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February 2013 Archive for Recon Ag Marketing

RSS By: Greg Wagner, AgWeb.com

Greg Wagner is president of GWX – Ag Advisors. For over 25 years, he has specialized in advising agricultural producers and end-users on marketing and risk management decisions. GWX Ag Advisors integrates fundamental and technical analysis, combined with experienced historic perspectives of agricultural markets in the decision-making process.

 

Fundamentals - Real and Imagined Continue to Drive Row Crop Values

Feb 19, 2013

CORN

Note: USDA’s Agricultural Outlook Forum later this week will provide the first "officially unofficial" forecast of the S&D’s of principal agricultural commodity balance sheets for the 2013/14 marketing year. As always, there will be a market response to the numbers. We will take a closer look at this new crop profile, as well as its potential price implications in the next post.

Old-crop corn has not experienced any recent infusion of bullish fundamentals that will act as a catalyst for a meaningful price rally. The ongoing bearish argument that domestic physical supply in the USA is both overstated continues to restrain the market’s ability to launch a rally. At this juncture, bearish trade sentiment remains focused on the inability of the corn export sales pace to provide evidence of recovery. In the absence of a sustained, multi-week, improvement in export sales of old-crop corn – price will be under pressure.

A wholesale price collapse does not appear in the cards, but the inability of corn to hold key technical support identified in the $6.95-$7.00 area basis March futures (2/11 post) points to a multi-week price consolidation at modestly lower levels. Look for a gradual consolidation of the trading range for corn near-term. If that develops, a natural consequence will be clearly defined areas of price congestion that will ultimately serve as either base building period for a rally or a near impenetrable area of resistance.

Now despite the psychological weight being brought to bear by the export sales malaise, the reality of tight physical supply will continue to function as a counter-balance. One need not look further than cash basis levels to confirm the situation on the ground. Relief for livestock and poultry producers, as well as ethanol facilities, to source available supply is not going to become any easier with the passage of time.

The bearish trade sentiments, which have lousy export sales as one of its primary taproots, may yet find these export sales circumstances marginally improving. If not, then projecting future reductions in USDA’s corn export sales forecast is unlikely to provide more than marginal increases in supply. I am of the belief that USDA’s current corn export forecast is attainable.

Again, clarity to what’s going on in the country is best reflected via interior cash basis levels. The unanswered question is not whether basis levels remain elevated, but the extent in which even more pronounced strength is manifested in the cash markets. In this scenario - more probable than improbable in my estimation – the crucial unknown is whether the board "coat-tails" cash market dynamics.

To date, futures price action has reflected the fundamentals of the cash market by backwardation in old-crop contracts – as opposed to flat price rallies. This backwardation characteristic is showing no signs of abating. However, the potential for backwardation AND a rally in futures flat price does have sound historical precedence. So, it is simply premature to rule out this dynamic reorientation in the futures versus cash dynamic. Flat price rallies and backwardation can occur in tandem.

Producers need to be fully engaged in what’s going on in their local cash markets. And by no means are any of these observations to be taken as a "carte-blanche" to disengage from sound risk management tools. Being as well as acquainted as possible with the bearish side of the argument, I respect the merits while not necessarily being in agreement. But the bottom-line is the bottom-line, which means that it is absolutely crucial that any of your unpriced production requires being risk managed.

SOYBEANS

The soy complex completed its post Feb crop report swoon by bottoming at the middle of last week. With March soybeans holding identified technical support above the $14 level (low $14.0450 Bu – Wednesday 2/13). The anticipated support and timing coincided with that in the prior post (2/11/13).

Price action as played out during today’s session might more typically be accompanied by the task of sorting out the relative strength of each sector of the complex which led the rally. In a nutshell, there is little to differentiate the strength seen in soybeans, soymeal, and soyoil. The entire complex exhibited prominent strength in equal measure.

To assign the price action as being "technical" in nature would place it in an area not too far removed from "head scratchin". The most recent soy complex rally was based on fundamentals. However, in the process it also realigned its technical profile in some noteworthy respects.

First, most prominently is that in the course of the sessions rally both soybeans and soymeal decisively retraced and filled downside gaps created in the March, May, and July contracts during the price swoon that occurred following the Feb 8 WASDE report. Conventions of technical analysis would hold that these downside gaps existed as levels of price resistance – keeping with the old saws of "filling the gap" and "falling back". However, prices advanced readily through the gaps without so much as a hiccup.

