Fundamentals - Real and Imagined Continue to Drive Row Crop Values
Feb 19, 2013
Note: USDA’s Agricultural Outlook Forum later this week will provide the first "officially unofficial" forecast of the S&D’s of principal agricultural commodity balance sheets for the 2013/14 marketing year. As always, there will be a market response to the numbers. We will take a closer look at this new crop profile, as well as its potential price implications in the next post.
Old-crop corn has not experienced any recent infusion of bullish fundamentals that will act as a catalyst for a meaningful price rally. The ongoing bearish argument that domestic physical supply in the USA is both overstated continues to restrain the market’s ability to launch a rally. At this juncture, bearish trade sentiment remains focused on the inability of the corn export sales pace to provide evidence of recovery. In the absence of a sustained, multi-week, improvement in export sales of old-crop corn – price will be under pressure.
A wholesale price collapse does not appear in the cards, but the inability of corn to hold key technical support identified in the $6.95-$7.00 area basis March futures (2/11 post) points to a multi-week price consolidation at modestly lower levels. Look for a gradual consolidation of the trading range for corn near-term. If that develops, a natural consequence will be clearly defined areas of price congestion that will ultimately serve as either base building period for a rally or a near impenetrable area of resistance.
Now despite the psychological weight being brought to bear by the export sales malaise, the reality of tight physical supply will continue to function as a counter-balance. One need not look further than cash basis levels to confirm the situation on the ground. Relief for livestock and poultry producers, as well as ethanol facilities, to source available supply is not going to become any easier with the passage of time.
The bearish trade sentiments, which have lousy export sales as one of its primary taproots, may yet find these export sales circumstances marginally improving. If not, then projecting future reductions in USDA’s corn export sales forecast is unlikely to provide more than marginal increases in supply. I am of the belief that USDA’s current corn export forecast is attainable.
Again, clarity to what’s going on in the country is best reflected via interior cash basis levels. The unanswered question is not whether basis levels remain elevated, but the extent in which even more pronounced strength is manifested in the cash markets. In this scenario - more probable than improbable in my estimation – the crucial unknown is whether the board "coat-tails" cash market dynamics.
To date, futures price action has reflected the fundamentals of the cash market by backwardation in old-crop contracts – as opposed to flat price rallies. This backwardation characteristic is showing no signs of abating. However, the potential for backwardation AND a rally in futures flat price does have sound historical precedence. So, it is simply premature to rule out this dynamic reorientation in the futures versus cash dynamic. Flat price rallies and backwardation can occur in tandem.
Producers need to be fully engaged in what’s going on in their local cash markets. And by no means are any of these observations to be taken as a "carte-blanche" to disengage from sound risk management tools. Being as well as acquainted as possible with the bearish side of the argument, I respect the merits while not necessarily being in agreement. But the bottom-line is the bottom-line, which means that it is absolutely crucial that any of your unpriced production requires being risk managed.
The soy complex completed its post Feb crop report swoon by bottoming at the middle of last week. With March soybeans holding identified technical support above the $14 level (low $14.0450 Bu – Wednesday 2/13). The anticipated support and timing coincided with that in the prior post (2/11/13).
Price action as played out during today’s session might more typically be accompanied by the task of sorting out the relative strength of each sector of the complex which led the rally. In a nutshell, there is little to differentiate the strength seen in soybeans, soymeal, and soyoil. The entire complex exhibited prominent strength in equal measure.
To assign the price action as being "technical" in nature would place it in an area not too far removed from "head scratchin". The most recent soy complex rally was based on fundamentals. However, in the process it also realigned its technical profile in some noteworthy respects.
First, most prominently is that in the course of the sessions rally both soybeans and soymeal decisively retraced and filled downside gaps created in the March, May, and July contracts during the price swoon that occurred following the Feb 8 WASDE report. Conventions of technical analysis would hold that these downside gaps existed as levels of price resistance – keeping with the old saws of "filling the gap" and "falling back". However, prices advanced readily through the gaps without so much as a hiccup.
Secondly, these same old crop soybean and soymeal contracts also created upside or breakaway gaps as the market opened and remained above the highs of the previous session (Friday 2/15). So, in effect today’s price action also has established a fresh benchmark of support going forward. Note that soyoil did not participate in this technical reconfiguration as it had never left any down side gaps needing to be filled. The March, May, and July soyoil contracts have been in a broad trend higher that originate in late May of 2012.
Now fundamentally little has changed. Those waiting on some consistent evidence of soybean sales cancellations are still waiting. Bears pinning their expectations on an imminent throttling back in the pace of the domestic soy crush could find little solace in the most recent crush numbers out of NOPA for January. Yes, crush was modestly lower than December, but running near 11% higher than year ago. The expected slowdown in the export sales pace coupled with cancellations have occurred (last week), but just as quickly reversed as early this morning with the USDA announcing under their mandatory reporting protocol that China purchased 120,000 MT of old-crop soybeans.
An observation as the week unfolds – both the May and July soybean and soymeal contracts are at significant levels of resistance. Some degree of price retracement is likely. Look for the "too far too fast", "profit-taking", and "good cash movement" as root culprits. And all those potential reasons have validity. But equally valid is the curious and decisively bullish behavior of the entire soy complex. It enhances, but not guarantees, the prospect of additional price strength near-term.