What Point Does Demand Say "Uncle?"
Jun 06, 2011
Many in the trade starting to question just how much higher flat price and basis will be able to run as more thoughts of poor livestock and ethanol margins loom. At what point does demand say "uncle?" If crude oil and livestock prices continue to erode, you have to believe it is sooner rather than later. I hate to sound like a broken record, but there is also now the question about how livestock feeders will react to significantly cheaper global feed wheat in comparison to corn. Not only has the flat price of wheat dropped significantly in comparison, but when you factor in the strong positive basis for corn against the weak wheat basis there are some significant savings. Another obvious item of interest this week has to be the USDA report scheduled for release this coming Thursday (June 9th) morning. There seem to be some speculation that a reduction in acreage could be in the mix. Some are even speculating that a yield reduction could be coming down the pipe for corn, giving the bulls even more reason to question supplies. I personally don't see it in the cards, and if this were to occur, I would have to believe it would be such an extremely small cut or reduction, it would carry very little weight. Still there is that possibility, so we have to be on our toes. The name of the game however remains the "weather." From what I have been able to gather, there was actually a little more rainfall than earlier forecasted in many parts of the Eastern and Central Midwest. I am doubting it slowed many planters down, but there were some areas reporting up to an inch late Saturday and into Sunday. If anything I would have to say planting was extremely brisk, but maybe just slightly less than a few of the bears were hoping for. The folks in the Southern plains unfortunately had to deal with more extreme heat. A situation that has become all too frequent. It is very tough right now to get a handle on the overall condition or yield projections. I talk to some producers who say things look fantastic, while others seem to be more concerned. A couple of producers are reporting very uneven growth in some fields, possibly being attributed to being worked too wet. On a side note, I am starting to hear a few traders wondering how much of last year's poor yields could have been attributed to producers scrimping on fertilizer. The thoughts are that with the previous crop being harvested much earlier and farmers eyeballing higher prices, significant "prep" work has been done this year to help ensure producers bountiful yields. There is thought that some major differences between this years crop and last years crop will be seen as farmers were able to apply fertilizer in great mass, and were given time to work the fields to perfection. As you can see, there are stories and theories on both sides of the fence regarding the projected yield. Right now, no one knows for certain where we will end up, and I think this is why the USDA will error to the side of caution and choose to do very little with the yields. As far as this week's trade is concerned, I am inclined to think prices may ease just a touch the next few days on improved weather conditions here at home and in Europe. I also think some of the "longs" may be looking to lighten the load or square up some positions ahead of any possible curve balls being thrown by the USDA on Thursday morning. Once this hurdle is cleared, which I guess to be only temporary, the trade should once again start to question supply, yield, acreage, etc...and resume its upward bias. The "outside" markets and money-flow continues to frustrate and should be watched closely.
* On the global weather front, some continued rain fell across France and Germany just like we had anticipated. Some locals are reporting extreme rain in some areas with as much as 2-3 inches being recorded. You have to believe this weighs on wheat prices in the interim. The trade is still however questioning if the the rains actually improved the current conditions or if the damage has already been done. From what I have heard, it looks like things will be heating back up in the next few days, so there may actually be some additional concerns popping up down the road. I will keep you posted if I hear of anything.
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