Secondly, these same old crop soybean and soymeal contracts also created upside or breakaway gaps as the market opened and remained above the highs of the previous session (Friday 2/15). So, in effect today’s price action also has established a fresh benchmark of support going forward. Note that soyoil did not participate in this technical reconfiguration as it had never left any down side gaps needing to be filled. The March, May, and July soyoil contracts have been in a broad trend higher that originate in late May of 2012.

Now fundamentally little has changed. Those waiting on some consistent evidence of soybean sales cancellations are still waiting. Bears pinning their expectations on an imminent throttling back in the pace of the domestic soy crush could find little solace in the most recent crush numbers out of NOPA for January. Yes, crush was modestly lower than December, but running near 11% higher than year ago. The expected slowdown in the export sales pace coupled with cancellations have occurred (last week), but just as quickly reversed as early this morning with the USDA announcing under their mandatory reporting protocol that China purchased 120,000 MT of old-crop soybeans.

An observation as the week unfolds – both the May and July soybean and soymeal contracts are at significant levels of resistance. Some degree of price retracement is likely. Look for the "too far too fast", "profit-taking", and "good cash movement" as root culprits. And all those potential reasons have validity. But equally valid is the curious and decisively bullish behavior of the entire soy complex. It enhances, but not guarantees, the prospect of additional price strength near-term.
 

Do Row Crop Prices Presume Evaporating Demand?

Feb 11, 2013
CORN
The precarious price scale for the corn market has tilted towards continued, yet limited, pressure being placed on values going forward. This market had been telegraphing its impatience on the demand front well prior to the release of the Feb WASDE. Outlined in a prior post (1/25/13) was a best case price scenario for March corn – a rally into resistance at $7.45-$7.50 Bu. An intra-day high of $7.4625 Bu basis the March contract was hit on Feb 1 - a full week prior to the reports to release. Not $7.50 Bu. The grain markets have a well-established pattern of making major price pivoting in half and full dollar increments.  
 
If the USDA did not put their thumb on the scale with any demand line item changes in the Feb WASDE, the result nevertheless has been to place a weighted bias towards selling rallies going forward. There is more to it than a 50 Mil Bu reduction in export sales. The underlying presumption that US corn export sales have so persistently been lagged behind the forecasted pace that achieving 950 Mil Bu this marketing year is sound. The 20 Mil Bu uptick in demand allocated to increased HFCS and starch production pales in comparison to the qualitative (as well as quantitative) impact of the export sales reduction. That pretty much sets the tone.
 
However, there is more to the numbers than meets the eye here. Two additional line items on the demand side of the balance sheet are very much in play. Both will continue to function as bearish psychological influences that are likely to limit any substantial price rally.  
 
First, on the list is corn grind for ethanol. This is an easy target which readily provides fodder for headlines. Ongoing reports of either ethanol plant closings or production reductions are being reinforced by weekly EIA ethanol production data. While I believe there remains a good reason to believe that ethanol production is forming a baseline bottom on which to build, that sentiment is not in the mainstream. Presently, the trade is kicking around the idea that a corn grind for ethanol will ultimately by trimmed by 25-50 Mil Bu.     
 
Secondly, skepticism still abounds on the 300 Mil Bu increase in Feed & Residual demand that appeared in the Jan WASDE. The upward adjustment - implied by the quarterly Grain Stocks report – was out of sync with trade expectations has not been reconciled within the trade. And it will not be until the release of the Grain Stocks report on Thursday, March 28th.
 
So, the underlying dynamic is anticipatory, setting aside for the moment the current historically tight stocks-to-usage ratio in corn while looking forward to the tightness to ease somewhat. Despite the anticipation of corn ending stock levels to increase over time, they will nevertheless remain uncomfortably tight. The market will uncover buyers and price support on breaks, while rallies of substance will be checked by the idea that not only that there is solid evidence of demand having been rationed, but it may have been accomplished to a much greater extent than what is presently apparent.
 
The bulk of the near-term slide in corn is more likely than not near completion with support located in the area of $6.95-$7.00 Bu area basis March.
 
SOYBEANS
So, we have a friendly crop report and a decidedly unfriendly price reaction. US soybean export pace lousy? Domestic soy crush starting to falter? Nope on both counts.
 
