EHedger Afternoon Grain Commentary 8-2-2011
Aug 02, 2011
Grains finished sharply higher with corn and wheat leading the way. December corn finished 30 cents higher at $7.15 ¾, November soybeans up 17 ¾ at $13.79 ¾, and December wheat up 38 at $7.58 ¾.
A lot of new money seems to be flowing into grains. Corn appears to be trading a yield that is lower than last year’s national average. Currently crop ratings are running at their 10 year averages for both corn and soybeans. Maybe the heat took more of a toll than what is expected, we will just have to wait to find out what yield ends up being. A private estimate from a "weather" service company lowered their expectations from 156.7 down to a 150 national average. We think this number is probably a little too aggressive at this point, especially since we are looking at crop ratings at their 10 year averages. We are very close to contract highs in December corn, and we made new settlement highs today. We wouldn’t be surprised if they try to test the contract highs on the overnight session.
We can make the argument that this rally is completely based on yield and not just money coming into the market, but that doesn’t explain why Sept wheat was up 47 cents today as well. Despite the stock market being sharply lower today, and the dollar sharply higher, they still wanted to take grains higher. Even crude oil couldn’t hold support today.
The economic numbers haven’t necessarily been supportive to demand. Exports have been running 3-4% lower from a year ago levels in Brazil over June/July. With a huge crop last year in Brazil, bad crush margins in China, and the Chinese government releasing stock piles, soybean demand is looking weaker. Chinese imports have been estimated to be all the way down to 51 MMTs, which was thought to be as high as 58 MMTs earlier this year.
For corn we are still seeing demand destruction at these levels. Ethanol numbers have stayed strong on the monthly S&D numbers, but running behind pace on the weekly numbers. We have seen a lot of wheat fed in place of corn, and situations of poor margins for feeding cattle. We can talk about the demand numbers all we want, but right now the market is 100% focused on supply, which is fine, at this time in the year that is to be expected. FC stone’s private estimates came out today at a yield of 153.2 for corn and 42.4 for soybeans. We have heard other estimates running much lower than this for corn, and with analysts with guesses between 145-155 yields, that is all the market is going to care about at the moment. It is import to realize that we are trading $7 corn because the market is factoring in these yields. For the market to continue to rally from yield reductions we have to keep reducing the yields even lower. Another thing to consider is even if they do end up being that low at the end of the year, there is a real risk that the USDA August report comes out closer to 160, as they use count population and average test weight. Basically there is a potential for the August 11th report to disappoint the longs.
Until the market is more comfortable with what yield is, it doesn’t seem to want to break. We want to remain in sustainable positions, and stay well hedged at these levels. Please call your broker if you need additional coverage or want to go over your current position. We have option strategies available that can cover a larger amount of bushels with a minimum bushel level of upside margin exposure.
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