Strap in...this week could be a wild ride in the grains!!
Jun 24, 2013
Wild weather patterns, USDA uncertainty and July deliveries should make this an extremely volatile week in the grain and soy markets. Producers should be looking to make final catch-up sales before what could be "game changing" data by the end of the week. Some type of floor in DEC13 corn between the $5.50 and $5.70 level still seems to make a lot of sense to me. A similar type of strategy in NOV13 soybeans, with a floor of some sort in place looks to be a smart play. There are just too many extreme dynamics in the marketplace right now to be taking "unprotected" risk. Below are just a handful of reasons why we need to proceed with caution and extreme respect for today's volatile markets.:
- Money-Flow - More big banks looking for ways "out" of commodities rather than "in." Players in the game continue to consolidate as funds shut doors due to lack of performance. The rocking of the boat could be extreme in both directions as many who have been in the commodity boat look for ways to exit.
- US Fed - What is the Fed's next move? How will that move ultimately effect commodities? In particular how will the US dollar react and how will that in turn help or hurt US Ag exports?
- China - Liquidity issues, shadow banking and thoughts that the Chinese government is trying to transition into more "consumer" based spending is cause for concern. How fast will the remaining lower-class transition into the rising middle-class? Any stumble by the Asian giant and global supply quickly overwhelms global demand. Pace of expansion and contraction will ultimately dictate volatility and greatly influence Ag prices.
- South America - Production and technological improvements are long-term bears, but logistical concerns, political problems and rising inflation makes for extreme uncertainty in South America.
- Black Sea - Russia, Ukraine and Kazakhstan production rebounding. Cheap supplies begin to attract many former US buyers. Increasing geopolitical tensions between US and Russia might soon start to become a more pressing Ag issue Must be monitored.
- India - Rapid rise in lower-class to middle-class ultimately makes India more of a driving force than China. Glut of government wheat inventory once again being released for exports, possibly changing global trade dynamics.
- Japan - What had been for years the worlds second largest economy is starting to slip from the ranks. Can Japan hold on? Will Ag demand increase or will they continue to slide?
- Middle East - Egypt, the worlds top wheat importer, has been facing extreme political turbulence and change. What will be the outcome? Global energy boom could have major long-term implications for oil export dependent countries in the Middle East. How will Saudi Arabia and other OPEC nations survive if global crude oil inventories skyrocket? More importantly what happens to their Ag demand, and how will they pay for it?
- Global Production - With three major highs (2008, 2011, 2012) in the past five-years (unprecedented), and some extremely profitable gross margins, Agriculture has attracted many new participants around the globe. This burst in production and participation will create serious waves as supply and demand search for balance and equilibrium.
- USDA Data - Major changes both here in the US and globally have presented the USDA with some extreme challenges. With these challenges have come highly unpredictable data sets. More farm storage, ethanol usage, DDGS, more global participation, more demand from countries like China (where data reporting is suspect) all make for a more difficult task of estimating supply and demand. In return the market seems to be more frequently caught by surprise.
- Global Weather - Extremes in weather might be an understatement for what we have seen in the past five-years. The question is are we just in the beginning phase or period of more intense weather extremes or are we head back to more normal patterns? With global demand continuing to push higher as the population surges towards 9 billion, weather will become extremely important, at times producing panic like buying and selling.
Don't miss out on my breakdown of the USDA's Quarterly Grain Stocks report this Friday, should be a big one...