Crops Analysis (VIP) -- August 3, 2012

August 3, 2012 09:38 AM
 

 

 

Corn

Price action: Corn futures ended the week with slight gains thanks to late-week buying spurred by sharp weakness in the U.S. dollar index. Futures were also supported by panic purchases by Mexico, as well as declining crop estimates.

5-day outlook: Focus next week will be on position squaring ahead of Friday's first survey-based estimate of the U.S. corn crop. Because of worsening Midwest drought conditions, traders will already have this projection "discounted," as more crop damage has been done since the survey took place. But key will be "how low" USDA goes with its estimate.

30-day outlook: We'll also have a better idea of crop prospects during the third full week of August during the Pro Farmer Midwest Crop Tour. But even though "small crops get smaller," the bulk of crop damage will likely be factored into prices by the time our Tour begins.

90-day outlook: The saying, "small crop long tail" refers to demand destruction that occurs during a short crop year. It could take years for the U.S. to rebuild its demand base -- especially if there are policy changes or livestock herd contraction deepens.

Hedgers: 100% sold on 2011-crop in the cash market. 40% of expected 2012-crop production is covered in Dec. $6.50 put options for 31 1/2 cents. 35% cash forward sold on expected 2012-crop production -- 25% for harvest delivery; 10% for March 2013 delivery.

Cash-only marketers: 100% sold on 2011-crop. 35% forward priced on expected 2012-crop production -- 10% for harvest delivery; 10% for March 2013 delivery; and 15% for May 2013 delivery.

 

Soybeans

Price action: Soybean futures finished with gains of 12 to 21 cents in most contracts today to secure decent price gains for the week.

5-day outlook: Price action early next week will hinge on the forecast weekend rain event. If rains are again disappointing, traders should be quick to build more premium into the market. But if widespread, beneficial rains are seen, soybeans would open the week under pressure. Focus the second half of the week will be on USDA's first survey-based look at the crop. Traders are expecting a sharp reduction in soybean yields and production from last months' projection. And that would force USDA to slash its 2012-13 usage projections.

30-day outlook: If widespread, soaking rains don't come by mid-month, it will be too late for the soybean crop to recover. We'll get a first hand look at the crop August 20-23 during the Pro Farmer Midwest Crop Tour.

90-day outlook: The smaller the crop size, the more rationing of supplies there will need to be. The only true way to slow use is through higher prices. If the market runs out of steam without slowing demand, futures would bounce back quickly. If prices fall in reaction to slowed use, it would take longer for them to recover.

Hedgers: 100% sold on old-crop in the cash market. 25% of expected 2012-crop production is covered in Nov. $14.00 put options for 42 3/8 cents. 50% of expected 2012-crop production is sold via cash forward contract for harvest delivery.

Cash-only marketers: 100% sold on old-crop. 50% sold on expected 2012-crop production for harvest delivery.

 

Wheat

Price action: Wheat futures ended with gains in the teens to 20-plus cents at all three exchanges. Wheat futures still ended lower for the week.

5-day outlook: Wheat futures proved this week they need the corn market for support. That will very likely remain the case next week, meaning focus on corn crop size will be the primary fundamental for wheat.

30-day outlook: If crop prospects in the Former Soviet Union continue to dwindle amid drought conditions, wheat could eventually get into a situation where it has more fundamental backing. While that would give wheat more ability to stand on its own, it's unlikely investors will be actively looking for "value" buying opportunities in the current shaky economic environment.

90-day outlook: With all of the focus on the drought impact on corn and soybeans, there's been very little talk of the potential impact to the winter wheat crop. Given very dry conditions, improved rains associated with El Nino will need to arrive by this fall or winter wheat stands will be poor,

Hedgers: 75% cash sold on 2012-crop for harvest delivery. 100% sold on 2011-crop in the cash market.

Cash-only marketers: 75% of 2012-crop production is sold for harvest delivery. 100% sold on 2011-crop.

 

Cotton

Price action: Cotton futures benefited from positive outside markets spurred by sharp dollar weakness. December cotton futures posted strong gains for the week by moving to the top of the two-month consolidation range.

5-day outlook: Followthrough buying is needed next week to move December cotton above the June high of 74.80 cents -- which is needed in order to signal bulls are gaining momentum. Cotton has not participated in the grain market rally as traders recognize global supplies will be able to make up a shortfall if the drought in the southern U.S. worsens. But it should provide for better cash-market opportunities through stronger basis.

30-day outlook: USDA will release its first survey-based crop estimate next week, which should turn more focus onto crop prospects. But 2012-13 carryover would have to be trimmed significantly to encourage more than a short-term price recovery.

90-day outlook: The International Cotton Advisory Committee expects global cotton trade in 2012-13 to decline by 20%, which doesn't bode well for U.S. exports.

Hedgers: 100% sold on old-crop in the cash market. 50% priced on expected new-crop production via cash forward contract for harvest delivery.

Cash-only marketers:s100% sold on old-crop. 50% priced on expected new-crop production via forward contract for harvest delivery.

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