Jul 30, 2014
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The Hueber Report

RSS By: Dan Hueber

The Hueber Report is a grain marketing advisory service and brokerage firm that places the highest importance on risk management and profitable farming.

Morning Comment - Midweek Blahs

Jul 30, 2014

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Wheat

It would appear that the bear is not quite finished in the wheat market as the breakdown yesterday pushed us into slightly lower lows for the year.  Prices have stabilized overnight and I do not feel this is the beginnings of a new wave lower but is indicative of just how difficult it is to put the brakes on a train moving downhill.

While the negative sentiment in corn and to a lesser extent beans are dragging on the wheat trade, the fact that we are contending with a large world harvest and a discounted Black Sea market continues to hang around the neck of this market like a weight.  The fact that the Russian Ruble has broken at least 5% over the past couple weeks has not helped the situation either.  The USDA attaché in Russia projects a total grain crop in that country of 94 MMT of which he estimates 52 MMT will be wheat.  Interesting to note that the current USDA estimate is 53 MMT and there are some in the trade who estimate the wheat crop could be as high as 60 MMT.  Wet weather continues to hamper harvest in Europe but that should be more of a quality issue. 

I continue to believe we should be rounding out a reaction low in the wheat market as we slide into early August but will need to be patient before expecting any kind of corrective bounce.   

Corn

While the corn market did not push into lower lows, we did witness a classic Tuesday undo day yesterday and have continued to struggle overnight. This is by no means a stunning or particularly insightful statement but at this point it is all about the weather and by extension supply.  Demand, while discussed to not really play in the psychology of the market this time of year particularly when there is no threat to the crop.

The weather outlook into August continues to look ideal for corn development.  Temperatures are forecast to remain normal to below normal with reasonable chances of moisture across a wide swath of the Midwest.  During my travels over the past 5 days or so, I heard time and again that all that was needed to finish this crop was another couple decent rains and a normal frost date.  The rains appear to be in the forecast and on the latest update from Drew Lerner at World Weather, he comments that there does not appear to be anything this year to suggest an early frost. 

We will see the weekly EIA ethanol number once again this morning and should continue to look positive.  One side note is that DDG’s continue under pressure with China out of our market, which should continue to be a drag on corn and meal demand and ultimately could squeeze margins for the grind. 

The corn market has been relatively stable for the past few weeks and traders may be reluctant to push the downside much more before the August report.  That said, considering the lack of crop threats and the fact that the wheat market can continue to extend into lower lows with a better handle on the overall crop size, it does not provide for much of an encouraging picture in the corn market particularly with managed funds still holding a long position.

Soybeans

The rally on Monday of this week told us that the bean market is still prepared to maintain a little risk premium as we move into August but the failure yesterday also told us there is a limit to how much that will be without more of a hint of a weather issue.  After testing the Ukraine air disaster high of two weeks ago, prices reversed lower and have been under pressure once again overnight. 

The active interest in the new export demand has continued to provide support but the most recent updates for August weather have provided the counterbalance.  If correct, we should have rains falling across a wide portion of the Midwestern growing region over the first couple weeks of August and no excessive heat.  By no means does that assure big bean yields but it would not appear that the plants will be stressed either. 

November futures appear to have settled into a trading range between 11.15/11.20 and 10.65/10.55 and we could chop back and forth between those parameter at least into the reports on the 12th.  The USDA should now be beginning to collect data for the report but this figure will be basically statistical and I would not imagine they would make much if any adjustments in the bean yield.  That said, if we have moved out to that time and still not found any threat in the weather forecast, I believe this contract will be headed for at least the 10.00 level.

Morning Comments - Bears are a little anxious

Jul 29, 2014

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Wheat

The wheat market wanted to join in the bean rally party yesterday, but they were just too shy to remain out on the dance floor.  While not an untypical pattern for this market, early strength faded and we finished lower.  I have commented that we should now have factored in a large portion of the supply news in this commodity but it would appear that we need a little input from the demand side if we are to jump-start a corrective rally. 

