have opted to simply include two charts. The top chart is a 5-year weekly chart of the US Dollar, while the second chart is 5-year weekly of the Corn market. I urge you to study these charts very closely, then ask me again why it is so important that we understand the movements and correlations associated with the US Dollar. As you can see there is a direct correlation. The 2008 high of $7.65 in corn came as the US dollar trade to it's lows.  The 2011 high of $7.99 once again came as the US dollar tested new lows.  My point is without the help of ALL the funds we will NOT get to these extremes. With a majority of the funds trading the "Macros" we need all of the stars properly aligned...it is no longer simply about the Supply & Demand numbers! 
 
The question now becomes "to QE3 or not to QE3?"  Some very well respected sources, and what I consider to be extremely "smart-money" tells me the Fed will be most apt to pull the trigger on another round of QE3 in late April or early May for basically two reasons. First they want to make sure they have all of their ducks in a row prior to the start of the US presidential election. Meaning the Fed does NOT want to be stirring the pot or creating any waves while the Democrats and Republicans are battling it out for Presidential votes. Second there is some talk that the Fed will have the firepower they need to pull this maneuver off as the GDP numbers start to slip on aggressively higher fuel costs. Understand what I am saying here, the rising fuel costs may give the Fed the go ahead as the GDP here it home falls under some unexpected pressure. Obviously the political powers that be can not afford for the GDP to fall, and can not afford for another economic meltdown, especially in an election year. Therefor the Fed may look to preempt any type of setback with another round of quantitative easing. The take away here is that QE3 is vitally important if we are to see the Funds making big bets on higher commodity prices. If it begins to look as if QE3 will not be happening then we may see the US Dollar strengthen even more and commodity prices start to deflate. Keep in mind this is just the opposite of what Bernanke and the Fed want to see happen. As you know they are looking for a weaker US dollar and higher inflation. 
 
We should also remember that "politics" will continue to trump the "fundamentals" during this election year as well. This may be no more evident than the fact several powerful US Senators are once again looking for answers in regards to "speculation." The talk in Washington is that the blame for higher energy prices may soon start to be directed back towards the large "speculators." There have been a few stories circulating that several influential US politicians are questioning what, if anything, has been done to reign in excessive speculation, especially in the energy markets. All I am saying is if Washington starts to put more heat on the CFTC, you might see some of the bigger fund players get spooked, choosing to liquidate rather than battling the government...just another moving "part" that we need to add to the equation.
 
We may actually see crude oil fall under a little pressure in the short-term as six of the world's leading powers US, China, Russia, Germany, France and UK agree to reopen talks with Iran in regards to its nuclear program in hopes of helping to avoid an air strike by Israel forces. I personally doubt it will do any good, but with gas prices around the world surging, global leaders are becoming extremely concerned.  
 
From a more traditional fundamental Ag perspective there really hasn't been much of a change in the landscape. All eyes seem to be zeroing in on Friday's USDA numbers. I just hope we don't see the proverbial "buy-the-rumor / sell-the-fact" type trade activity off the USDA data. My fear is that even though the report is bullish...will it be bullish enough for the trade becomes the question?
 
Obviously it is all about the South American production numbers. As we sit here today the USDA is estimating the Argentine corn crop at 22 million metric tons. We all know this number is coming down, but the question is how far? I have the feeling the market is currently trading at an estimated 20 million metric level or lower. The problem is the so called "average" trade guess is above 21 million metric tons. There is a similar type action taking place in soybeans, as the USDA is currently estimating Brazils soybean production at 72 million metric tons, while the market seems to be trading something more like 68 million metric tons or lower, while the "average" trade guess is just north of 69 million metric tons. My point is even though the USDA will be making cuts to both corn and soybean production in South America, they will need to make more substantial cuts than the "average" trade guess or the markets will be disappointed and break lower on the news.
 
