Sep 1, 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.

Weekend Commentary - Dangerous Ratios

Aug 29, 2014

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You would have thought that the most newsworthy event in Washington this week was the shade of suit that Obama wore at a press conference. While tan in not a color you often see on a President, it probably was not worth the amount of blog posts and other fashion advice that it generated.  Outside of that, most of the attention was centered on the Russia/Ukraine situation and ISIS; but believe it or not, there was actually a spot of positive economic news in the mix.  The second quarter GDP was released by the Commerce Department and, low and behold, it would appear that we have shaken off the winter blues.  After the dismally negative 2.1% number posted for the first quarter, our economy grew a solid 4.2% during the second three months of the year.  Additionally, this growth came across all sectors not just with a boost in inventories, and corporate profits appear to be soaring. Contrast this with the EU who could possibly be sliding into recession once again.

While this as well as the job growth provide us with much to be thankful for, it can also blind us to two very import elements and the long-term ramifications.  First, how many trillions of dollars of public money has it required to finally jump-start this economy? Secondly, while I do not have the exact figures as to what TARP and the QE programs have cost, a glance at the ongoing escalation in the Federal debt load looks anything but encouraging.  Granted, Federal debt began to rise soon after 1980, moving from around $1 trillion to $6 trillion over the next 20 years. But since the Great Recession, we have seen this number escalate from less than $10 trillion to closing in on $18 trillion this coming year.   Herein lies one of the fallacies of deficit spending at the public level; in theory, it is a useful tool to stimulate an underperforming economy or stem a decline, but in reality, a politician is never going to take away money he or she has doled out, at least not if they want to be reelected. Furthermore, if this money is in the form of social programs that are not reformed within the context of the demographics of the country, such as Social Security and Medicare and Medicaid, the drain on the finances just continues to compound.

The second element or ill-effect is related to the amount of debt we continue to accumulate as a percentage of the overall economy and this seems to be the factor that has been brushed aside as the economy has improved over the last few years.  The theory is that as the economy expands, the debt as a percentage of the whole will become less significant so the deficient spending becomes irrelevant.  The pace of deficit spending has slowed down, and we hear discussion about how the continued low interest rates have been such a benefit to slow this down, but who on earth believes interest rates can remain here for an extended period? Even at current rates, the Congressional Budget Office estimates that just the interest to service the debt will reach $799 billion dollars within a decade.  Compounding this issue, no pun intended, is that from 2018 forward, the drain coming the baby boom generation will accelerate.  Some will argue that the number to watch is the Federal Debt held by the public as a percentage of GDP, which is closing in on 75%, is the key number to watch; others believe it is the total federal debt as a percentage, which is already above the 100% mark. Regardless of which number is watched, each have climbed a near linear path since 2009 and historical research tells us it is when we have pushed beyond that 100% threshold that the debt becomes a serious drag on the economy. Japan has existed with a debt to GDP ration in excess of 200% for years now and should provide living proof, for, as outside of a temporary spurt here or there, their economy has been flat lining.  

So by all means, we should celebrate the growth we have posted in this most recent quarter. But soon, the politicians will begin crowing about the fantastic things they have accomplished to turn our economy around. Let’s not forget to remind them that they have still done nothing to confront the real long-term issues that our children, grandchildren and possibly even great-grandchildren will need to confront in the decades ahead.

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Chicken Little Scenario?

Aug 29, 2014

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Wheat

Usually when I get up in the morning I will check the electronic versions of a couple newspapers to see what we could be greeted with in the markets. When I clicked on the Wall Street Journal this morning, the first headline that I saw stated "Russia Invades Ukraine."  That has since been replaced with a "Putin Lashes Out at Kiev" and while that still suggests a situation in flux with tensions running high it is certainly something less than an invasion.  As you can imagine my first reaction was to think that this must have really touched off buying in the wheat market but upon looking at the CME quotes, I found that was really not the case either.  Prices were higher but certainly not any kind of panic short covering.  Could we have a "Chicken Little" scenario here where the trade has heard predictions about possible invasions and disruption of shipping in the Black Sea so often that they have become somewhat jaded to the news?

All that said, as I have commented recently the wheat market appears to have been in a foundation-building pattern for the past 7 to 8 weeks and we are now pressing to and through what has been solid resistance zones.  I would suspect that with the long weekend ahead of us and uncertainty around the world, not only with Russia/Ukraine but also the ongoing dryness in Australia, we could see additional short covering into the close.  If correct and particularly if we can finish above the 5.71/5.72 level in December futures we should have room for additional strength after the weekend.  Keep in perspective though, US wheat is already not competitive for most would-be buyers and forcing prices higher would not help that in the least bit.  I suspect the most we could look for without a "real" problem developing would be another 20 cents or so to the upside. 