Reading between the lines of both side of the ledger reveals nothing prima facie that would suggest the soy complex price reaction following the Feb WASDE is warranted. So, is it simply a case of "buy the rumor, sell the fact"? On first glance, certainly appears so, but again there was simply nothing either stated or implied within that report that provides the impetus for the magnitude of the price weakness that followed in its wake.
 
A noteworthy perspective is that USDA’s 2012/13 soybean end-stock number did not radically depart from trade expectations – at 125 Mil Bu the USDA forecasted a number a mere 4 Mil Bu below the 129 Mil Bu average trade estimate. So, while the essential fundaments of the soy market remain sound, the price response to USDA’s numbers suggests otherwise. It’s this rather dramatic divergence that requires some reconciliation.
 
There appears more of the "buy rumor-sell fact" quality at work here near-term. In this regard, the post-crop report price swoon needs to be taken into the context of where values stood prior to the report. As alluded to previously (2/4/13) the $15 Bu area basis March soybeans was the definitive "line in the sand".  And that level was challenged in the four trading sessions leading up to the report, but March soybeans were never able to trade above an intrasession high of $14.98. Reference again, as in the case of corn – grain markets love to pivot in in half and full dollar increments. Not precisely though – that would be much too tidy. Complicating the technical profile is the volume spike which accompanied the price break coming off the Feb WASDE. The subsequent high volume session neutralizes what was a most classical technical breakout that propelled values to the $15 Bu vicinity.   
 
Now we have soybean end stock numbers trimmed to levels that came reasonable within trade expectations and the Feb WASDE did not contain any intrinsic shock and awe aspects. Coupled with prices at a major area of resistance, a bullish "shock" was perhaps the only thing that would have provided the fuel to propel values higher. Be that as it may, there still remains a more problematic issue with the fundamental revisions in USDA’s latest forecasts and the markets price behavior that goes beyond the technical profile.  
 
The price/fundamental disconnect cannot be linked to any evidence of demand rationing - for all intents and purposes that is non-existent. Neither export sales/shipments, nor the pace of domestic crush are showing any true signs of fatigue. However, there is a presumption by the trade that a reduction in the unsustainable pace of demand for soybeans is imminent. Relief is widely anticipated to arrive in both export sales and crush.
 
In this scenario, fresh export sales will ultimately throttle-back to a near halt. Also, crucial to advancing this argument is that sales already on the books will be whittled back as cancellations occur in fits and starts commensurate with the availability of SA soybeans. After all, in support of this "demand leak" argument one need look no further than USDA’s latest export sales forecast, which was unchanged from January - and December, and November. The last revision to export sales occurred in the November, 2012 WASDE when sales were raised from October by 80 Mil Bu to the currently forecasted 1.345 Bil Bu.
 
So, will export sales/shipments be throttled back? As well as, the crush pace? The answer to both is yes. But, a yes is required because none other is allowed. In other words, the state of physical soybean supply/demand in the US is already at implied pipeline levels. There is not any wiggle room for increased demand. The key to a recovery in old-crop soy values is very much joined at the hip with the pace of export sales and as importantly wholehearted cancellations of booked sales. The efficiency in which Brazil can get its record soy crop to ports and afloat will provide the answers.
 
There needs to be concrete evidence of soy sales cancellations by the end of March. If not, it will be the May soybean contract which will be revisiting that $15 Bu area. Now that the market has experienced a hefty high-to-low pull-back of $.70 Bu, it’s not actually a matter of fresh demand that prompts a price recovery, but rather that pre-existing demand is resistant to softening. Without a tangible evidence of demand retreating, price advances.     
 
At or before midweek, the near-term slide in soybeans should be complete. Support is located in the vicinity of $14 Bu basis March.

 

Old Crop Soybean Prices & Cross Bred Support

Feb 04, 2013

There are both technical and fundamentals providing near-term support to soybeans. Producers need to be aware of both.
 
Last weeks decisive breakout from a descending triangle in March soybeans on Jan 30th, points to a further build of recent gains. The timing of the breakout occurred sooner than had expected. We noted in the F 1/25 blog post, the significance of the high volume session accompanying a rally from the low ($13.5150 Bu) made prior to release of the Jan 11 crop reports. That session saw volume surge 45% above that of the prior 5 trading sessions. Recall, volume surges accompanying decisive price moves serve to validate their legitimacy.
 