We also need to be keeping a closer eye on soybean meal demand both domestically and globally. As I have mentioned on several occasions if meal demand starts to really pick-up it could certainly provide the fuel needed to prompt an even stronger soybean rally. There is starting to be some speculation that DDG usage in China may take the back seat to more traditional soymeal feedings as their hog herd rapidly expands.  Obviously with the South American setbacks a jump in global meal demand could push soybeans even further. 
 
* I would suspect more position squaring ahead of Friday's highly anticipated USDA report.  Choppy trading on both sides of the fence should prevail. If the ADP numbers are weak, we may face some additional outside market headwinds. In my opinion, Spec's wanting to add length or initiate bullish positions in soy should continue to wait patiently. I may end up being painfully wrong, but I also believe the bull spreads in both corn and soy are due for a little break as we head into the US planting season.  FWIW there are some talks starting to circulate that the weather pattern is turning "wetter" and may even start to cause some planting "delays" in some select areas.  We are already hearing about a few delays in the south and delta regions. Producers should use the recent rallies to get caught up on their soybean sales. I continue to patiently wait to pull the trigger on more new crop corn. 
 
 
 
 
 
 

Broad Sell-Off in Commodities and Grains

Mar 06, 2012

  

The "Macro" traders continue to focus on yesterday's news out of China, as their economic growth estimates fall to levels not seen since 2004. This was also confirmed by reports that new car sales in China have now fallen by 3% during the first two months of the new year, and that home values have fallen to new 19 month lows. I would suspect the Chinese slowdowns will continue to be the topic of discussion and on the minds of many traders, at least until we see more pressing news from the European Central Banks and details about the Greek bond swap deadline set for Thursday. After that we have the US employment data and USDA numbers on Friday.
 
In a nutshell I am thinking the "outside" markets may continue to take on a more negative tone at least until later in the week. Keep in mind Apple stock continues to control the overall price direction of the S&P500. With the "iPad 3" scheduled for release this Wednesday we could start to see some more volatility, especially if fund traders try their hand at a "buy the rumor / sell the fact" type trade strategy. Just something to think about! In any regards the "outside" markets are providing a strong headwind, unless the US dollar comes under pressure I would suspect we will spend most of the day in the "red" across the commodity sector. It has eased back some off its overnight highs so there is hope.   
 
Many Ag traders are now eyeballing more specific remarks made yesterday by China's National Development and Reform Commission. From what I heard their top economic planner said China would expand imports of agricultural commodities deemed to be in short supply, and highlighted the need for stockpiling corn, cotton, rapeseed, pork, soybeans and sugar. There was also talk from China’s top producer of livestock feed (New Hope Group) who seems to be pushing for China to reform their corn "import" program by dropping shipment quotas and raising the amount Chinese importers are allowed to purchase. Obviously the magic question is "WHEN"... Remember China's minister of agriculture, just last week, reported by state radio that he expects total grain production in China to fall from 571 million tons in 2011 to just 525 million tons in 2012, basically because of poor weather conditions, as well as higher labor and fertilizer costs. In a nutshell the funds seem excited about the thought of China more aggressively importing corn and may soon take on a more bullish tone. 
 
In light of the news, we maybe start to see some unwinding of the highly popular "long Soybean vs. short Corn" trade that had been producing nice profits. At this juncture, I do NOT like the thought of being long soy over corn. That strategy has performed nicely as of late, but I feel it may have temporarily ran its course. "IF" some additional Chinese corn purchases are announced in the next few weeks, I think will start to pop. I am not taking anything away from the extremely tight soy carryover, I am just thinking the soy trade might have gotten a little ahead of itself.  I am also thinking we may see some profit taking as we head into Friday's USDA report. The funds have added some length as of late and the soybean markets have produced some nice gains, the funds might feel it is time to bank some profits.
 
