Weather, Chinese Rate Cut To Fuel Further Gains in Grains

July 5, 2012 01:53 AM

What Traders are Talking About:

* Crop stress continues. Crops across the Corn Belt continue to bake under very hot and dry conditions. While crop stress in the hardest hit areas has been well documented, the "good" areas are starting to take a noticeable step backwards amid unrelenting heat and dryness. Unfortunately, the forecast offers very little hope for meaningful relief. While temps are forecast to moderate slightly from recent extreme levels, they are expected to remain normal to above normal across the Corn Belt, while rainfall is expected to remain mostly below normal through at least the 10-day window.

The long and short of it: Historically, price trends either accelerate or change coming out of the Fourth of July. Based on current weather forecasts, traders have a strong reason to build more weather premium into the market. But weather-induced rallies are typically short-lived and tend to play out before yield/crop forecasts bottom.

* China cuts interest rates. China unexpectedly cut its benchmark interest rates by 31 basis points and lending rates by 25 basis points. In addition to cutting lending and deposit rates, the central bank took also lowered the floor for lending rates to 70% of benchmark rates from 80% previously. The further easing of monetary policy comes ahead of Chinese June inflation data next Monday and strongly suggests the consumer price index and producer price index will both continue to ease. Reduced consumer and producer prices along with slowed economic activity are raising concerns of deflation in China, causing the central bank to take more aggressive steps to boost economic activity.

The long and short of it: The surprise rate cut will add fuel to bulls' fire in grain and soy futures when markets open at 9:30 a.m. CT.

* ECB also cuts interest rates. As expected, the European Central Bank (ECB) cut interest rates by 25 basis points to 0.75% and the deposit rate by 25 basis points to 0% in an attempt to boost euro-zone economic activity. Also as expected, the Bank of England (BOE) launched a third round of quantitative easing by announcing plans to purchase 50 billion pounds of assets.

The long and short of it: While the ECB rate cut (and BOE quantitative easing) was expected, it's still pressuring the euro and supporting the dollar. But grain and soy traders are likely to look past the dollar strength as they focus on weather.


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