Exports are not providing any stimuli.  For the week ending July 24th we shipped 14.4 million bushels, which was down around the low side of trade estimates.  This brings the marketing year to date tally up to 133.89 million bushels compared with 188 million a year ago.  To reach the projected 900 million this year we will need to bump the average up to 17.4 million per week.

Not helping matters are the expectations for a larger Russian crop and the declining prices in the Black Sea market.  Some feel that exports from that country could push as high as 6 MMT. 

Domestically, the crop conditions report reflected unchanged conditions for spring wheat at 70% good/excellent.  This compares with 67% a year ago with 93% of the crop headed.  Harvest for the winter crop has reached 83% versus and average for this date of 80%.

Even though we do not have enough interest to rally wheat just yet, we at least remain in a sideways pattern and for grain markets that would be a typical bottoming pattern. Managed funds are already short in this market and without additional follow-through lower, they could soon grow impatient.  I would not be surprised to see prices struggle through the balance of the week and if correct, we should be in line for a corrective rebound in early August.  

Corn

The corn market did a little better job of holding gains than did wheat yesterday and December futures were just able to fill the gap left on the previous Monday.  There were a few attributing the dryer conditions we have seen across the Midwest for the past 10 days for the rally and I guess after nearly a 19% loss over the past 18 trading days, it would not take much to spoke a few of the shorts.  To make that extend very far will be the greater challenge. 

While it is true that we still need moisture to fill out ears, we should have ample sub soil reserves to tap into, particularly seeing that we have no heat stress sapping the plants.  We did see crop conditions slip 1% in the good/excellent category this past week to 75% but that should really come as now surprise as this is normal post pollination.  Last year at this time we stood at 63%.  78% of the crop is silking compared with 75% normally and 17% of the plants have reached the dough stage versus a normal 16%. 

Export inspections were disappointing as we shipped just 31.7 million bushels.  With only 5 weeks left in the marketing year, we have moved 1.646 billion bushels and to reach the USDA target of 1.62 billion, we need to step the average up to 50.7 million per week.

While it is still a little premature to call for a turn-around, the corn market does have the appearance of trying to round out a low.  It was so fractional that I am not sure it is worth mentioning but with that ¼ cent push through last weeks highs yesterday, it was the first that had been accomplished since late June.  That said, you have to start somewhere.  Another few days of sideways action with a dip back down against the lows could have us poised then for an early August bounce. 

Soybeans

It was realistically all about the beans yesterday as China continues to be a solid buyer for the new marketing year, purchasing another 18 mil. bu., and the key August weather just around the corner.  Add in that the managed funds are short and you have a recipe for short-covering bounces like yesterday. 

The forecasts for August are by no means alarming but do remain cooler than normal but of course that does not preclude sunshine.  The weekly crop rating dropped 2% from the previous week and stands at 71% good/excellent.  Hardly what you would call alarming.  Beans blooming has risen to 76% versus an average of 72% and setting pods at 38% compared with the normal 31%. 

If nothing else, the weekly bean export inspections are consistent.  For the week ending July 24th we shipped 4.2 million bushels, which is right on top of the 10-week average.  Year to date we have now moved 1.581 billion bushels but to actually meet the USDA target of 1.62 billion, we will need to average 7.8 million per week.  While if we missed the target by 20 million bushels, that does not represent much of a 1.62 billion goal but that would still be a 14% boost in ending stocks and would potentially add to a growing supply for next year.

With the strength yesterday and overnight, November beans have poked through last week’s highs but not the Ukraine air disaster inspired highs of two weeks ago.  There is no question that this market carries the most uncertainty moving forward but I suspect the headwinds will become quite stiff as we approach the 11.30 + level without actual issues with the crop.

Morning Comments - Finally a stable start to a week

Jul 28, 2014

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Wheat 

The wheat market began the overnight trade with a little strength but as the night wore on, buying waned.  Overall this still leaves us in a flat congestion pattern, which is actually encouraging as it is the first step we need to make if there is to be a setup for a possible corrective bounce. 

