Premium Still Being Aggressively Built Into Futures

July 16, 2012 01:50 AM

What Traders are Talking About:

* Premium still being added. Weekend rains were beneficial for areas that were lucky to get them, but amounts and coverage levels weren't enough to be of widespread benefit. Plus, very hot temps returned and are expected to last through the week. As a result, traders continue to build weather premium into the market. Traders expect another significant downturn in crop condition ratings this afternoon. More importantly, yield forecasts continue to decline rapidly amid the persistent crop stress. Meanwhile, More than 1,000 irrigators across Nebraska were ordered by the state to stop pumping from rivers and streams until drought conditions improve. With around two-thirds of Nebraska's corn crop irrigated, the watering ban is not positive news at a time when the crop most needs moisture. And there are reports of producers across the Corn Belt cutting corn for silage after getting insurance confirmation of poor yield potential. On the livestock side, poor pasture conditions and high feed costs are causing herd liquidation. Such reports will build as drought impacts worsen.

The long and short of it: For now, traders are still actively adding weather premium into futures, but weather markets can end abruptly and typically tops come when market conditions appear most bullish.

* Forecast stays hot, dry. Temps are forecast to be above- to much-above-normal this week, with heat advisories and warnings in effect across the Corn Belt the first half of this week. Aside from a few scattered, showers that may pop up mid-week, the forecast is also dry. The National Weather Service forecast for July 21-25 doesn't call for any relief as it shows above-normal temps and below-normal precip across virtually the entire country, including all of the Corn Belt, Mid-South and Delta.

The long and short of it: Forecasts signal crop stress will continue into at least late July. That means even the corn in the "good" areas will be stressed as it starts to fill. And while the bean crop could turn it on late if the weather dramatically improves, there's no hint of that happening.

* Bernanke in focus this week. Fed Chairman Ben Bernanke will testify before Congress Tuesday and Wednesday in what's commonly referred to as the Humphrey-Hawkins report. Bernanke will highlight monetary policy and the economic outlook. Of most importance will be whether the Fed chief mentions the possibility of additional quantitative easing. Most investors believe QE3 is coming, but the anticipation of when the first hint of such action by the Fed is like waiting to open presents at Christmas.

The long and short of it: Anticipation of QE3 is keeping some of the focus off the global economic struggles. While investors are well aware of the issues in Europe and China's slowing economy, the belief the Fed will be there if/when needed, is enough to avoid a doom and gloom attitude across the investment world.


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