Published on: 17:31PM Apr 11, 2012
With the April USDA report behind us the funds will start to consider the May 10th report, where the USDA will first start to incorporate their March "Prospective Plantings" acreage estimates into their 2012-2013 WASDE supply and demand prospects. Keep in mind, we will not see the true soybean or corn planted acreage numbers until the June 29th "Quarterly Stocks & Planted Acreage" report. With some fundamental "dead-time" ahead, I have to imagine the funds will once again start reacting more to the "outside" market headlines.
Europe has once again become the topic of major concern and there is starting to be greater fear in the marketplace in regards to Spain and Italy, who will both be watched closely in the weeks and months ahead. I am afraid any further defecting from their budgetary reduction goals and we could see another significant debt problem in the EU similar to that of Greece. As for today the Spanish and Italian bond yield have backed off some, and the macro traders seems to breathing a slight sigh of relief. The US stock market is making a little bounce after trading lower for six consecutive days but is still in danger of blowing through major short-term "technical" support. The poor US jobs data and continuing debt crisis in Europe seems to be starting to weighing on the minds of some of the bigger players, and seems to be causing them to think twice before adding more "risk." Because the funds are record long soybeans and holding significant long positions in corn we do need to spend some time addressing the potential "risk-off" or negative money-flow trade action that could occur despite the "fundamental" bullish crop data that is circulating.
Since "Operation Twist" expires in June, and the Presidential race will start to heat up shortly thereafter, I have to believe the Fed is going to pull the trigger then something will need to be done within the next 60-90 days. My hunch is it will be some type of "sterilized' move dealing with mortgage backed securities. The Fed is not only concerned about the US stock market, but is also deeply concerned about the US job situation and the US housing sector. With some reports circulating that a new wave of foreclosures are just around the next corner, I am thinking the Fed may try their hand at helping to reduce this threat by making some type of move in the housing sector. If I am wrong and nothing transpires, we may start to see more aggressive "risk-off" type action across most all of the commodity markets. Keep in mind with soybean prices at these levels (above $14) and the funds already record long, we weed aggressive "buy paper" entering the trade each and every day in order to keep prices moving higher. The question is will the funds want to add more "risk" in this environment or will they be looking to peel some off as falling global growth becomes more of a reality.
It also doesn't help much when you have the IMF reporting that commodity-exporting countries should prepare for "lower prices" given weaker global economic activity and lower demand. They also reported that weaker global growth suggested that commodity prices are highly unlikely to continue increasing at the pace they have as of late. As you can see, statements like this make me fearful that commodity investors COULD start looking for alternative type investments in other sectors.
Soybeans continue to be the regarded as the best "bullish" bet on the Ag board, but we have to be aware of the "outside" market influences that could arise and adversely affect the trade in the coming weeks. Fundamentally the USDA made no bones about a more bullish soybean outlook, they made substantial cuts in South American production and raised their US domestic crush estimates and US soybean export estimates. I thought it was interesting to see the USDA left Chinese soy imports at just 55 million metric tons, but chose to raise the US export number only slightly (15 million bushels) on such aggressive South American reductions. I know many in the trade were hoping to see a more substantial push higher in exports, especially with the reduction in South America, but I am thinking the USDA had this number too high to begin with. Think about it this way, in order to achieve the USDA’s current soybean export estimate of 1.290 billion bushels, we will need export sales need to average right around 8.5 million bushels a week through the remainder of the year. Last year we were lucky to average just over 3.0 million bushels from this point forward. Yes, South America was sitting on large supplies last year that hurt our overall sales, but we have to consider they have not been completely taken out of the export game as of yet this year, and I am certain they will remain highly competitive during the next couple of months. The takeaway is, yes, we can achieve the current USDA export estimates, but we need some fairly good sales numbers during the April-August time period, and I am thinking those could actually be a little tougher to muster than many in the trade are thinking. It makes sense to believe the US exports should be significantly higher on the massive reduction in South America, but when you look deeper inside the numbers you can see what the USDA is thinking, and I really don't disagree.
Funds continuing to hold "record" long positions in soy, however this makes the market extremely vulnerable to "risk-off" type trade activity associated with outside macro market influences. If the funds become more nervous about the debt situation in Europe, the job situation here in the US, or the real-estate situation in China, there is a fear that the funds could liquidate some length across the entire commodity sector. Not that the fundamental picture for soybeans will have changed, but rather the "funds" will be wanting to lighten up some of their overall exposure to "risk" and move more capital back into cash. If this scenario plays out we could see the soybean market temporarily take several steps backwards. As I mentioned in yesterday's "Special Afternoon" report, I doubt there is any more than $0.50 to $0.75 cents of downside risk in new crop soybeans, but I have seen the power of "money-flow" push these markets well beyond my most realistic expectations. If the talking-heads start to really evoke some massive "risk-off" type fear heavy fund liquidation could certainly push the Nov contract back down to $12.50 in the blink of an eye. In my opinion this would be a perfect opportunity to unload some of the aggressive hedges you may have put in place much too early, liquidate some of the call premium you may have sold up above or simply lift some of the puts that you have had in place for a floor. If you are a producer I would NOT be a seller of any additional "new crop" soy on the breaks. The "balance sheet" simply remains too tight and demand too strong. The "money-flow" may get nervous and cause you to think twice about your devotion, but remain patient and let the macro market fears pass, allowing the trade to once again focus on the "fundamental" severity of the situation and overall lack of supply.
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather. I know as a producer, you may have questions as to how this pertains to your farm and your marketing, especially after last Friday's USDA Report. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow." Just click here -
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Jim's Afternoon Markets Report--April 11