This Week in the Grain Markets
Feb 13, 2012
Now that the Greek parliament has "officially" passed a highly controversial austerity bill to secure a second bail-out from the European Union, the "outside" markets will turn their attention to Wednesday's meeting of the Eurozone finance ministers who will be discussing the country’s broader bailout details. In addition, the minutes from the Fed's January 25th FOMC meeting will also be released on Wednesday. After Bernanke's comments, the trade seems extremely eager to see just how close we are to more "Quantitative Easing." Another round of asset purchases focused on mortgages rather than Treasuries could be closer than the crowd is thinking. In any regards, if "QE3" seems to be more of a reality than a pipe-dream and the Eurozone continues to find ways to kick-the-can further down the road, we will see more of a "risk-on" type environment in the days ahead.
On the political front, Mitt Romney makes a comeback by winning the Maine caucuses over the weekend, barely edging out Ron Paul. While president Obama will release his Fiscal 2013 Budget today, calling for $3 trillion in deficit reductions over the next 10 years. The plan is supposedly very similar to the one proposed for Fiscal 2012 and would essentially leave Medicare, Medicaid, and Social Security unchanged. Keep in mind "none" of the major items contained in Obama’s budget are expected to become law prior to the November elections.
The "outside" markets should remain favorable today with little economic news on the calendar. The thoughts of getting one-step closer to a Greek bailout should keep traders somewhat at ease. Tomorrow we will take a closer look at US January "retail sales," then we have US "unemployment" numbers on Thursday along with the "Producer Price Index (PPI)," followed by the "Consumer Price Index (CPI)" on Friday... If these numbers can continue to move in the right direction we may actually see an entire week of favorable tail-winds.
Be careful getting yourself overly "bearish" based on the recent improvements in South American weather. Yes, conditions for most parts of Argentina have definitely improved. In fact, I have heard some rumors that rainfall totals in several areas the past 30-days are now actually running ahead of normal. The problem is I am NOT convinced as of yet that Brazil and some of the other surrounding areas in South America are getting that much better. My fear is that we are going to start heating back up and a few areas are still without substantial rainfall most notably southern Brazil and Paraguay. There is some talk that the USDA soybean production estimate for Brazil needs to be reduced even further (an additional cut of 3-4 million metric tons might be in order), especially if the southern areas do NOT start getting some additional rainfall.
There continues to be more talk about China looking to aggressively purchase more soybeans despite the USDA's recent 1 million ton reduction. In fact, I am hearing many sources in China are actually thinking their soybean imports will jump 2-3 million metric tons rather than falling like the USDA has indicated. A few sources actually reporting Chinese imports in 2012/13 well above the 60 million ton mark.
Rumors are China purchased at least 10 cargoes of Brazilian soybeans and 3-4 cargoes of US soybeans just last week. I am hoping we will see even more purchases made this week with the Chinese visiting the US. Remember last year after the Chinese visited, the USDA announced a "promise" of more than 11.5 million tons of soybeans would be prurchased. Don't forget the NOPA soybean crush data for January is out tomorrow, most in the trade seem to be thinking we will see a larger crush number coming out of the data. If we don't get it the market might be a little disappointed.
Several larger players are now also starting to take a closer look at the new crop soybean vs corn spread. The ratio is now out to the highest level we have seen since early summer, as many traders are eyeballing the tight projected 2013 carryover in soybeans (sub 230 million), as compared to what seems to be the potential for a bulging 1.5 billion plus carryover in corn. The thought is soybean acres will need to fight aggressively against corn to make up for the recent losses in South America. Personally, I am NOT on this page as of yet, but certainly believe it is something we must be aware of. It might just provide us with a nice opportunity to get more of our 2012 soybean bushels priced or hedged in the weeks ahead. Keep your eye on it!
US wheat continues to be attractive globally as reports over the weekend showed that Egypt's GASC stepped in and grabbed 55,000 metric tons of SRW out of the US at about $289 (C&F). I heard French wheat was offered at about $301, Russian wheat at about $306, and Argentine wheat at about $307. It is obviously good to see US wheat holding a competitive edge, I am just worried about how long we can hold on.
I still believe the "Big Bear" hiding in the closet could be in the wheat market, as we battle record global supplies and a 40% plus stocks-to-use ratio. In my opinion, some type of major production glitch will need to take place if we are to sustain any type of significant longer-term rally. We have the makings for potential setbacks in Russia, Ukraine, parts of the US and throughout Canada, for this reason "weather" will become extremely important for the wheat market during the next several weeks and may keep us somewhat supported. If the weather continues to cause production concerns the market will obviously add additional premium. On the flip side, if these fears begin to waver and weather conditions improve... lookout below!
Everyone is obviously concerned and keeping their eye on the December 2012 corn contract and in particular the February average (as it pertains to crop insurance). A good way to monitor this is to track the 20-Day Moving Average. Right now the 20-Day Moving Average for Dec Wheat is around $5.66, while our actual February 2012 closing average to date is just a little over $5.74. Unless something completely out of left filed hits the market, I am fairly confident in saying that our 2012 insurance guarantee for corn will be close to $5.50. Keep in mind, even though it is significantly lower than last year's $6.01 guarantee, it will still go down as the second highest insurance guarantee on record. With this type of number, I believe we almost guarantee ourselves close to 95 million plus corn acres going in the ground.
Though US ethanol demand may be slowing temporarily, there is talk that DDGS demand may continue to surge in the months and years ahead. One big reason is because China is said to be implementing a five-year plan to slash the production of "grain-based" ethanol. At first glance this would seem to definitely be bearish domestic Chinese grain usage (especially corn), but it is highly likely it will quickly increase the imports distillers dried grains (DDGS) during the next five years. There is some talk that DDGS from the US may actually jump to over 7 million metric tons within the next couple of years. This is something we certainly need to watch.
Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO. You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more.
Click this link to find out more Grain Marketing Seminar 2012. Like this blog and want to read more, sign-up for our free trial of the daily report. Click here