Overall news has been very quiet over the weekend.  News from Russia is that the ongoing harvest grinds ahead and prices for wheat continue to sink lower in response.  As I reported last week it is currently estimated that their crop could reach into the 57 to 60 MMT range, which compares with the last USDA estimate of 53.  They will be a force in the export market for much of the year.

After much hoopla earlier this year, the El Nino event appears to be more of a whimper than an ill weather-producing event.  Recently the Australian Bureau of Meteorology stated that there was still a 70% chance of an El Nino but they felt it would be so weak it would have little impact on weather.  That country has already been having issues with dry conditions and a large event could have potentially pushed them into a serious drought.

Finally, harvest continues to advance in the United States and as reported last week, yields have continued to improve as we have moved north.  The Quality Council tour last week has set high expectations for above average yields once we have reached into the Northern Plains states.  

Even though all the news for wheat would appear dour, December wheat has moved into the third week of sideways trade roughly between 5.70 and 5.50.  If we continue in this fashion through the end of the week, I suspect we are poised then for a corrective bounce in August.  

Corn

While there would appear to be nothing positive to stimulate enthusiasm, December corn has begun the new week with a round of buying and we have reached up to touch against the highs of the previous week.  Now if we can actually push through and fill the gap that was left a week ago today at 3.77 ½ is left to be seen, this would seem to suggest the market is a little weary of trading the same supply news.  

Since this past Friday I have traveled from Northern Illinois to Des Moines, from there into Wisconsin and then on Sunday straight down through Illinois and into Southern Indiana. Basically a thousand miles of travel. While I recognize that windshield crop observations can be notoriously inaccurate, I have to say I do not believe I can ever remember seeing such consistently great looking crops through the entire journey.  Yes, there were areas where you would find low ground completely drowned out but they represent a minor portion of the total.  Crop conditions should reflect little change this week.  With a benign forecast for the weeks ahead it is difficult to imagine the corn market providing us with much of a rebound to the upside.  

That said, as we approach the end of a month, there could be the possibility that selling will lighten and we could even catch a short-covering bounce.  With managed funds still long in this market though, overhead selling should be stiff and corrective strength likely anemic.  

Soybeans

Beans have also witnessed a little overnight bounce as we have begun this new week but so far remain trapped within the range of the previous three weeks.  This is of course the crop that holds the most yield uncertainty at this point and it would appear bulls are prepared to defend their positions until more is known.  As I commented under corn, during my travels over the weekend I saw miles and miles of beautiful looking fields but as anyone who has been around beans will confirm, big bushy plants do not assure big yields.  I continue to maintain we need sunshine now in August to bring on this crop.  I suspect crop ratings will reflect little change this week.  

I continue to believe this market appears poised for a short-term corrective bounce but I suspect resistance will be stiff between 11.00 and 11.30 with another shelf of resistance against 11.50.  The bears have not been able to wrestle control of this market just yet and it would appear we will need to move a bit further into the month of August before that may be the case.

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Weekend Commentary - A Look Forward Part I

Jul 27, 2014

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Last year we published a report titled A Look Forward in an effort to try and help prepare our readers for challenges that we believe American agriculture will be facing in the decades ahead.  To a certain extent we could have titled this piece "A Look Back to enable us to Look Forward" as what we believe is in front of us is realistically a replay of pervious periods; while all long-term cycles will carry their own uniqueness, there are certain patterns that seem to play out time and again. In light of what has occurred now with the 2014-growing season, it seems fitting to review what we wrote about last year. This paper was written in four parts so beginning this week and running for the next four, we bring you once again A Look Forward.

Part I

I began my agricultural career back in the mid-to late 1970’s.  It was a precarious time in the world, as we were still in the throws of world-wide concerns over food production and population growth.  You did not have to look far to find Malthusian[i] predictions about mass starvation in the not-too-distant future.  Considering we had just emerged from a series of crop problems created by both adverse weather and disease issues around the world, it was not a stretch to envision how there would just be too many mouths to feed.  In 1974, the United Nations held a World Food Conference in Rome to discuss the situation.  At the conference, then Secretary of State, Henry Kissinger, stated that within a decade no child should go to bed hungry[ii]. "Plant fencerow to fencerow" became the mantra of the day, and world agriculture responded by increasing production in just about every hemisphere. Indeed, even before these concerns had arisen, had it not been for the pioneering research efforts of individuals such as Dr. Norman Borlaug [iii] in the 1950’s and 1960’s ushering in the "Green Revolution", there would most certainly have been numerous instances of mass starvation in places like India and Africa.

