Bernanke's Impact on the Grain Trade
Mar 01, 2012
The Chinese PMI index overnight was reported at 51.0 in February, up from 50.5 in January. Remember a reading above 50 indicates economic expansion, and a definite improvement in the nation's manufacturing activity. The problem is this may prompt the Chinese government to take a more cautious approach towards easing.
After seeing the results of the European "LTRO" and hearing Bernanke speak yesterday, the trade seems a little fearful that another round of "quantitative easing" has been put on the back burner. With Bernanke giving no clear indication of further economic measures to stimulate the US economy and the outlook for inflation being "subdued' it caused gold, copper and silver to fall under heavy pressure, and has some in the trade now thinking the US dollar may be due for a little rebound.
Keep in mind, with both the US, Europe and China sending out signals that easing monetary policy may be winding down to some degree it could invoke more of a "risk-off" type environment than we have seen as of late. If you listened closely to Bernanke and a few of the other US Fed representatives you heard them reiterate that in their opinion US inflation is NOT a worry or concern art this time, and that there remains considerable downside risks due to the slowing European economies. To me, this means the recent run up in commodity prices may be overdone as problems in Europe creates ripples across the globe.
If the "funds" get spooked by the recent shift we may see some commodity liquidation across the board. Keep in mind with Europe signaling that they may now be done, China acting as if they may now be done, and the US pushing thoughts of "quantitative easing" further down the road, the trade may start to question growth. There is also now some early concerns starting to circulate in regards to the end of "operation twist," which is due to end here in the US in a couple of months. Keep in mind the last time "quantitative easing" ended here in the US the markets struggled.
I am not trying to scare anyone, I just want you to know a few of the key global players in this economic game have shifted positions and they look to be running a slightly different defense. This may cause the funds to throttle back, and in turn creating a little headwind across the entire commodity board.
In addition ethanol numbers released yesterday were NOT what we wanted to see. In fact, not only did production fall by almost 3% compared to last week, now at 896,0000 barrels per day, but ethanol stocks have now jumped to another record high up above 22 million barrels. Stocks or excess ethanol supplies are now more than 15% larger than last year. As I have been warning, the excess surplus may soon start to become extremely burdensome. My best guess is we are now about 5 million barrels too large, and need to see an increase in domestic demand or global exports soon or more plant closures and reduced production runs will remain the theme.
As far as South American weather is concerned, it seems that Central Brazil is trending dryer and will be in need of a very large drink come mid-March. The weather models seem to be indicating that rainfall should hit just in time, but I am personally not giving it much credence. Obviously, if conditions remain dry and the rain doesn't come, second crop corn could become an issue.
Weather extremes continue here at home as we wake up to news of deadly tornadoes touching down in six-states across the Midwest. Our thoughts and prayers go out to those who have lost loved ones or lives have been affected by the rare February blasts. Last year was one of the worst on record for US tornadoes, with their being more than 1,700 reported, lets hope this year is not a repeat. Traders are also keeping a close eye on moisture levels in Iowa, Minnesota and the Dakotas (since they make up about 1/3 of our total US corn production) as areas in these states have been abnormally dry this winter. The folks in Boston are finally reporting some snow, at this point last year they had 80 inches of snowfall, up until yesterday they had just 8 inches of snowfall. My point is "weather" extreme continue to be the norm and I would suspect a very erratic summer growing season.
The US wheat market seems to be concerned that the prospects of an early crop may now leave wheat fields in key growing regions highly susceptible to an early cold-snap or freeze, this could drastically affect overall yields. We have certainly seen this happen in the past, therefore I have to believe the market will be keeping a close eye on it as we move forward.
Don't forget Informa will be releasing their updated "world balance sheet" numbers Friday after the market opens. I don't think there will be any comments or new data released in regards to US acreage, but we could see some updates to winter wheat conditions.
*As for today, I would suspect the grain and soy markets to trade on both sides of the fence as some of the larger players try and get their hands around the Macro concerns and shifts that may be taking place. I still believe producers should be moving "old" crop bushels in order to protect against weakness that may develop in the basis. I am patiently waiting on more "new" crop sales, as I believe having 30-50% priced, sold or hedged at this juncture is adequate considering the production setbacks in South America and the renewed Chinese interest.
*Base Price for "Revenue Crop Insurance" will be set at $5.68 for corn this year compared to a $6.01 base price last year. The soybeans base price will be set at about $12.54 this year compared to $13.49 last year. This puts the corn/soybean ratio at 2.21, compared to last years ratio of 2.44. Meaning the insurance guarantees more aggressively favor corn over soybeans this year. The late rally in soybeans along with thoughts of extreme US weather conditions has many producers considering if they should flip a few corn acres back to soybeans. I haven't heard of anyone making any big adjustments, but it has certainly piqued the interest of producers across the country.
Our Grain Marketing Seminar last Friday here in Kansas City, MO went really well. It's not too late to get signed-up for a DVD of the show, we have a few left! Just give us a call and let us know. (816) 322-5300
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