The entire grain complex began the year sharply higher at 9:30am CST yesterday, but held the gains for a span of only minutes. The soybean market opened 25 cents higher and was unchanged within an hour and down 15 or more by the close. Similar action was seen in the wheat and corn markets. Early enthusiasm for the grains inspired by a fiscal cliff deal from Washington as well as higher outside markets was quickly extinguished by professionals who had clearly been waiting for a rally to sell. Yesterday’s trade was yet another example of why successful traders don’t follow the headlines; "Those who buy headlines will end up selling papers." The corn, soybean and wheat markets have been in bear mode since early September; rallies will be sold until we have another weather issue or something friendly from the USDA in regards to demand. We’re seeing some follow through selling this morning after yesterday’s collapse. We continue to believe that stale length in the corn market especially needs to be eliminated prior to any attempt at a rebound.
South American weather has been mostly friendly for crop development according to most sources. Dr. Cordonnier left his estimates for corn and soybean production unchanged for both Brazil and Argentina. While he notes the potential for crop problems down the road due to late planting and excessive moisture in Argentina, the possibility of a big crop remains intact. As we saw this past summer in the corn market, traders will price-in a big production number until there is a problem. Keep in mind that Dec ’12 corn dropped from the high 5.90s to 5.00 from Jan 1, 2012 until the drought hit in mid-June. We’re seeing the same type of action in the soybeans with regards to Brazil/Argentina weather; the market will act as if there is a big crop until a weather issue is seen.
Despite extremely positive action in the equity markets yesterday, many remain skeptical of the fiscal cliff deal that was passed by Congress. Only $1 in spending cuts will be seen for every $10 in new taxes; the federal government’s habit of hemorrhaging money exponentially faster than it brings it in continues. The bill involves what is essentially the first major US tax increase since 1993. Despite rhetoric from congress and the President, taxes will go up for even the middle class due to an expiration of a two-year social security payroll tax cut. The average middle class family earning between $50,000 per year will pay an extra 2%, or $1,000 per year. Republicans will attempt to squeeze spending cuts out of the democrats during the next couple of months; however, it looks as if our government has just been issued a brand new credit card after maxing out all the others, courtesy of the taxpayer.
Weekly Export Sales are delayed until tomorrow morning due to the New Year’s holiday. The USDA will release its January Crop Production report on the 11th at 11:00am CST. All major USDA reports will be released at 11:00am CST rather than 7:30am CST moving forward. Many traders look for demand cuts in the corn balance sheet, from exports in particular. There is a good chance that these cuts may be partially offset by a decrease in harvested acreage, a move that has been widely expected by analysts for months.
We believe there continues to be significant downside risk in all of these markets. Remember that "the trend is your friend," and that picking bottoms or tops in trending markets is rarely a successful strategy.
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