Short- To Mid-Range Outlook Offers Little Hope of Meaningful Relief From Heat and Dryness

July 6, 2012 03:50 AM

What Traders are Talking About:

* Slight break in heat coming, but very little rainfall. The Corn Belt must endure another one (western locations) to two (eastern locations) of extreme heat before a break in temps arrives. But even then, temps are forecast to remain slightly above normal across much of the region. There is a chance for scattered, light rains during the weekend, but meaningful precip is not likely for most areas. The 6- to 10-day outlook indicates a rebuilding of very hot temps late next week while rainfall remains below normal.

The long and short of it: Crop stress will continue to mount if the forecast plays out. A brief cool down from recent extreme temps will not provide crops with relief without meaningful precip.

* Funds heavily loading up on corn. Funds bought an estimated 27,000 contracts (135 million bu.) of corn Thursday as traders returned from the one-day holiday break with heightened concerns about the crop amid persistent hot and dry conditions. Over the past nine sessions, funds have bought 121,000 contracts (605 million bu.) of corn and they are net buyers of 166,000 contracts (830 million bu.) of corn since June 1 when crop conditions started to take a noticeable turn down after a strong start.

The long and short of it: Funds are still well short of their record long position as they had cut it by over two-thirds during a four-month liquidation phase which ended at the beginning of June. While funds have room to add to their long position, it's important to watch their activity closely as the bull run in the corn market is likely to end when funds stop aggressively buying.

* Another disappointing jobs report. The Labor Department reported the U.S. economy added 80,000 non-farm payrolls in June, which came in short of the average guess of 90,000 jobs added and well below the "whisper" number. The unemployment rate stayed at 8.2%.

The long and short of it: Market reaction to the disappointing jobs data is about as expected -- the U.S. dollar and Treasuries are higher, while the stock market is under pressure as investors seek safe-havens. Combined with a dour outlook from European Central Bank President Mario Draghi and China's surprise interest rate cut yesterday, this raises concerns about the health of the global economy.


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