Rough Day in the Grains: Where Do We Go from Here?

Published on: 16:31PM Jan 30, 2012

  The Heavier rains forecast for South America, continued worries about European Debt and a stronger US Dollar weighed on the grain and soy markets right out of hole this morning. 

The good news is Asia will back in full-swing this morning as the Chinese New Year celebration comes to an end. Some believe there is a strong chance we may see additional demand or possible "switchbacks" to US corn and soy because of the logistical problems taking place in South America.  There is also more talk circulating in the trade that Mexico and South Korea might be panicking a little and trying to get ahead of the next wave of Chinese buying. 

I am telling you now, the Mexico thing could be much larger than most wires are reporting at this time. In case you missed it, the USDA reported sales on Friday of 170,200MT of corn to Mexico. Keep in mind this is about 500,000MT in just the past week. As the drought deepens, we will want to carefully monitor this situation. 

The  "outside" markets are trying to get there hands around rumors that Greece may soon be making some type of orderly exit from the European Union, or putting the final touches on a "major" debit reduction program. We will also need to keep our eyes on the latest round of problems being reported out of Portugal, along with Italy's 5 and 10 year bond auction this morning. 

Let's not forget European banks will be in the "headlines" this week as their earnings will start being released tomorrow morning.  The first out of the gates will be  "Santander," who has more than 80 million customers in 40 different countries. Not only are they one of Europe's largest banks but they have grown to become one of the five largest banks in the world by profit. The markets seem to be worried about the European banks so we need to pay close attention.    

Here at home traders will be watching the Florida Primary scheduled for this Tuesday. Mitt Romney has about a 10 point lead over Newt Gingrich, but Tea-Party favorite Herman Cain is now backing Newt. Even though reports show Romney is out spending Gingrich 4:1 in Florida, this race might end up being a little closer than it is currently being reported. If Newt finds a way to win Florida, Gold will quickly move towards $1800, and the US Dollar will give up ground. Net-net the results would more than likely be a "risk-on" type rally in commodities. On the flip side, if Romney takes Florida I would have to believe the US Dollar will continue to rally and some additional risk may come off the board. Keep your eye on politics as it continues to dictate Macro direction.   

The Corn "Basis" is red-hot and seems to be the topic of many discussions in the Ag world.  Even though the basis has now moved to record levels in many parts of the country (for this time of year), several in the industry believe we could push even higher, possibly not peaking until late-April or early-May. One concern I am starting to hear more about is grain "quality." Vomitoxin whispers seem to be circulating in greater frequency out in the Eastern corn-belt, especially in parts of Ohio and areas of Indiana. The problem is with Illinois having a mediocre crop, the traditional movement of corn from Illinois "East" is NOT happening a smoothly as easy as it has in the past. In fact a few respected sources in the industry now thinking both Ohio and Indiana could theoretical run out of corn before the 2012 harvest.  Below are a few more reason I believe the "basis" is so much stronger this year than in years past, and why I believe it may continue to strengthen for the next couple of months:


  • Demand Has Been Underestimated: There is talk in the trade that the USDA has simply underestimated domestic US corn demand. Obviously the feed usage number is highly debatable and thought to be too low. Many also believe the USDA has the Eastern corn-belt demand way too low. While others believe the USDA's ethanol and DDGS production ratios are way out-of-whack. Test-weights and quality could be throwing off the grind and blend ratios causing many more bushels to be used than what the USDA has estimated. 
  • Supply Has Been Overestimated: We have all heard the fire and rhetoric from those who believe the USDA estimated this year's corn crop way too high.  Many very good sources have the average US corn yield sub 145 bushels per acre, along with fewer acres being harvested. If this is true then the corn simply isn't there and the basis has no where to go but higher. 
  • South American Infrastructure & Logistical Constraints: Increases in crusher capacity in large production areas of South America may be forcing the ports to bid up for soybeans more than in the past.  We are also now hearing of boats running ashore in Argentina causing even further delays and back-ups. Between politics, labor strikes and transportation issues, South America continues to struggle moving the crop outside of it's borders in a quick and efficient fashion. 
  • Farmers Not Selling: The argument is, with the US farmer flush with cash from high prices, and more available on-farm storage than ever before, the bushels simply aren't being given up easily. There is also a belief that the "bankers" are much more willing to work with the farmers these days because of their improved balance sheets, therefore the farmers have much deeper lines of available credit and room to more easily maneuver. 


Weather continues to be highly monitored around the globe. South American weather is obviously the most important at this juncture, but as more rains and cooler temps move into the forecast the trade seems to be somewhat tiring of the story. Rains are expected again in Argentine today with average coverage and about 1 inch of rainfall. Brazil should remain dry for the next few days with rains starting back up towards the end of the week. It looks as if during the next couple of weeks rains could be plentiful in many of the drier areas of Northern Argentina and Southern Brazil. This could obviously weigh heavily on the soybean trade. 