It’s funny the things that are remembered generations later.  I have always found it a bit curious that Thomas Malthus is identified with dire predictions of mass starvation.  In fact, he was basically just analyzing demographic trends in population.  His theories predicted that trends in population would tend to increase at a faster rate than trends in food production, creating disruptions and the need for adaptation, i.e. lower birth rates, increased use of land, etc.  The fact that the world had not already starved was a testament, or verification really, to something else at work.   What changed?  Refer to it as Adam Smith’s "invisible hand" or economics 101: we humans respond to stimulus and incentive, and the global agricultural community stepped up to the plate and increased production.  As a student of the markets coming in at such an exciting time, I was hooked. 

It was in the 1970’s that I developed an interest in cycles.  It only stood to reason that with the ebb and flow of world grain production we would experience periods of glut and shortage, and price movement would reflect the need to increase or decrease production.  To further my education, I was introduced to the writings and research of individuals like Russian economist Nikolai Kondratiev and W.D. Gann who believed there were natural and somewhat predictable patterns that unfolded over time.  Though I knew that I could never embrace the more esoteric ideas particularly of Mr. Gann, this research instilled in me a hunger to learn more about the natural cycles or rhythms that appear to influence us in many ways.  And so a lifelong search for more information ensued.   

Along my quest to find and share knowledge, I have encountered many reactions to the idea of cycles.  The imprecision of cycles is one of the basic problems that many people experience with the topic of cycles.  What good is something if the best you can expect it to do is an occurrence within a 3-year time window?  Additionally, some argue that as civilizations and technology evolve, we will render these swings either useless or ineffective.  But try as we might, we humans cannot control everything, particularly not human nature or the weather; an endless source of frustration for many.  While learning about cycle does not allow you to control the events that could occur, ideally it will at least provide an advance warning or way to prepare.  As such, even though no pattern or event unfolds the same way each time, I believe looking at past cyclical patterns can give us insight into current and even future events.

This brings us to the most common question—where in the commodity cycle might we be today, and more importantly, what might we be looking for in the not-too-distant future?  In general, commodities, and particularly agricultural commodities, appear to have an approximate 30 year cycle of advancing into new highs.  This pattern or cycle appears well defined on this price chart of December corn futures that extends back to 1899, with major peaks in 1919, 1947, 1974, and then most recently in 2012.  Specifically with the most recent peak, commodity markets as a whole began to rally soon after we entered the 21st century with a culmination in 2012.  Of course, the prices of agricultural commodities are not the only thing to advance or inflate during these advances as all commodities accelerate including energy and fertilizer. Ultimately this also translates in the land costs and other input expenses.  I am not sure if this is a case of the dog wagging the tail or the tail wagging the dog, but ultimately when prices level off, profitability is once again squeezed.  For many on the production side of the business, the return on investment reverts to levels no better than prior to the price advance, but with risks higher as we now must commit more capital than before the move. 

Each and every time this has occurred, there will be those exclaiming that we have entered a new era and that the prices for commodities will continue to rise to ever higher levels.  The reasons are many, take your pick: there is not enough land and/or water available, we are not increasing productivity, or the old Malthusian prediction that population growth is outstripping the capacity to produce food.  Now, I certainly do not have the foresight to predict whether there will be a day when one or all of the above scenarios comes true, but I believe that at this point in history they are misdirected once again.  Unfortunately some of those who have bought into the story will end up paying a financial penalty as we adjust and rebalance to new price structures. 

