Game Not Over
Sep 26, 2012
The supply side of the equation for the U.S. grain markets is within two events closer to being resolved. The Small Grains Summary and 4th Quarter Grain Stocks report released this Friday, September 28th will provide the trade partial closure. Of greater consequence are USDA’s October Crop Production and WASDE reports queued up for delivery on Thursday October 11th. For all intents and purposes, the domestic supply of corn, soybeans and wheat will be fully embraced by the trade.
However, bearish trade sentiments that have escalated over the course of the past three to four weeks are not confined to the supply-side of the balance sheet. Bears are taking comfort, perhaps prematurely so, that the spike in corn and soy prices have both risen to and sustained levels high enough to more than adequately ration demand. So, it is expected that this price negative narrative will be further reinforced in the quartet of USDA reports coming out in a period of less than two weeks.
To suggest that the high water mark in corn and soybeans are NOT already established is to argue against some exceptionally strong historical evidence to the contrary. If anything, for a drought induced rally, corn and soybean prices have peaked later than the historical norm.
The exception offered up is the 1995/96 bull market in corn - when weather crimped U.S. corn production did not see price fully ration demand until May 1996 ($5.50+ Bu) is perhaps the sole exception. But it’s important to keep in mind that it was unrelenting exports that drove that rally. China flipped from an exceptionally large net exporter to a net exporter. The U.S. was the only viable supply source for world supply. And it was a creeping rally marked by unrelenting export sales that ultimately led USDA to raise their 1995/96 marketing year export forecast by 50 Mil Bu in course of four consecutive months. Corn grind for ethanol at 500 Mil Bu (pre RFS days) was still in a nascent stage; representing a meaningful, but relatively small sector to ration demand.
Today, the pronounced unsettling feature for the bearish camp, which in some respects conjures up the 1995/96 corn market, resides in soybean export sales. The 787.7 Mil Bu of U.S. soybeans sales on the books as of September 13, 2012 represent a whopping 58% of USDA’s current projection of 1.350 Bil Bu.
The evidence of demand rationing in the soybean market, across the line items, is presently sparse. More credible evidence of curbing consumption exists within the demand profile for corn. While the odds of both row crops having established their highs is strong, it is premature to project that a true bear market has evolved.
Wheat remains a wildcard and technically the strongest. Close attention will be given to the Hogs and Pigs report, also to be released this Friday, September 28th at 2pm. The influence on feed prices and farrowing intentions will be fully incorporated and influence price behavior, as well. Disheartened bulls and emboldened bears are likely to find their passions tempered over the course of the next two weeks.