South Africa also seems to be getting some much needed rainfall, and their situation might be improving as well. Russian winter-kill stories seem to have also subsided as more snowfall in many areas looks to have reduced the potential damage to less than 5% of the winter crop.  Temps will still be extremely cold at -20F to -30F in many parts of the region, therefore we can not completely say they are out of the woods just yet. On the flip side, I am hearing Europe will be turning a little colder in the central and western areas, and there may in fact be some winter-kill rumors circulating later this week in regards to Germany and France. As a whole though I would have to say the global weather situation has improved, therefore the weather bulls may be tempted to pull back the reigns a little this week and remove a small portion of the "weather" premium that has been added as of late. 

US Acreage talk is also starting to heat up. There is no question corn acres are heading higher, the question is how high? With a shrinking US cattle herd, you have to believe we will see more and more pastureland rolled into corn acres. Producers understand the first year a piece of "pasture ground" is brought back into production it is generally best to plant corn. The fertility rate will be the highest and there will be fewer complications with insects and disease going with the corn. Throw in the "preventive plant" acres and higher cash rents and I see no where for corn acres to go but higher. I will throw my hat in the ring by estimating 94.9 million corn acres will be planted in 2012. Unlike many, I also believe soybean acres are heading higher as well. I realize Informa and some other top analyst are calling for a reduction in soy acres...I just don't see it.  All of the producers I have been talking to have been very pleased the past couple of years with their soybean yields and don't seem too excited about reducing their acres, with this in mind I am estimating we will jump higher to 76.9 million soy acres being planted. 

Change of ownership has definitely been the theme taking place in the "paper" as of late, as traders who where bearish a month ago have become somewhat bullish, and  some that were bullish have now become somewhat bearish. I am definitely not afraid of change, but believe as "risk managers" we need to carefully take notice.  As Winston Churchill once said, "There is nothing wrong with change, just as long as it is in the right direction..." 

This morning, traders on the floor were reporting aggressive selling and buying of combos (selling puts and buying calls or doing the opposite). I am also hearing a lot of talk about traders buying and or selling the straddles. Supposedly there was a ton of interest in "buying" the July Corn $6.50 straddles at less than $1.00 on Friday. With the volatility low this might make for a nice "trade."    

For those of you not familiar with this strategy, all you are doing is simply buying the July $6.50 call and buying the July $6.50 put. Since it cost you about $0.95 cents to make this play, you will be looking for the market to make an "extreme" type move in "either" direction between now and the July option expiration. If you get a big move you could stand to make some good money.  Ultimately if you hold through expiration you would simply subtract the settlement price from $6.50.  Any thing greater than $0.95 cents would be your profit, any thing less would be a loss. This is NOT a margined position and your total loss can NOT exceed your cost to initiate. If you think we are going to see some extreme moves the next few months you may want to run this idea by your trade advisor to see if it is right for you. 

As for today, you obviously saw trading was most painful for soybeans and will cause some short-term setbacks. The "bulls" will be patiently waiting for reports of additional end-user buying (from China, Mexico, South Korea, etc...) on the breaks. If more export sales and demand aren't announced, I am afraid the break could become more significant over the next couple of days on the improved weather models and stronger US Dollar. Some good news out of Europe or stronger Chinese economic data would go a long way to stop the bleeding.  

*Cattle-and-Calves report released Friday by the USDA showed the US now has fewer cattle and calves than we have had in the past half century.  To be specific we now have 90.8 million head, this is 2.7 million less than last year, and the lowest January 1 inventory of all cattle and calves since 1952. This is also well below what the trade had expected. Most of the traders I had been talking to thought we would stay above 91.25 million head. The biggest loss of cattle was in Texas, where numbers fell from 13.3 million a year ago to 11.9 million on Jan. 1st mostly due to the severe drought.  Below are a few more of the highlights from the USDA report: 


  • Beef cows, at 29.9 million, were down 3 percent from January 1, 2011.
  • All heifers 500 pounds and over, 19.4 million, down 1 percent.
  • Beef replacement heifers, 5.2 million, up 1 percent.
  • Other heifers, 9.6 million, down 2 percent.
  • Steers weighing 500 pounds and over, 16.1 million, down 2 percent.
  • Bulls weighing 500 pounds and over, 2.1 million, down 5 percent.
  • Calves under 500 pounds, 14.1 million, down 3 percent.
  • Cattle/calves on feed for slaughter in feedlots, 14.1 million, up 1 percent.
  • The combined total of calves under 500 pounds, and other heifers and steers over 500 pounds outside of feedlots was 25.7 million, down 4 percent.
  • Milk cows, at 9.2 million, were up 1 percent from January 1, 2011.
  • Milk replacement heifers, 4.5 million, down 1 percent.