Recent Price Action And Weather Raises Lots Of Questions For Grains

February 27, 2013 12:29 AM

What Traders are Talking About:

* Weather pattern changing? Recent weather events in the U.S. (and in South America) raise questions about whether the weather pattern is shifting. After prolonged drought, the weather pattern has become active across the western Corn Belt and Plains, suggesting a pattern change may be in the works. While forecasters continue to say conditions are ENSO-neutral, and will remain that way into at least spring, the frequency and amount of moisture moving into the country's midsection has increased.

The long and short of it: The reduction of the drought footprint started in the eastern Corn Belt and is spreading west. This is the classic pattern coming off a major drought. Still, given soil moisture deficits, timely rains will be needed this spring and summer to build big yields for corn and soybeans.

* Funds moving back into long corn? Funds bought 11,000 contracts (55 million bu.) of corn Tuesday, their largest daily net "buy" since Jan. 15, which concluded three days in which funds bought a combined 37,000 contracts (185 million bu.) of corn. While much of the attention in corn yesterday was on firming basis -- at the Gulf and across the countryside -- the fund activity is worth watching. Both the firming basis and the fund buying are signs the market has found "value," something that's needed to put in a short-term low.

The long and short of it: The ebb and flow of price action in corn, especially old-crop contracts, lines up very closely with what funds are doing. Therefore, it's important to watch if Tuesday's active fund buying was an isolated event or a shift in their activity.

* Corn to go premium to wheat? March Chicago wheat futures ended Tuesday's session at only a 3/4 cent premium to March corn futures. That spread widened a little through the overnight hours, but given tight supplies and signs of improved demand for corn, traders wouldn't be surprised to see corn move premium to wheat soon. From June 2011 through May 2012, front-month Chicago wheat futures spent periods at a slight discount to front-month corn futures, but prior to that corn had not been premium to Chicago wheat since June/July of 1996.

The long and short of it: While there's talk of corn going premium to wheat, history says the spread is about as tight as it will get. Therefore, if corn rallies, wheat should follow. And if corn prices slide, wheat should not slide as sharply.


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