Supplies Are Tight, Demand Should be the Focus

August 14, 2012 01:19 AM

What Traders are Talking About:

* Watching for end-user buying. Most of the attention until now has been on the drought and its impact on crops. Now that traders have a ballpark idea of crop size, some of the focus is shifting to demand as end-users must compete for a tight supply of corn and soybeans. The watch for fresh demand is especially heightened after there has been some price weakness as traders watch to see how quickly end-users step in to cover needs. The more quickly and aggressively end-user buying shows up on price breaks, the stronger the demand base appears to be.

The long and short of it: High prices have eroded demand to some extent, but there are still plenty of end-users waiting to buy on a price dip, which limits the downside unless there's an "outside" factor that triggers massive liquidation.

* Rains improve soybean conditions. USDA's weekly crop condition ratings showed recent rains modestly improved the soybean crop. As of Sunday, USDA rated 30% of the soybean crop "good" to "excellent" and 28% "poor" to "very poor" -- up one point in the top two categories and down 1 point in the bottom two categories. For corn, USDA's ratings showed 23% "good" to "excellent" (unchanged) and 51% "poor" to "very poor" (up one point). When USDA's ratings are plugged into the state-weighted Pro Farmer Crop Condition Index (0 = crop failure; 500 = perfect crop), the corn crop slipped 1 point to 248, while the soybean crop rose 2 points to 273.

The long and short of it: While the forecast is relatively non-threatening, widespread, heavy rains that are needed to greatly benefit the crop are not in the outlook. Still, it's hard for soybean traders to ignore it if rains are falling in August.

* El Nino slowly building. Development of El Nino slowed during the second half of July, but equatorial Pacific waters continue to gradually warm. As a result, the Australian Bureau of Meteorology expects a weak El Nino event to be fully established by the end of September. El Nino conditions are typically associated with increased rainfall across the central United States.

The long and short of it: The transition from La Nina and now the development of El Nino is taking more time than thought. But with El Nino slowly building there is still hope late-season weather will be improved for the soybean crop.



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