There has also been a ton of talk as of late about about the recent run up in soybean prices and how we desperately need to buy more US soybean acres. As I reported last week, gross margins in many parts of the corn belt are now extremely close for both crops. Obviously many producers have already completed early field work, and many have been applying fertilizer and prepping the fields to plant corn, therefore I doubt we will see any real significant flip-flopping of acres. Several producers I have spoken with though are seriously considering making the switch to more soybean acres on fields that have not been prepared, especially since there is the belief we are once again going to see some extremely volatile wether conditions this growing season here in the US. If this is the case planting soybeans seems to be a lot less risky in regards to yield and certainly less of an investment. Below is a simple cost of production model that has been circulating, as you can see profitability on each crop is now extremely close to one another. These are just broad range estimates based on yesterday's close: 
 
Estimated Corn Profitability (Illinois/Iowa)
Cost per Acre = Between $800 - $900 
Yield per Acre = 170 - 190
Cost per Bushel = around $4.70 
DEC12 Corn Price = $5.70 
Avg New Crop Basis = minus $0.30 cents
Flat Cash Price = $5.40 
Profit per Bushel = +$0.70 
Profit per Acre = around $126
 
Estimated Soybean Profitability 
Cost per Acre = $450 - $520
Yield per Acre = 40-50 
Cost per Bushel = around $9.70 
NOV12 Bean Price = $12.90
Avg New Crop Basis = same as corn, minus $0.30 cents 
Cash Price = $12.60
Profit per Bushel = +$2.90 
Profit per Acre = $130.50
 
Money-flow certainly doesn't seem to be a problem as of late, in fact many in the trade are talking about how so called "hot money" purchased 100,000 plus Ag contracts last week...this is leading several analyst to report "Ag Investing" is back in "vogue."  More specific data from the CFTC showed that "Managed Money" actually increased their bullish bets on the agri-commodity complex by pushing their total net long position to 639,688 contracts for the week ending February 28th, up 123,717 contracts from last week, making it the largest week-on-week increase since August of 2011.  It was good to see that Managed Money actually reduce their net short CBOT wheat positions by over 9,200 contracts last week, even though they are still thought to be net-short about 48,000 contracts, it was actually the biggest weekly reduction in short positions in over four months. I also thought it was interesting to see Managed Money increased their net long position in Soybean Oil by almost 35%. They are now net long over 37,200 contracts, their largest long position since late this past summer. There is also now talk that Managed Money has increased their net long soybean position by almost 200% this past month...WOW!
 
I am hearing more talk as of late that world wheat ending stocks may actually start slipping in the months ahead. Here at home some reliable sources are talking about more "spring wheat" acres being taken out of production in order to plant more corn.  There is also some speculation that "winter wheat" acres in a few areas will be plowed under in order to prep fields for more corn planting.  The bottom line is even though we are currently sitting on record supplies we may soon start to see more wheat acres switching to more profitable crops in all areas of the world.  Along these same lines I am also hearing that US rice producers may be entertaining thoughts about switching some rice acres over to soybeans.  
 
The trade seems to have tired of the South American weather story as of late, but seems much more interested in "DRY" conditions in select parts of China, Canada, Europe, Ukraine, Russia, Kazakstan, South Africa, Mexico, etc...  On the flip side, recent heavy rains in parts of Minnesota and the Dakota's are improving the soil moisture levels and increasing the odds of a good crop.     
 
*As for today's price action, it seems that after hearing confirmation from China that they are in fact slowing, along with horrible Service PMI reports yesterday out of Europe maybe slowing global economic growth does actually matter. You certainly have to believe the momentum traders might be caught "offsides" here, the question is will the big money continue to buy the breaks. My gut tells that trend might be ending as well.  For weeks every dip was met with heavy buy paper, I am not so sure that will be the theme moving forward. We are definitely at a fork in the road, I encourage you to continue watching the US dollar as it will dictate long-term price direction. We made some good soybean sales yesterday in the $12.98-$12.99 range and will be looking to pull the trigger on a few more bushels on a move towards $13.20. Several producers also made new crop cash corn sales against the Sept delivery around the $6.00 level. These seem to be good early sales if you can get theme booked. I would suspect most of the day will be spent on the negative side of the fence so be patient.  
 
*There seems to be some more rumblings and rumors circulating in regard to corn seed availability.  A couple of good sources have now told me that Monsanto's seed has arrived and there seems to be very little shortage in their supply line.  On the flip side I have heard Pioneer corn seed supply out of Argentine maybe short by 30-40%.  I couldn't confirm the accuracy of these remarks, but thought I should pass along what is starting to circulate in the trade.  
 