Corn

Yesterday the corn market was able to ride higher on the coat tails of the wheat market but we must have hit a bump along the road last night and fallen off as that strength has not been able to carry-through into this morning.   The rally did manage to push December futures back against resistance at the 3.70 mark but with the fundamental picture looking overwhelmingly bearish, we are going to need something more than wheat short covering to lift corn prices higher.

Rains are expected to continue falling across much of the upper Midwest through the weekend, which should weigh on prices through the balance of the day.  Markets do close at the normal time today but will not reopen until Tuesday morning so it is difficult to expect much in the way of new positions outside of some possible weekend pre-hedging from the south. Yield reports from the southern states continue to be outstanding and while that by no means assures the same once the harvest pushes north, the trade will likely assume that to be the case.

As I commented yesterday, there is a seasonal tendency for the corn market to turn south after the Labor Day weekend, particularly in large crop years and without and unexpected event; that would appear likely for this season.  There is a possibility that prices could remain range-bound into the September 11th report but I suspect that as private estimates and guesses begin to roll in ahead of that number, it will become increasingly difficult for the foundation to hold. 

Soybeans

November beans have been able to build a touch on the strength that was posted yesterday but at this point have only been able to almost reach back against last weeks lows at 10.35.  I guess in light generally good weather that we have experienced during the month of August it is a victory of sorts that prices have not fallen further but at current levels, we will still have given up around 60 cents and will be trading at the lowest level for a November contract since September 2010. 

As we witnessed again yesterday morning on the sales report, China continues to be a large purchaser of new beans and this along with the ongoing tight nearby situation would appear be helping this market from really pushing over the edge.  Realistically, we may not see that happen at least until we have a better handle in the next South American crop.  China most specifically has just experienced two quite challenging years of bean imports with logistical and well as monetary issues creating problems.  I believe this has somewhat masked the reality that world ending stocks of beans have continued to grow for the past four years and are projected to set a new record in both raw quantity and when measured as a stocks to usage ratio.  Without a problem in the Southern Hemisphere this season, I cannot help but think this large supply will come to roost on bean prices.

As with corn and wheat, I would not look for much fresh trade today but if we have not developed any new problems through this long weekend, it would appear we could have a difficult time holding above the 10 level for much longer.

 

How long can you hold those arms out there?

Aug 28, 2014

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Wheat

It should come as a surprise to no one but tensions and fighting have increased once again in Ukraine and helped spur buying overnight in the wheat market.  Kiev has claimed that Russian troops have entered their territory and captured several villages but other news reports that I have read indicate this has been a counter offensive by the separatists.  Regardless, with the trade already quite short in this market and a long weekend looming ahead it has been enough to entice some of the bears to the sidelines.

Also providing a little support this morning is a short-term dry forecast in the wheat growing regions of Australia.  Unless we see the longer-range forecasts change this should have little effect on their crop prospects but when you add this to the other concerns from the Black Sea region, some traders will opt to error to the cautious side. 

On the other side of the ledger is Russia.  Granted, they play significantly into the situation with Ukraine but estimates for their crop potential continue to grow.  More analysts are joining the crowd that believes the total wheat crop will be in excess of 60 MMT.  The last USDA report has them at 59.

Wheat exports sales were uneventful and right in the middle of trade expectations at 403,600 MT or 14.8 million bushels.  The top purchasers were Brazil at 94k MT, Nigeria at 93.7k MT and Japan at 89k MT.

The initial strength overnight in the wheat did push us into key overhead resistance but prices have cooled as we came into the daylight.  As I have commented previously, I believe wheat has absorbed and priced in much of the negative supply information and with the speculative trade leaning to the short side, we could be poised for corrective rallies at anytime.  I am not sure if the current news is enough to stimulate an extended run but will be watching closely to see if we can actually poke through the upper side of the range after the long weekend ahead.  

Corn

The corn market has experienced a little two-sided action overnight and remains in a holding pattern.  This very well could extend through the upcoming long-weekend but I expect to see us move out of the range after that and they way things stack up right now, it is difficult to imagine that being to the upper side.  Early yield reports out of the south continue to be outstanding and it I have to imagine the trade will begin factoring in higher yields as we work out to the September 11th crop production and supply/demand estimates. 

As we are right on the cusp of wrapping up the end of the marketing year, exports sales for this crop year reflect a balancing between old and new.  As such, we registered a negative 32,700 MT or -1.3 million bushels.  This places year to date sales at 1.9155 billion bushels, just below the targeted 1.92 billion.  Sales for the 2014/15-crop year were towards the upper end of the estimates but nothing to write home about at 695,600 MT or 27.4 million bushels.  Top purchasers were Columbia at 140.9k MT, South Korea at 125k MT and Costa Rica with 120.5k MT. 

