Grains slide lower on prospects of good crop!
Jun 07, 2010
Grains and oilseeds continued to slide lower under the pressure of a good developing crop and weak outside markets. The unpriced producer is now getting into real trouble. He’s got a lot of 2009 corn crop still to move and 2010 inventory production is just around the corner. While it’s not a scientific study I get the impression from my phone conversations with people in the grain industry that producers are under sold for the 2010 crop at this time of year.
So many producers are going to be selling 2009 corn at or below the cost of production and if that was not bad enough 2010 corn is nearing cost of production levels. So what is the producer going to do? I suspect now that producers are going to only dump what they can, store and hope for a recovery event. Normally, this strategy has really helped but I would suggest now is not normal times. The problem developing is with big carry incentive in the market producers should be selling the carry to assure a return to storage like an elevator. History suggests they will not sell the market because the flat price represents a loss. So, they will put it the bin and hope for a rally.
My first concern is we are nearing the cycle low of a five- to seven-year cycle as we move into 2011. It’s been my experience in these time period, prices can go lower than expected but it’s equally very difficult to stay short and everybody gets long to early. The function of the market will be to drive supply out of production and stimulate usage.
The second big unknown right now is the outside markets, which are in turmoil. The news media is daily trying to tell us how good things are but everybody knows by looking in their checkbooks that revenue is low and expenses are high. Unexpected demand growth does not seem to be on the horizon. So, a “V” bottom is slowly giving rise to a “W” or double dip recession. This is what everyone is worried about. Now when globally governments of the world have thrown a lot of money at trying to turn the economy and employment still goes lower. It seems very simple to me higher taxes, higher cost of employee cost associated with health care and an overall governmental distain for business and profit has most businessmen thinking. Why take any risk, right now I’m simply going to hold onto what I’ve got and wait and see what happens.
In summary: Today’s gaps on the corn chart are a potential dangerous warning sign. Either they are an exhaustion gap and the market turns up within the next two to three days or the more negative interpretation is it’s a breakaway gap to lower price action. My fear is its the latter.
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