*It looks as if the Argentine dock worker strike has ended, but now I am hearing talk that the truck drivers will be going on strike next week...What a mess!
 
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A Closer Look at Informa's Numbers

Mar 02, 2012

   Informa "world" numbers were released this morning, below are a few highlights: 

Total South American Soybean production down 3.4 million metric tons from last          month.  
Brazil seen at 68.0 million metric tons, down 2.0 million from last month.  
Argentina forecast at 47.5 million metric tons, which is actually up 1 million.  
Paraguay down 2.4 million metric tons to 4.0 million.  
Argentina corn seen at 22.5 million metric tons, which is unchanged from last month.  
Brazil is seen at 61.5 million metric tons, unchanged from last month as well.
 
In my opinion "new" crop corn has to be looking fairly attractive to Chinese importers, especially if they sense a poor growing season may be upon their doorstep. Obviously the fundamentals are favoring the "July vs. Dec" bull spreads, but just keep it in the back of your head that last year many in the trade were also wildly bullish this spread, and it ended up putting in it's high during the first week of March. My point is be careful getting overly optimistic with the "old crop vs new crop" corn spreads.  If you are playing this game I advise drinking only very small doses. Better yet you might want to take a look at trading this one from the opposite side of the  fence for a short-term pop.    
 
The funds continue to view soybeans as the "darling" of the trade. The USDA announced 5 cargoes of beans to "unknown" this morning, 2 old crop and 3 new crop.  This was NOT anything the market hadn't been anticipating, so no real excitement from the news. Similar to the corn market, I think the bull spread in soybeans may have ran it's course (at least for the interim), therefore I am not opposed to "Selling the July beans and Buying the Nov "new" crop beans."  
 
There is some talk circulating about what seems to be an annual dock workers strike in Argentina.  It seems like every year right after harvest kicks in the dock workers go on strike.  I guess if they keep getting raises and better benefits out of the maneuver...why not?  I would suspect this problem goes away just as quickly as it started, if not it could be another notch against South American exports. 
 
As far as "weather" is concerned, I have a feeling the market is viewing it as more "bearish" than "bullish," especially as the trade starts to make the shift from focusing on South American weather to US weather. I still think South America could see a few additional hiccups, but I believe this market has somewhat tired of the news. Starting in mid-March it will be all about US planting conditions and or issues in China and Canada. 
 
In my opinion, the "outside" market winds are starting to shift. The US dollar is stronger, crude oil is under pressure, while gold, silver and copper are all trading lower. Pay attention to these trends, if they continue I would have to imagine pressure will eventually start to spill over into the Ag markets. It may not be immediate, but I could see it start to gradually affect bullish momentum.  
 
There is more than likely some new money flowing into the commodity markets with this being the start of a new month, that is why downward pressure was limited "TODAY." Be careful though as we move into mid-month.
 
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Bernanke's Impact on the Grain Trade

Mar 01, 2012

The Chinese PMI index overnight was reported at 51.0 in February, up from 50.5 in January. Remember a reading above 50 indicates  economic expansion, and a definite improvement in the nation's manufacturing activity.  The problem is this may prompt the Chinese government to take a more cautious approach towards easing. 

After seeing the results of the European "LTRO" and hearing Bernanke speak yesterday, the trade seems a little fearful that another round of "quantitative easing" has been put on the back burner. With Bernanke giving no clear indication of further economic measures to stimulate the US economy and the outlook for inflation being "subdued' it caused gold, copper and silver to fall under heavy pressure, and has some in the trade now thinking the US dollar may be due for a little rebound. 

Keep in mind, with both the US, Europe and China sending out signals that easing monetary policy may be winding down to some degree it could invoke more of a "risk-off" type environment than we have seen as of late. If you listened closely to Bernanke and a few of the other US Fed representatives you heard them reiterate that in their opinion US inflation is NOT a worry or concern art this time, and that there remains considerable downside risks due to the slowing European economies. To me, this means the recent run up in commodity prices may be overdone as problems in Europe creates ripples across the globe.

