The precarious price scale for the corn market has tilted towards continued, yet limited, pressure being placed on values going forward. This market had been telegraphing its impatience on the demand front well prior to the release of the Feb WASDE. Outlined in a prior post (1/25/13) was a best case price scenario for March corn – a rally into resistance at $7.45-$7.50 Bu. An intra-day high of $7.4625 Bu basis the March contract was hit on Feb 1 - a full week prior to the reports to release. Not $7.50 Bu. The grain markets have a well-established pattern of making major price pivoting in half and full dollar increments.
If the USDA did not put their thumb on the scale with any demand line item changes in the Feb WASDE, the result nevertheless has been to place a weighted bias towards selling rallies going forward. There is more to it than a 50 Mil Bu reduction in export sales. The underlying presumption that US corn export sales have so persistently been lagged behind the forecasted pace that achieving 950 Mil Bu this marketing year is sound. The 20 Mil Bu uptick in demand allocated to increased HFCS and starch production pales in comparison to the qualitative (as well as quantitative) impact of the export sales reduction. That pretty much sets the tone.
However, there is more to the numbers than meets the eye here. Two additional line items on the demand side of the balance sheet are very much in play. Both will continue to function as bearish psychological influences that are likely to limit any substantial price rally.
First, on the list is corn grind for ethanol. This is an easy target which readily provides fodder for headlines. Ongoing reports of either ethanol plant closings or production reductions are being reinforced by weekly EIA ethanol production data. While I believe there remains a good reason to believe that ethanol production is forming a baseline bottom on which to build, that sentiment is not in the mainstream. Presently, the trade is kicking around the idea that a corn grind for ethanol will ultimately by trimmed by 25-50 Mil Bu.
Secondly, skepticism still abounds on the 300 Mil Bu increase in Feed & Residual demand that appeared in the Jan WASDE. The upward adjustment - implied by the quarterly Grain Stocks report – was out of sync with trade expectations has not been reconciled within the trade. And it will not be until the release of the Grain Stocks report on Thursday, March 28th.
So, the underlying dynamic is anticipatory, setting aside for the moment the current historically tight stocks-to-usage ratio in corn while looking forward to the tightness to ease somewhat. Despite the anticipation of corn ending stock levels to increase over time, they will nevertheless remain uncomfortably tight. The market will uncover buyers and price support on breaks, while rallies of substance will be checked by the idea that not only that there is solid evidence of demand having been rationed, but it may have been accomplished to a much greater extent than what is presently apparent.
The bulk of the near-term slide in corn is more likely than not near completion with support located in the area of $6.95-$7.00 Bu area basis March.
So, we have a friendly crop report and a decidedly unfriendly price reaction. US soybean export pace lousy? Domestic soy crush starting to falter? Nope on both counts.
Reading between the lines of both side of the ledger reveals nothing prima facie that would suggest the soy complex price reaction following the Feb WASDE is warranted. So, is it simply a case of "buy the rumor, sell the fact"? On first glance, certainly appears so, but again there was simply nothing either stated or implied within that report that provides the impetus for the magnitude of the price weakness that followed in its wake.
A noteworthy perspective is that USDA’s 2012/13 soybean end-stock number did not radically depart from trade expectations – at 125 Mil Bu the USDA forecasted a number a mere 4 Mil Bu below the 129 Mil Bu average trade estimate. So, while the essential fundaments of the soy market remain sound, the price response to USDA’s numbers suggests otherwise. It’s this rather dramatic divergence that requires some reconciliation.
There appears more of the "buy rumor-sell fact" quality at work here near-term. In this regard, the post-crop report price swoon needs to be taken into the context of where values stood prior to the report. As alluded to previously (2/4/13) the $15 Bu area basis March soybeans was the definitive "line in the sand". And that level was challenged in the four trading sessions leading up to the report, but March soybeans were never able to trade above an intrasession high of $14.98. Reference again, as in the case of corn – grain markets love to pivot in in half and full dollar increments. Not precisely though – that would be much too tidy. Complicating the technical profile is the volume spike which accompanied the price break coming off the Feb WASDE. The subsequent high volume session neutralizes what was a most classical technical breakout that propelled values to the $15 Bu vicinity.
Now we have soybean end stock numbers trimmed to levels that came reasonable within trade expectations and the Feb WASDE did not contain any intrinsic shock and awe aspects. Coupled with prices at a major area of resistance, a bullish "shock" was perhaps the only thing that would have provided the fuel to propel values higher. Be that as it may, there still remains a more problematic issue with the fundamental revisions in USDA’s latest forecasts and the markets price behavior that goes beyond the technical profile.
The price/fundamental disconnect cannot be linked to any evidence of demand rationing - for all intents and purposes that is non-existent. Neither export sales/shipments, nor the pace of domestic crush are showing any true signs of fatigue. However, there is a presumption by the trade that a reduction in the unsustainable pace of demand for soybeans is imminent. Relief is widely anticipated to arrive in both export sales and crush.
In this scenario, fresh export sales will ultimately throttle-back to a near halt. Also, crucial to advancing this argument is that sales already on the books will be whittled back as cancellations occur in fits and starts commensurate with the availability of SA soybeans. After all, in support of this "demand leak" argument one need look no further than USDA’s latest export sales forecast, which was unchanged from January - and December, and November. The last revision to export sales occurred in the November, 2012 WASDE when sales were raised from October by 80 Mil Bu to the currently forecasted 1.345 Bil Bu.
So, will export sales/shipments be throttled back? As well as, the crush pace? The answer to both is yes. But, a yes is required because none other is allowed. In other words, the state of physical soybean supply/demand in the US is already at implied pipeline levels. There is not any wiggle room for increased demand. The key to a recovery in old-crop soy values is very much joined at the hip with the pace of export sales and as importantly wholehearted cancellations of booked sales. The efficiency in which Brazil can get its record soy crop to ports and afloat will provide the answers.
There needs to be concrete evidence of soy sales cancellations by the end of March. If not, it will be the May soybean contract which will be revisiting that $15 Bu area. Now that the market has experienced a hefty high-to-low pull-back of $.70 Bu, it’s not actually a matter of fresh demand that prompts a price recovery, but rather that pre-existing demand is resistant to softening. Without a tangible evidence of demand retreating, price advances.
At or before midweek, the near-term slide in soybeans should be complete. Support is located in the vicinity of $14 Bu basis March.