Front Running Tomorrow's Highly Anticipated USDA Report
Aug 10, 2011
All eyes will be focused on tomorrow's USDA report. I have included some details, ranges and trade guesstimates that you can use as a cheat sheet for tomorrow's data. With the "outside" markets continuing to search for direction, the USDA report, though huge, could actually be overshadowed by a more powerful wave of outside influences. With crude oil being hammered like it has as of late, and heavy fund liquidation taking place the past few weeks, I am worried that a few of the big boys might simply be hanging around the grain and soy markets on hopes of an extremely "bullish" USDA report. Once they get the numbers and the markets surge higher, we might see them try and bank the profits in order to balance their books and offset some losses. If the numbers for some reason come out "bearish" I would suspect they will be dumping the trade in mass. I simply believe many fund mangers have stuck around the grain and soy markets because of the good "story," and the opportunity of getting bailed out. I just can't help but think they will try and offset some of these recent losses by banking profits in the grains as we head into the weekend. There are just so many moving parts right now, nobody wants to be over exposed. Therefore, I have to believe even the most bullish of numbers could be capped by the end of the week.
With this in mind, I continue to urge those of you who are not to a comfortable level with your new crop sales to take advantage of any rally.
Longer-term, and fundamentally speaking, I agree this corn crop is just not here. But who cares? We can sit here all day and prove point after point that the yield is not going to be here, but if the global economies continue to melt-dwon its all for not. There are several other factors that make me believe the timing may just be right.
To start with, I personally doubt China steps in to buy corn in any big form or fashion until after their corn harvest is completed. If you figure their harvest is still a couple of months away, and it will take another couple of months to complete, I would have to guess China is good on corn for another six to eight months. The only way they are buyers from here is if we break substantially lower.
The ethanol plants are watching margins slip further and further as crude oil has fallen more than $30 in the past 60 trading days. If the margins don't improve, ethanol plants will more than likely throttle back in the coming weeks. They will certainly start to ease their basis as they now believe new crop bushels will be harvested much earlier than anticipated and therefore they will be able to more easily bridge the gap between old crop and new crop corn supplies.
If the global economies continue to struggle higher protein livestock demand will certainly waver. Livestock feeders are already searching for any viable alternative to corn, and ample supplies of "Black Sea" wheat are now flooding the marketplace leaving me to believe if corn prices push higher even a greater percentage will be searching for alternatives.
Understand, we are not talking about a corn market that is trading at $4.00 right now, where everybody and there brother would be willing to take the risk. Instead we are talking about a corn market that is trading close to "all-time" highs in the wake of massive global economic uncertainty.
Yes, I am extremely bullish corn longer-term. I am just concerned about the current "timing" of the trade. I have producers all over the country calling me and trimming back yields each and every day. I am starting to question if we will even see a 150 yield. They are all saying the same thing, "the kernels are small." Yes, they have good population, but the kernels are small and the depth just isn't there. The ears are tipped back, their are numerous blanks, they are skinny, etc...
Those who are predicting that a couple of good rains will add 15 bushels back to the crop are simply wrong. Maybe a week or two ago that would have been the case. Today, that possibility is all but an afterthought. I have producers who generally have 200 bushel corn telling me the ears are just 10 rows round. Not a single producer is thinking that the "top-end" number is still intact. Most are off 10-15%. If you take a a terrific year and assume a 164 yield, reduce it by 10-15% and you are looking at a total somewhere between 139.4 and 147.6. A yield number in this range simply is unmanageable, and price will somehow have to ration demand.
Throw on top of all this the extensive wind damage, recent hail storms, tornadoes, lost acres from the Missouri and Mississippi rivers, abandoned acres from drought, abandoned acres caused by the extremely wet spring and late snow melt...the list goes on and on.
Even greater reason to be bullish longer-term is because seed corn is now looking like it could be in a real pinch come next year as well. Sure farmers want to increase corn acres, but will they be able to???