If the "funds" get spooked by the recent shift we may see some commodity liquidation across the board. Keep in mind with Europe signaling that they may now be done, China acting as if they may now be done, and the US pushing thoughts of  "quantitative easing" further down the road, the trade may start to question growth.  There is also now some early concerns starting to circulate in regards to the end of "operation twist," which is due to end here in the US in a couple of months. Keep in mind the last time "quantitative easing" ended here in the US the markets struggled.

I am not trying to scare anyone, I just want you to know a few of the key global players in this economic game have shifted positions and they look to be running a slightly different defense. This may cause the funds to throttle back, and in turn creating a little headwind across the entire commodity board.   

In addition ethanol numbers released yesterday were NOT what we wanted to see. In fact, not only did production fall by almost 3% compared to last week, now at 896,0000 barrels per day, but ethanol stocks have now jumped to another record high up above 22 million barrels. Stocks or excess ethanol supplies are now more than 15% larger than last year. As I have been warning, the excess surplus may soon start to become extremely burdensome. My best guess is we are now about 5 million barrels too large, and need to see an increase in domestic demand or global exports soon or more plant closures and reduced production runs will remain the theme.

As far as South American weather is concerned, it seems that Central Brazil is trending dryer and will be in need of a very large drink come mid-March. The weather models seem to be indicating that rainfall should hit just in time, but I am personally not giving it much credence. Obviously, if conditions remain dry and the rain doesn't come, second crop corn could become an issue. 

Weather extremes continue here at home as we wake up to news of deadly tornadoes touching down in six-states across the Midwest. Our thoughts and prayers go out to those who have lost loved ones or lives have been affected by the rare February blasts. Last year was one of the worst on record for US tornadoes, with their being more than 1,700 reported, lets hope this year is not a repeat. Traders are  also keeping a close eye on moisture levels in Iowa, Minnesota and the Dakotas (since they make up about 1/3 of our total US corn production) as areas in these states have been abnormally dry this winter. The folks in Boston are finally reporting some snow, at this point last year they had 80 inches of snowfall, up until yesterday they had just 8 inches of snowfall. My point is "weather" extreme continue to be the norm and I would suspect a very erratic summer growing season.   

The US wheat market seems to be concerned that the prospects of an early crop may now leave wheat fields in key growing regions highly susceptible to an early cold-snap or freeze, this could drastically affect overall yields. We have certainly seen this happen in the past, therefore I have to believe the market will be keeping a close eye on it as we move forward.  

Don't forget Informa will be releasing their updated "world balance sheet" numbers Friday after the market opens. I don't think there will be any comments or new data released in regards to US acreage, but we could see some updates to winter wheat conditions.

*As for today, I would suspect the grain and soy markets to trade on both sides of the fence as some of the larger players try and get their hands around the Macro concerns and shifts that may be taking place. I still believe producers should be moving "old" crop bushels in order to protect against weakness that may develop in the basis. I am patiently waiting on more "new" crop sales, as I believe having 30-50% priced, sold or hedged at this juncture is adequate considering the production setbacks in South America and the renewed Chinese interest.  

*Base Price for "Revenue Crop Insurance" will be set at $5.68 for corn this year compared to a $6.01 base price last year. The soybeans base price will be set at about $12.54 this year compared to $13.49 last year. This puts the corn/soybean ratio at 2.21, compared to last years ratio of 2.44. Meaning the insurance guarantees more aggressively favor corn over soybeans this year. The late rally in soybeans along with thoughts of extreme US weather conditions has many producers considering if they should flip a few corn acres back to soybeans. I haven't heard of anyone making any big adjustments, but it has certainly piqued the interest of producers across the country. 

 

Our Grain Marketing Seminar last Friday here in Kansas City, MO went really well. It's not too late to get signed-up for a DVD of the show, we have a few left! Just give us a call and let us know. (816) 322-5300

 

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