Likewise, the decisive breakout from that chart pattern on Jan 30th was accompanied by a high volume sessions. Note also, that Jan 30th rally saw a volume surge in the March soybean contract 35% above that of the prior 5 trading sessions. Again, volume validated that the price action was not an outlying fluke. The technical picture for the March soybean contract now projects additional near-term positive price performance.  
 
However, this begs two primary questions:
 
 1) What magnitude of additional price advances can be reasonably anticipated near-term?
 
 2)  What fundamental circumstances are either currently present or are will soon to be introduced as catalytic drivers for further gains?
 
First  - on the issue of the magnitude to be expected in additional price advances. At this time, the market is rapidly approaching primary price objectives in March soybeans. Intra-session highs of $14.8650 Bu on Friday, Feb 1 are within reach of major resistance at $15 Bu. The last time March soybeans tapped the $15 Bu level was on Dec 17, 2012. It will be a formidable "line in the sand" to breach.  In addition, significant resistance resides at the 150 day moving average, converging in the $15 Bu area. That momentum indicators have tracked up into the (at/or near) vicinity of overbought at $15 Bu, coupled with chart resistance makes that level "case-hardened", of sorts. Momentum indicators are also currently above levels seen when the March soybean contract last hit $15 Bu – and were not even at that price level, yet.   
 
There is no shortage of traders and producers primed to sell into the $15Bu area basis March soybeans. I find it particularly curious that a number of higher profile spec traders seem to be quite animated about the prospect of selling a rally into the $15 Bu area basis March soybeans. Be that as it may, the selling is more likely than not to be absorbed – with some price pull-back to follow shortly thereafter. A fresh extra injection of demand, whether anticipated or actual, will then be required to provide the fuel to grind to the next level of resistance at $15.45 Bu. If we get that far, we can then address the next realistic area of resistance. 
 
Secondly, in regards to fundamental drivers for further price gains – they retain their positive distribution across the US domestic balance sheet AND the Southern Hemisphere. Well known, is that the US soy export sales/shipment pace, as well as the pace of the crush must recede, whether separately or in tandem, to ensure the 135 Mil Bu 2012/13 end stock level does not erode further. There is not any leeway on this. Period.
 
The pace of the US soybean crush is not likely to slow significantly near-term. However, trade consensus expects n imminent slowing in soybean export sales. Conventional wisdom holds it will be accomplished via Chinese cancellations already on the books and a dramatic slowdown in the pace of exports as SA soybeans become readily available. The reality that current soybean export sales of 1.227 Bil Bu represent 91% of USDA’s forecast total of 1.345 Bil Bu for the 2012/13 marketing year. In other words, only 118 Mil Bu or 9% of additional sales are required to meet USDA’s forecast over the course of the next 7 months. As it stands, the sales trajectory is so out of sync that something has to give.
 
Prospect for soybeans prices pivot not on the fact that something indeed has to give, in the way of export sales/commitments, but rather the timeframe that in which it occurs. The USDA will then have some confirmation to begin the process of realigning export sales forecasts downwards towards a sustainable pace. Some insight into the answer should begin to surface within the next 4-8 weeks. It will require a demonstrated ability on the part of Brazil to get their soybean s out of the field, transported to port, and loaded onto a large flotilla of ships already waiting there for that purpose. If Brazil cannot execute these demanding tasks in a timely fashion, the likelihood that USA will, by default, be called upon as a supply reserve is virtually assured.
 
Granted, there are an exceptionally large number of unknowns in this scenario. However, the potential of Brazilian soybean exports to (once again) become ensnarled in a complex and inefficient logistical transport system are quite real. This leads to the question of at what point in time, shipping delay volumes become so acute as to go beyond foreign-end user’s comfort zone to ensure timely delivery to their home ports.    
 
So, the size of the Brazilian soybean crop will continually overshadowed by the trades focus on their ability to meet in a timely fashion the historically large demand for it. The demand pressure for the Brazilian soy crop is already present. A flotilla of ships at their principal ports now awaits loading. Demurrage charges on ships docked idly waiting to be loaded is skewing on a daily basis the bottom-line landed cost to importers, as well.  
 
Producers holding old-crop soybeans need to keep a very close eye on the $15 and $15.40 level basis March soybeans. The backwardation in old-crop soybean contracts reduces their appeal. While there is arguably a better technical profile in back month old crop contracts – suggesting steady/better price performance with the passage of time – the flat price discounts should discourage. It is advised to keep a close eye on your local basis levels and retain downside protection in short-dated options until old-crop sales are complete.  

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