Who Else Is Tired of South American Weather???
Dec 27, 2011
"Weather" seems to be the ongoing theme. From what I am hearing, the Euro Model shows a SEVERE HEAT wave coming for Argentina in the 6-10 day forecast...supposedly with temps reaching the 100 degree mark. Here at home the weather has been unusually warm as well. Last year more than 70% of the Midwest was snow covered according to NOAA, this year less the 1% is snow covered. In fact, it was the mildest Christmas in Chicago in 17 yrs. The 45 degree high was well above the 32 degree normal and not far from the all-time high of 54 degrees. You have to believe traders will be even more inclined to buy into the South American heat story, as we roll through an abnormally warm period ourselves.
With problems in Europe looking as if they have temporarily subsided, the funds seem to be feeling a little more optimistic about adding some risk to their portfolio. Especially ahead of the upcoming Jan 12th USDA report, where many are starting to believe the USDA will not only aggressively cut US corn ending stocks, but may also aggressively trim production estimates in both Argentina and Brazil.
I am not sure if you heard it on Friday, but I have been told well respected South American analyst Dr. Michael Cordonnier lowered his Brazilian corn estimate from 63 million metric tons down to 60 million metric tons. I also heard he lowered his Argentine corn estimates from 28 million metric tons down to 27 million metric tons. He also made similar moves in soybeans by reducing his Brazilian crop estimate from 75 million metric tons down to 74 million, and lowering his Argentine forecast from 53.5 million to 53 million. The recent extreme heat seems to be taking its toll on many areas. Yes, some key growing regions are doing well, but as a whole I am starting to hear more fear in regards to a shrinking crop.
The bears will obviously want to continue focusing on thoughts of huge US corn acres coming down the pipe in 2012, while the bulls will stay focused on the more immediate threat of South American weather. Personally, I have to give the advantage to the bulls, at least for the short-term. Even though the bears can pencil in a massive ending stocks number here in the US, if we plant 95 million acres and have optimal growing conditions this next season, but the bulls can pencil an extremely tight global "stocks:usage" ratio even quicker if South American production suffers any additional losses from here. With the bulls argument being more pressing and near-term, I have to give them the nod and move my corn and soybean ratings back to a bullish "+1" reading. I am not sure how long I will stay on the bullish side of the fence, but for the time being it looks like the place to be.
Many of you might be asking why am I not more optimistic about prices, and how come I am not getting more bullish at this time? There are a hundreds of reasons, but in order not to overcomplicate things, let's just start by saying world supplies are extremely cheap. In fact, cash corn in Argentina is almost so cheap that it pencils into the US. Let's also not forget we can loose 6 million metric tons of corn production and 3-4 million metric tons of soybean production in South America and still be at last year's level, which was more than enough supply to pressure US export sales. Don't get me wrong, I am NOT simply discounting the South American weather problems, I just don't see the losses having much of an impact early on in 2012. You have to believe the South American's are going to have plenty of bushels harvested, giving them more than enough supplies to make sales well into the US growing season. If the US struggles, and South America comes up excessively short, we may see some more serious concerns closer to the US harvest, but not until then, that is still nine long months away. My point is, South America is going to have plenty of bushels to sell, and with the thought of a massive US crop being planted in the Spring the trade may feel adequate global supplies currently exist... Just be careful getting yourself overly optimistic on the South American weather forecasts.
As for the "outside" markets it seems as if we will continue racing under the "yellow" flag through the remainder of 2011. There is very little news coming out of Europe, and very little to speak about here at home. Don't forget with most of Washington on break there will be very little political shuffling taking place this week. A couple of reports that we will want to keep our eye on will be the "initial jobless claims" number released on Thursday along with the Chicago Purchasing Managers Index, and Chinese PMI data. Other than these numbers, I personally don't see a lot of market moving news. Due to the holidays I suspect trade volume will be extremely low. Just remember low volume doesn't necessarily equate to low volatility. If you absolutely have to be in the markets trade small and limit your exposure.
I also want you to keep your eye on crude oil, as I am hearing Iran's navy has started a 10-day drill in international waters near the strategic oil route that passes through the "Strait of Hormuz." The worry is that these exercises could bring Iranian ships into extremely close proximity with United States Navy vessels in the area. Remember, the US Navy's Bahrain-based Fifth Fleet is very active in the area, as are warships of several other countries that patrol for pirates there. I doubt it would take much to prompt the US or Israel to take action against Iran. As I have mentioned before, if the "Strait" becomes a war zone, crude oil traders will quickly add premium to the market. I am NOT saying this is going to happen, but the conditions are certainly right for a conflict, so keep your eyes and ears open.
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