As I have been trying to preach for the past several weeks, as in life "timing is everything..." I certainly have no crystal ball, but at these price levels banking a portion of your profits seems only sensible on a rally, not only for producers but for traders as well. With so many moving parts and unpredictable circumstances now affecting our prices, yield and domestic production will only play a select role in determining our overall direction. Will the big boy's be looking to add aggressively in these troubled waters, or will they be looking to secure the ship and lighten the load even more??? My guess is they are looking to take a little off the table until some type of "outside" stabilization is guaranteed.
I simply feel that the next large run higher might be the last one until post harvest. There will be some highly anticipated USDA reports that will reveal some key numbers in the fall, and these may give us another bounce higher, but between now and then the market may become tired. Look for the next rally to get yourself in position!
The soybean market continues to build more of a "bearish" case as the heat and moisture levels seem as if they will improve moving forward in several areas. Throw on top of this thoughts that the world soybean stocks will jump higher in the coming weeks and the bean market may soon find it tougher and tougher to sustain a rally. With crush rates in Brazil and Argentina slowing the past couple of months, along with less Chinese buying, South America is sitting on a glut of soybeans right now. Yes, there is some fear that the US will produce fewer bushels, but if the resurvey finds more soybean acres all bets are off. A slowing global economy, what has been less Chinese interest, and massive South American supplies are all weighing on the trade. It will take a yield estimate from the USDA well below 43 bushels per acre to get the trade excited. On the flip, side the resurvey could go in either direction. If the USDA finds more soybean acres the analyst will be quick to pencil in higher ending stocks and prices will quickly fall. If fewer acres are actually found to be planted then the ending stocks will be lowered to extremely dangerous levels and price premium could certainly be added. I personally believe the USDA however will lower yields just a touch and raise acres. Also keep in mind that the hot dry conditions will help raise the oil and give us heavier numbers, therefore producing slightly larger than anticipated yields in many areas. Remember, it is the "oil" in the plant that provides the yield. The only real "bullish" news in the marketplace right now is that China imported 5.35 million metric tons of soybeans in July, and their crush margins have improved dramatically. If China starts ramping back up demand the markets will react positively, just keep in mind there will still be large quantities of global beans to chew through regardless...
Wheat in my opinion continues to be a sleeping dog. The funds are leaning heavily on the CBOT contract, and getting "flat" could certainly cause a knee-jerk type bounce to the upside. You have to believe before long the trade will start to look at Soft wheat planting intentions, and how the drought like conditions will affect total acres. You also have to feel that at some point the increase in soft wheat feedings will start to be acknowledged and this market will come back into favor. The trade is also excited to see that US wheat prices are getting awful close to the prices now being seen offered in the "Black Sea" region. You have to figure if corn yields are reduced even lower, wheat demand is only going to rise. I am already hearing about more and more starting to book wheat for feed as it is. As we sit, there is no real supply-demand type story for wheat, but with so many moving parts I see no reason to play around with being "short." There are just too many variables that could flush the funds, and cause massive "buy" paper to hit this market. I think you have on two ways to play this market, either by being cautiously long with some type of limited risk type strategy, or be on the sideline spectating!
Bottom-line, I like being bullish corn and wheat heading into the report. Soybeans could be pulled higher in the wake, but I am not excited about the story right now. After the numbers are released...
Tomorrow's USDA Supply and Demand Report is shaping up to be one of the most important crop reports of the year. I want to help you position your operation to make cash sales and hedges that benefit your operation and keep you ahead of the game, go ahead and sign-up to receive my FREE Full report. Remember, the markets don't react to fundamental news like they use to, in the FULL report, I bring you the inside scoop on what the Big Money players (Hedge Funds/Managed Money) are watching and how to take advantage of it! Simply follow the link below. You can also click the button below to follow my Team and I on Twitter and get daily updates on what is happening in the grain and livestock markets.