Even though cyclical patterns may not predict the exact day to buy or sell, I believe ignoring their importance is folly on behalf of the producer or consumer.  As I have commented previously, recognition of a possible forthcoming event can potentially provide us the blueprint to take appropriate measures in our overall business plan. This is not meant to come across as some type of doomsday scenario where you need to hunker down in a fallout shelter with bottled water and freeze dried food, but rather lay out a plan to deal with tighter margins of return and less forgiving conditions for those who are not prepared.

In the following segments of this series, I will be exploring further the swings the agricultural community has faced in the past relating to land, price, and production.  Finally, I will explore the tools you will need in your arsenal to prepare for the years ahead.  I hope you’ll join us.


[i] Library of Economics and Liberty. (n.d.). Thomas Robert Malthus. Retrieved from The Concise Encyclopedia of Economics: www.econlib.org

 

[ii] Thurow, R., & Kilman, S. (2009). Enough - Why the World's Poorest Starve in an Age of Plenty. New York, New York, USA: Public Affairs.

 

[iii] The World Food Prize Foundation. (n.d.). Norman E. Borlaug. Retrieved from The World Food Prize: www.theworldfoodprize.org

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Morning Comments - Bad news keeps rolling in

Jul 25, 2014

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Wheat

Yesterday was another discouraging day for the wheat market as early gains were once again surrendered and prices continue to wallow around the recent lows.  None of this really comes as any shock as we try and determine if we have reached a point of value in face of ongoing negative news. 

There is the old saying about "if I did not have bad luck I wouldn’t have any luck at all" and you can paraphrase that in the wheat market to "if I did not have bad news I would not have any news at all."  The Quality Council tour came up with a yield for North Dakota spring wheat of 48.6 b/p/a, nearly 4 bushels higher than last year. Sales yesterday we basically ho-hum and the Black Sea continues to dominate the world market and very likely will continue to do so through the balance of the calendar year. 

While I would not want to qualify it as positive, the most encouraging thing that can be said about the wheat future performance at this point is that we are have been tracking sideways now for two weeks and you have to quit going lower before you can go higher.  As I am preparing the comments this morning we have December futures at 5.49.  Last Friday we closed at 5.56 and the Friday prior 5.47 ¾.  If we can hold this level into the beginning of August, bears may grow impatient enough to provide us with a short covering bounce. 

Corn

If the picture in wheat looks blue than you would have to describe the corn market as black and blue as the bulls took a few knocks again yesterday.  It is not that we closed much lower but we failed to hold the early strength and have been back under pressure again overnight.  December corn closed last Friday at 3.78 ½ and this morning we sit around 3.67 so unless we see some type of shocking reversal into the close, this will be the 5th week in a row of lower closes with nothing to suggest we are ready to end the slide.

While the continued benign weather and ideas of larger yields are probably enough to keep prices on a downward slope, corn did received another kick in the teeth yesterday with news out of China.  They will now require that all shipments of DDG from the United States be certified MIR162 free by the USDA.  Basically, they will not be accepting any DDG’s from the United States, which effectively is 50% of our export market.  This is not positive for corn or soymeal. 

The corn market is on a mission to find value but that will be difficult to effectively do until more is know about the size of the crop.  While that does not preclude seeing rallies, and as we witnessed this week a little perceived threat in the bean can provide a bounce and even the week before with the airline disaster in Ukraine, but to sustain strength should be very difficult.  As such, we will continue to fade bounces with the idea that corn will potentially push against the 3.00 level before this move is complete this fall. 

Soybeans

The positive export sales provided the bean market with enough fuel yesterday to push to the highest level in a week but not enough to sustain most of that strength for the close.  Without another shot of juice overnight and into this morning, we have now erased all the gains that we achieved.  That said, we are off the lows for the week, which in November futures are 10.55 and the lowest close to date, which is 10.57 ¾. 

The bean market continues to cling to premium with the uncertainty yet of the August weather.  The forecasts that I have seen do not appear to offer anything crop threatening but as we know, there is certainly no assurance that something may not develop.  If we can hold stable through the next week I suspect this market should have room for a bounce possibly back into the 11.30 to 11.50 range and as it stand right now, we would be viewing such action as an opportunity to reward.


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