With the temperature forecast for the next 30 days predicting normal to above normal temperatures, little happening in the export scene, funds still long in the corn and promising early yield reports, it would seem that it will be increasingly difficult to see corn continue to hold this sideways pattern.  I just saw a yield update out of central Illinois reporting a range of 230 to 270 b/p/a.  As my associate Jake Wiener likes to say, the longer you have to hold your arms outstretched, the more likely you are to be come fatigued and eventually have to let them drop. Without a little assistance to prop up the arms of this corn market, they could soon give out. 

Soybeans

The pattern in the bean market since July has been to drop into lower lows and then just track a bit sideways for a bit before grinding lower once again.  That appears to be the case this past week as November futures pushed through 10.35 and reached the 10.20 level only to move flat from there.  The bean bull has never given up easily this year. 

For the second week in a row and of course the second to last week of the marketing year, we posted a negative sales number for the 2013/14 crop.  This time the number was -62,800 MT or -2.3 million bushels.  This still leaves us with sales of 1.691 billion bushels, which is 51 million above the USDA target.  2014/15 sales were down 9% for the week but still solid at 1,290,800 MT or 47.4 million bushels.  Just over 50% of these sales were to China who took 655k MT followed by Vietnam at 112.2k MT and unknown destinations at 96k MT.

As with the corn market, with no serious weather threats on the horizon, increasing harvest activity and very solid yield estimates it is difficult to imagine that we will not see prices erode further as we move into the month of September.  That said, after spending more than 35 years in this business I know that when everything looks obvious and one-sided it is time to be in the lookout for an unexpected event so you are not blindsided. That said as it stands right now, the path of lease resistance remains lower. 

How long can the floor hold this weight?

Aug 27, 2014

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Wheat

It seems that I am having to scratch a little harder each day to uncover fresh news for the markets.  As expected the Egyptian wheat tender went to Russia and Romania with no U.S. wheat even offered due to the fact we would not have been competitive anyway.  Wet conditions continue to hamper harvest of the spring crop but at this point, the market does not appear to be overly concerned.  On the opposite side of the world, Australia has continued to see increased rainfall which has improved crop prospects "down under" with trade estimate for production in the 23 to 27 MMT range compared with the last USDA number of 26.  Seeing this falls within existing numbers would say that it is not bearish per se but after the El Nino hype earlier this year and what has been drier than normal conditions, it removes a possible stimulus.  ABARE, who is the Australian counterpart to the USDA will release estimates on the 8th of September. 

Wheat was able to bounce away from base support once again yesterday, possibly aided by increased tensions and a few rumor again from Ukraine but that momentum has waned quickly this morning.   As I commented yesterday, there remains a possibility that we could see prices dip into lower lows in the days ahead but I would not expect a new leg lower.  For now I look for additional sideways activity.

Corn

Even though we were able to bounce away from support again yesterday, the corn market struggles and it would appear that it is only a matter of time before the impending harvest forces us into lower lows.  If there were any dry pockets in the upper Midwest it would appear they have pretty been eliminated or at least will be over the next 7 days and in parts of Iowa, Minnesota and Wisconsin, it would appear that we have swung the pendulum completely in the other direction.  While that could ultimately delay the maturity of the crop and could even hamper early harvest activity, it is always challenging to get markets overly excited about too much rain at any time of the year. 

While many southern states have been turning to beans to capture the nearby premium, corn harvest has been making progress.  As of last weekend it was estimated that Texas was 46% complete, Georgia 56%, Louisiana 38% and Mississippi 20% with a few others registering in the 1 to 10% range.  I wish I could provide solid yield data at this point but only have partial information.  That said, the numbers we continue to hear are impressive. 

The weekly ethanol number will be released later this morning and should be continue to remain solid with the profitability in the industry.

I am somewhat surprised and mildly impressed that the corn market has been able to hold on a well as it has to this point but as I commented initially, it would appear to only be a matter of time before the floor give way to the weight of record production.  We may be able to hold ground into the long weekend, but if nothing bullish materializes before next week, that should become increasingly difficulty to do.     

Soybeans

As with corn and wheat, beans were able to bounce from the early pressure yesterday and actually extended a little higher this morning but the onset of harvest and some exception bean yield reports has pretty well taken all the wind from the sails.  A few weeks ago I had heard reports that in the Delta, some beans were measuring near 100 b/p/a and I read overnight that 400 acres harvested in Mississippi came across the scale at 96 b/p/a.  Incredible. 

