Once again we have witnessed first hand what can happen when the boat is listing too hard to one side and it tries to right itself. Coming into the week, funds were holding a record short position in the wheat market with nothing really fresh for the bear to feast on. With reports looming ahead on Friday, a slight pickup in demand and a reversal in some macros, mainly the dollar, there was a rush to get back to the middle of the boat. The net result so far has been a rally back to the highest levels in a month. While I suspect we could have a little more room to the upside I would expect to see this initial rally fail within the next few days but as I have been commenting recently, wheat has probably absorbed the lions share of negative news and I believe we should have the worst of the down swing behind us. That said, it would also seem premature to look for an extended advance just yet or naive to think that we could not work back lower to revisit the lows. Traditionally grain markets peak with a spike and then boor you to death with sideways action at lows.
Adding a little extra incentive for the bounce has been the weather in Southern Brazil. While there have been some concerns about the dry conditions in the central part of that country, in the south where most of the wheat is grown continues to have just the opposite issue. In the state of Rio Grande do Sul it is estimated that 55% of the crop in the filling stage and with persistent rain, there are serious concerns about problems with gibberella and rice blast effecting both quality and yield. We shall see what Conab thinks about this soon, as their next crop estimate will be on the 9th.
While we have reached very close to the low end in the overnight trade, I believe December futures have room to reach into the 5.14 to 5.28 retracement zone on this bounce but believe that will cap off the extent of the rally for the foreseeable future.
Shorts continued to head for the exit in the corn market as well yesterday as we reached up to levels last traded in mid-September. If they were stepping out by choice, wanting to bank some profits before the report or were being taken out by stops matters little, it has provided us with one of the best bounces since prices turned lower last spring. While I do believe the corn market is in the last stages of this bear trend, with the majority of the harvest in front of us I have to remain the camp that believes we have not witnessed our lows just yet.
Many of the stories I have seen over the past couple days can talk about the slow start of the harvest and the frosty temperatures over the weekend prompting the rally and while I would not deny they have contributed to the buying, I do not believe they are the reason. I suspect we just reached a point where there short was not seeing equity continuing to increase and wanted to reduce risk. Of course many people like to hear concrete reasons so it is more convenient to give them one. Saying that there was more buying interest than selling interest leases too much uncertainty but there are some days when that is the case.
While not a market moving piece of news, I read an interesting blurb last night out of Argentina. While I am not sure if I can say that the government in that country is the most inept, inefficient and corrupt, it has to make onto the top 10 list as they teeter on the edge of insolvency and default once again. They have now come up with another brilliant idea to make the Ag trade even more convoluted. Evidently the government will be creating a new company specifically to compete with Cargill, ADM Dreyfus and whoever else is in the grain business there. While I am not sure where they will have the physical facilities I understand that this new endeavor will only pay the government an export tax between 5 and 10% while the other grain firms will continue to pay the current 35% tax. While it is difficult to imagine how this venture may succeed, I suspect if they move ahead with the plan, it can only be a positive for US Ag.
I suspect the trade for the balance of the week will be dominated by pre-report position squaring. The most recent survey was released by the Wall Street Journal, which is the one we participate in, and is very close to the previous trade estimates. The average yield estimate is 174.7 with a range of 172.3 to 178.1. The average production number is 14.523 billion and carryout at 2.144 billion
While we did not exactly collapse, after reaching to higher highs for the bounce early yesterday this market struggled to hold it’s head above water late in the day. It is estimated that funds bought around 4000 contracts. We have bounced a bit again overnight but it would appear without anything additional to spook the short, we should have our pre-report correction out of the way.
It would appear that we have a pretty clear weather forecast through the balance of this week, which should allow harvest to kick into high gear in many areas. Beyond that time frame though there appears to be a little disagreement as to how much if any moisture is headed back to the Midwest. The US model calls for little. Realistically, weather delays would appear to be one of the few possible supportive factors in beans and even then, I suspect only temporary. When you look at the overall picture in the bean market right now, it is difficult to be anything but negative.
According to the Wall Street Journal Survey the average estimate for yield is 47.6. The average production estimate stands at 3.977 billion and projected carryout at 478 million. We shall have to remain patient between now and then.