A case for a low?

December 15, 2008 06:00 PM
 
Typically, when markets rally in the face of bearish news, it signals buyer confidence is building. Given recent price action in the corn and soybean markets, one could argue that lows are in place the markets are ready for a recovery rally. But bears still have a case for another round of selling pressure as economic conditions remain very weak and USDA's December Supply & Demand Report changed the fundamental situation, especially for corn.

Today's featured question:

Price action since Dec. 5 suggests lows are in place for corn and soybeans. How much upside potential do you see near-term?; longer-term?

 

My response:

Price action in corn and soybean futures has been impressive since the Dec. 5 lows. The more impressive part is that virtually no one expected prices to rally, especially with USDA raising its corn carryover estimate much more than expected in the Dec. 11 Supply & Demand Report. For grains to continue higher near-term, traders must ignore very weak economic data and recession talk.

That job will be much easier for corn and soybean traders if the stock market doesn't make a new for-the-move low. Despite persistently poor economic news, the Dow Jones Industrial Average has treaded water over the last month. Bulls would argue that Dow is building a base of support and regenerating investor confidence. But bears would suggest this is just a pause before the next leg lower. Given how much influence outside markets are having on grain trade, the Dow may hold the key for corn and soybean futures into early 2009.

The U.S. dollar is another key. While the dollar was rallying, corn and soybean futures were under pressure. As the dollar has dropped from its fall highs, corn and beans have rallied. If the dollar continues to weaken, it would make it much easier to generate semi-consistent buyer interest in the corn and soybean markets.

Fundamentally, USDA now estimates 2008-09 corn carryover at nearly 1.5 billion bu. -- comfortable stocks. If recessionary factors continue to take a bite out of corn use, that carryover figure could swell to around 1.8 billion bu. before all is said and done. That's why demand is the key fundamental factor moving forward. Conventional wisdom would suggest foreign buyers will use the sharp price break in corn and soybeans to aggressively forward book needs. But lines of credit will dictate how far out they buy. And lines of credit are still very tight.

For soybeans, U.S. carryover is far from plentiful for soybeans at 205 million bu., but that's a relatively comfortable level of stocks. On the global front, the world is carrying over about 90% of a Brazilian crop. That eliminates any dire concerns about stocks -- domestically or globally. Still, weather could become a factor if South America experiences widespread problems.

The longer-term picture for corn will be largely dictated by ethanol demand. While ethanol producers are facing some hardships, the RFS that's in place dictates considerably more corn usage for ethanol production, which means more corn acres will be needed in 2009. And that means and acreage battle happen at some point before spring. As of right now, corn and soybean acreage for next year are highly suspect, while it's a safe assumption to say both wheat and cotton acreage will be down from 2008 levels.

The price outlook for corn is friendly in the year ahead -- unless the global recession takes a bigger bite out of demand than anticipated and the recovery is much longer than expected. The price situation for corn would get potentially explosive for corn if acreage isn't up.

The price outlook for soybeans is friendly, but not as strong as for corn even though ending stocks are estimated to be tighter in relationship to corn. But a serious South American crop problem could lead to a strong price surge in soybeans.

 

Drop me an email at bgrete@profarmer.com and your marketing questions will be answered.

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