The possible counterbalance to this has been reports of Sudden Death Syndrome showing up in Indiana and Illinois. 

We have seen November beans reach the upper end of our price target at 10.20 and price could stabilize now into the long weekend.  Regardless, unless weather really take a turn for the worse and brings harvest to a halt, I suspect we will head down to at least the lower targets at 9.80 in September.

 

Bulls have to contend with a starvation diet

Aug 26, 2014

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Wheat

We have defensive overnight trade across the floor but understandably wheat appears to be the least impacted.  As I have noted previously, wheat should have already factored in much of the supply situation, at least on the domestic front, into current price levels but still lacks a demand stimulus to move us away from this base.  We do know that Egypt has set a tender for an unspecified amount for shipment between September 21st and 30th but in all likelihood, this will be filled from the Black Sea and/or Europe. 

There is a slight concern about the recent wet weather across the northern plains states and Canada hampering wheat harvest but the most recent updates do promise a drier pattern.  While conditions remain solid albeit slightly lower at 66% good to excellent as of the 24th, spring wheat harvest stood at only 27% complete compared with an average of 49% and even last year at 39%. 

Export inspections have been consistent over the past several weeks and last week we shipped 20.5 million bushels.  This is slightly ahead of the 10-week average of 17.8 million and brings the year to date total up to 210.88 million bushels.  To reach the USDA target of 925 million will now need to post a weekly average of 17.9 million bushels. 

I did read overnight that France may be shopping around for good quality wheat to blend with the moisture damaged crop they are dealing with this year.  While that does not change the overall supply situation around the world, and could very well come from Russia, it could provide a much needed demand spark for this market.

Corn

While still holding the 5-week base, corn was under pressure yesterday and has been again overnight with very little news to provide support. Recent moisture has turned excessive in some areas of the upper Midwest but any damage in low-lying areas would have occurred long ago so the benefits far outweigh any problems.  The trade should now be completely focused on the finishing touches of this crop with ideas of early frost fading quickly.

The weekly crop conditions showed improvement with all the recent moisture and the good/excellent categories actually picked up 1% and stand at 74% good/excellent. This is the best rating for this time of year since 1994 and normally, we would have already been seeing these numbers slip as the crop begins to mature.  Corn in the dough stage is slightly ahead of normal at 83% compared with the normal 78% but corn denting is 8% behind average at 35%.  Regardless, the trade will be fully expecting the yield numbers on the August and possibly the October reports to continue to move higher and I expect soon after the Labor Day weekend that will again be the topic du jour.  Dr. Cordonnier raised his corn estimate to 170 b/p/a yesterday. 

Corn exports were better than expectations, coming in at 43 million bushels.  This brings the year to date inspections up to 1.809 billion bushel with one week to go.  We will need to wait for the census number to determine how close we are to the 1.92 billion bushels target. 

Early yield reports in the south have been sparse, as it would appear farmers have attacked beans first to try and capture the inverse market and current premiums.  Reports out of Texas though, just say yields have been exceptional.

I suspect the corn market could stumble and bumble through the balance of this week traders may be reluctant to enter new positions in front of the end of the month and a long weekend.  That said, if we have found nothing positive to work with by the time trade starts again then in September, you have to believe the path of least resistance will be lower. 

Soybeans

As I commented under corn, we do have a little harvest activity kicking in to the south as farmers try and capture the inverse premium for nearby values.  Mississippi reports 2% harvested and Texas 8% and while yield numbers are sketchy, there have been reports of 70+.  Cordonnier raised his U.S. bean estimate ½ bushel yesterday to 45.5 which basically just keeps him at the same level as the USDA and the Pro Farmer tour. 

Bean rating slipped 1% last week but remain at a solid 70% good/excellent and like corn are at the highest rating for this time of year since 1994.  Beans setting pods climbed 7% to 90% leaving us 1% ahead of the normal pace.

We are just about to close out a very interesting to say the least, marketing year and we posted comparatively decent export sales for this next to the last week.  The total loaded was 5.3 million bushels, which compares with the 10-week average of 3.3 million and brings the year to date tally up to 1.593 billion bushels. We do not have to look back too many months and the debate was over if there would actually have been enough beans to make it until new crop arrives.  As I have stated many time before, when you know about a problem long-enough in advance there will most likely never be a problem.  That is exactly how a free market is supposed to function. 

While still quite grudgingly, November beans keep chipping away into lower ground and this morning we are finally reaching down to the upper end of the gap targets at the 10.20 level.  I continue to believe we should see this market settle out between 10.20 and 9.80 but could then move into a new congestion pattern at this price range. 

 
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