Published on: 16:33PM Jan 24, 2012
The "outside" markets seem a little more concerned this morning as talks in Greece breakdown, and the Standard & Poor's ratings agency has reportedly turned more negative on six French banks including Credit Agricole and Societe Generale (SocGen). Traders are also digesting news from the "Bank of Japan" who decided to keep its key interest rates "unchanged" at close to zero percent but downgraded its growth forecast for the year.
Don't forget the world is patiently awaiting news from the US "Fed" in regards to "Quantitative Easing." From what I am hearing, the Fed's first meeting of the new year will wrap up tomorrow, at which time the Fed will release a statement to the public at 1:30pm CST (Wednesday). Following that announcement we will hear from Fed Chairman Ben Bernanke, who is scheduled to speak at 3:15pm CST. I doubt we see any significant changes, but you never know. Make sure you are prepared!
Keep in mind, "Thompson Reuters" is now reporting that 8 out of 17 primary dealers they have surveyed, who do business directly with the Fed, believe the US central bank will announce some type of "QE3" during the first half of 2012 - and the expectation for how much they will print (if they do) is rising to $600 billion, from $525 billion just over two weeks ago. Bottom-line...Make sure you are strapped in when Bernanke speaks, there could be extreme volatility!
Long-term strength in the US dollar is also being questioned. For weeks many risk-managers have been thinking that European debt problems would ultimately push the US dollar higher in 2012. That mind-set is now clearly changing and we need to pay close attention. I am starting to be of the belief that big money is looking down the road to an extremely important US Presidential election, and has left the EU debt crisis to sort itself out. The trade currently seems to feel that a Gingrich or Obama victory will equal "uncertainty." Which in trading lingo equals extreme volatility. If we take that one step further, a Gingrich or Obama White House looks as if it would mean a weaker US dollar, higher gold prices, higher commodity prices, and at least initially a weaker US Stock Market. On the flip side the market seems to believe a Romney White House would mean "stability," therefore equating to a stronger US Dollar, along with strength in the US Stock Market, and weaker commodity prices. The takeaway is that I believe "politics" will be trumping "fundamentals" during the remainder of 2012. Throw all other assessments out the window, big money will be using the next ten months to better positions themselves for the next four years.
Argentine corn production seems to be the hot subject around the water cooler these days, and rumors are starting to fly throughout the trade in regards to total production estimates. I am now hearing from very reliable sources that not only will production ultimately fall below 22 million metric tons, but I am starting to hear estimates from inside Argentina that a sub 20 million metric ton number is a reality. I am also hearing talk that a soybean crop around 45-46 million metric tons could be possibly in the cards as well. Understand, these would be significant production cuts if they were to be realized, and the market would need to immediately add more premium to our current price. In addition, there are many people in the trade talking about more second crop soybean acres in Argentina being planted behind the failed corn. Be careful with this thought, as I am hearing more talk about wheat stealing some second crop acres from soy. Remember, the Argentine government places a much stiffer tax on soybeans than they do wheat. In any regards, the takeaway is a smaller Argentine corn crop.
If we are looking for a sequel to this summer's "Agricultural Bull Run" we might just be able to pull something off, as it seems that a few of the key cast members are starting to gather upon stage:
- Leading Actor - "South American Production" In the last episode, US production and weather related issues played the lead. This time around, South American Production steals the spotlight as many in the trade now believe the USDA may be 10-15 million tons to high on their estimates.
- Supporting Actor - "Ethanol" With crude oil staying strong and the world looking for more alternative fuel ethanol margins remain strong. Many are now estimating corn used for ethanol at 5 billion bushels is too low and may need to push higher by 150-250 million bushels.
- Leading Actress - "Macro Markets" The outside markets seem to be stabilizing and a "risk on" type environment seems to be the theme of the day. If our leading lady can find even more support in the coming weeks we could be in for a real award winning performance. Look for politics to trump fundamentals in months leading up to the US Presidential election.
- Supporting Actress - "Chinese Demand" Crush margins are turning positive and supplies at the ports seem to be shrinking. Corn bids in northern China are heating back up, and there is talk that the Chinese economy may start to turn back around. This character actor has the potential of bringing down the house.
There are still several key cast members and crew that are missing from the previous action packed hit, but if we can get them back onboard we might just have something worth watching:
- Stage Manager - "Big Ben Bernanke" If Big Ben can bring along another dose of "Quantitative Easing" to the party our cast and crew will become much more relaxed and comfortable about the sequel. He might not seem like a big part of the performance, but he does a tremendous job behind the scenes. I am not sure the last episode would have happened without the help of Big Ben. By printing more money and pushing us further in debt, the US Dollar is sure to fall under pressure and spark more commodity interest.
- Cameo Appearance - "Wheat" Most may not realize this, but wheat has been instrumental in kicking off the most recent hit performances in the Ag markets. I am afraid if we can not get "wheat" to cooperate or to be a part of this performance, our show may never make it to the big screen. In my opinion the "cameo" by wheat could be make or break.
- Makeup & Hair - "The Talking Heads" Everyone looks better on stage or on film, and in our story much of the credit has to be given to the "press." If the investment news channels start to talk more about shortages in corn and or soybeans, I have to assume we will once again see the best "Makeup and Hair Stylist" begin to shine and do their part to stoke the "bullish" flames. Don't underestimate just how important it is to have these crew members on hand. They can either make or break the perception of our audience.
I think you get the picture. There are some key players that are needed to bring a "bull" story to life. I think we have several at the current time who are willing to play their respective parts, but we still need a few to read the script and agree to the details of the contract. If we can get them to agree to the terms, I have to believe we could start shooting any day now.
Bullish I have become, but just keep in mind many very respectable sources are extremely bearish, with good fundamental reason. I don't want to rain on everyone's parade, but I want you to know both sides of the story, so you can make the best decision of your operation. This past weekend, Informa added about 65 million bushels to their 2012 corn crop production totals and is now estimating the 2012/13 ending stocks number to be a whopping 1.749 billion bushels (more than double our current level). In the process, I am hearing they have lowered their projected 2012/13 average corn price to $4.20, and seem top be thinking the December 2012 corn contract could print a $3 handle by this fall, if US production goes off with no real weather type glitches. There is also fears circulating as the USDA has raised their world wheat production numbers by almost 40 million tons, and we are now staring at the the second highest world wheat ending stocks in history! My point is, I am "bullish" why some of the best and most respected sources in the industry are now aggressively "bearish." I guess this means "game-on." Oh well, I never liked following the crowds anyway, it always seemed too easy!
As you can see, "fundamentally" the numbers would indicate we have an extremely steep hill to climb. For this reason, I urge to be smart and reduce your risk accordingly. This is NOT the environment or the hand to be betting the farm on. I am willing to the risk a portion of our bushels, just not the entire crop. The more bushels you can get locked in at a profit, the easier it is to take a chance on the remaining bushels. Put yourself in a position to take "some" risk, not in a position to loose it all!