New Highs Overnight
Jul 16, 2012
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Corn, soybeans and wheat made new highs overnight as traders realize that permanent crop damage has been done throughout the majority of the United States. We now know that the corn crop will be poor, and that the soybean crop will likely suffer a similar fate. Some analysts are now looking for a national corn yield below 140bpa. Some believe the market is in the process of pricing-in a national corn yield near 135bpa or lower. The biggest question now: How much are ethanol plants, feeders and importers willing to pay for the grain? Ethanol margins are clearly negative despite its current premium to gasoline; margins for many livestock operations will be negative in coming months. The USDA only lowered their projection for ethanol demand by 100mil/bu on last week’s report, leaving plenty of room for further reductions. Some traders are talking about the possibility of government intervention regarding the current ethanol mandate. There has been no concrete evidence that any such move will be made up to this point.
Weekend weather patterns were within expectations. Scattered rains were seen across many areas, however coverage was poor. An intense heat wave will engulf much of the country during the next 10 days; while below average rainfall is expected. The bottom line here is that no relief is seen through the end of the month. The most critical phase for the corn crop has passed in the east and is in progress in many areas in the west.
The USDA will release their Crop Progress report this afternoon. Again, major declines are expected in both corn and soybean ratings. A drop of anywhere from 3-10% is expected for both crops according to trade sources.
Although they have virtually no impact on the "Drought ‘12" grain market, outside markets are mostly negative this morning. Crude oil, equities and metals are marginally lower with the US$ higher. The European Central Bank is now advocating imposing losses on holders of bonds issues by troubled banks in Spain, in a major reversal.
Moving forward in time, there are many question marks surrounding not only our markets, but also government policy. Crop insurance claims will undoubtedly set a new record this year while the ethanol industry takes a bath. Livestock numbers will almost certainly fall during the first part of 2013, if not earlier, due to high feed prices. The shock wave of $8 corn and $16 soybeans will be felt for many months to come; even if the prices do not sustain themselves. Below trend corn yields have occurred 3 years in a row only twice in the last 40 years. Both times, a fourth year of below trend yields was seen.
We wouldn’t be surprised to see corn or soybeans trade limit-up today ahead of Crop Progress this afternoon. We believe that December corn will trade $8 by week’s end.
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