Quick Look at this Week's Fundamental News
Dec 05, 2011
This is going to be a busy week, and one that I expect will end in a big crescendo on Friday, after we hear more specifics from the European leaders, and get a first hand look at the December USDA crop production report scheduled for release prior to the open on Friday. This should provide the trade with a nice blend of "Macro" economic news and more "Fundamental" crop data.
Looking more specifically at Agriculture, we have Informa throwing out some World Production numbers today, USDA export inspections, followed by the Canadian production report on Tuesday, ethanol production numbers on Wednesday, export sales on Thursday and the USDA Supply/Demand report on Friday morning (actually the WASDE and world crop production report. Most seem to be thinking 2011/12 US wheat and corn stocks will adjusted ever so slightly, while soybeans may jump a little based on reduced Chinese demand, US exports and domestic usage. Even though the numbers are important, I would suspect the trade is much more focused and more eagerly awaiting the USDA's January Stocks and Final Production data scheduled to be released on January 12th.
As I mentioned above, the soybean market will remain fixated on US export sales. I could throw a hundred different numbers and scenarios at you, but most all of them point towards lower US soybean exports. I think the simplest scenario, and easiest to understand, is if US soybean sales in the coming weeks move at a similar pace to last year's sales from here on out then we will fall massively short of the current USDA estimate. In fact, several leading analyst in the industry are now thinking we could fall to 5 or 6 year lows.
I am not sure I am willing to go to those extremes, but I definitely think US soybean exports are a major concern. When considering this issue, I want you to keep in mind there are two sides of this argument, and it all hinges on overall Chinese soybean demand. You have one group who believes China will soon stop releasing soybeans from their state reserves, and will be rebuilding them instead. If this is the case the current USDA estimate of China importing 56.5 million metric tons may be too low. Some big players like Cargill are thinking they will import closer to 58 million, COFCO is thinking closer to 58.5 million, and Singapore-based Noble is thinking China could import above 60 million. On the flip side, the players at Oil World and the Australia & New Zealand Bank said they don't see it happening, especially since some of the biggest crushing facilities in Guangdong and Shangdong are now looking at margins close to three year lows. There are actually reports circulating that margins in Dalian, are now at their lowest since 2005. Obviously crush margins have an overall bearing on demand, and this is something we should continually keep our eye on moving forward. If these numbers don't turn around, you would have to believe Chinese demand will have to slow even more. Even though China may ramp up some of their short-term buying in order to replenish supplies while their domestic demand is low (essentially giving them a window of opportunity to catch back up). If crush margins don't pick back up after their "restocking phase," then we may actually see Chinese demand fall back even further.
I am starting to hear more talk that Ukraine grain may be of less quality than some had anticipated. The word around the market is that despite Ukrainian feed wheat and corn to Taiwanese buyers being some $15-30 a ton cheaper than that from the US the quality is somewhat suspect. There is also more global competition from Brazil being talked about, and more rumors that Brazilian feed wheat is now being shipped into the EU. Thoughts are Brazilian feed wheat is actually cheaper than their own EU feed wheat. Let's not forget that Australian feed wheat is also being delivered into Southeast Asia cheaper than US corn. Throw on top of this the fact that Mexico is opting to purchase US wheat instead of US corn, and you can easily see why many analyst are worried that US corn demand is slowly falling out of fashion. Before we get too overly bearish, keep in mind even though exports are struggling, we are still seeing robust domestic demand for ethanol usage, therefore net-net I don't see a real big change...especially if wheat can find some type of bid or traction in the next few weeks.
There is still some bantering back and forth as to whether or not the USDA will eventually bump their bushels used for ethanol higher than their current 5 billion being estimated. On the surface one would have to imagine the USDA will indeed adjust the number higher, especially when you consider the recent surge in production. Be careful putting a lot of faith in this however, since we know most blenders are gobbling up supplies in an effort to capture the $0.45 cent blenders credit before it expires in less than 30-days. If you look beyond the obvious you will notice ethanol margins out into 2012 are much lower and domestic demand for ethanol is actually lagging. This makes me second guess whether or not the recent jump in production will be enough to compensate for the drop in demand that could immediately follow the expiration of the $0.45 blenders tax credit.
In summary, the "outside" markets could definitely add some support through year-end. I also believe fund liquidation in the grain and soy markets will slow the next couple of weeks, leaving me to believe we will stay stuck in this rangebound type atmosphere somewhere between $5.60 and $6.60 in corn. I am afraid soy may continue to drift lower, while wheat may actually find some traction.
As for hogs, I continue to urge producers to lock in a portion of their sales. I am hearing more talk about lower prices on renewed Chinese supplies and weakening demand being possible in the weeks ahead. I doubt this set-back is of any long-term significance, but I think you need to take advantage of the recent strength in the deferred contracts just to be safe.
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