Today's Macro Event Does Nothing to Change Fundamentals in the Grains
Nov 30, 2011
The question is if, when, and how much premium will the grain and soy markets try to add ahead of the critical South American pollination phase, the release of the January (end-of-year) USDA report, and this mornings announcement that the Fed, ECB, Central Banks of Canada, England, Japan and Switzerland are coming together in joint action to boost liquidity by lowering rates on dollar swaps (Bearish the US Dollar / Bullish Commodities).
With the funds now sitting massively short CBOT wheat, almost flat soybeans, and long close to 200,000 corn contracts, it is anyones guess. There is certainly a better story in crude oil than there is in corn right now, and the proverbial "wall-of-worry" in the Macro markets is as high as it has been at any point since the 2008 meltdown. If the funds see reasons to be long both gold & crude oil we have to honor the fact corn, beans and wheat may need to be purchased in order to balance their portfolios into the year-end.
Please don't misunderstand or take this to mean that I am bullish, I am just merely pointing out the fact if your looking for a bounce, the current environment might provide you with your best window of opportunity. Keep in mind there is still about 200 million bushels of corn unharvested. More than 25% of Ohio's corn is still out in the field, while Indiana, Michigan and Pennsylvania still has about 5% left in the field. With uncertain weather conditions, it may force a fair amount of that grain to stay in the field until spring. I doubt it, but we may see the market opt to build in a little extra premium because of this. In the end though I don't see it being a real concern.
As for the "outside" markets, it's all about this mornings announcement that the world is coming together to help bailout Europe. There is also news floating around that China has lowered their bank reserve requirements, a complete reversal from actions this past summer as they tried to cool their economy. This is positive for growth!
The Euro Finance Ministers also agreed last night on two ways to leverage the firepower of their bailout fund, the 440-billion-euro European Financial Stability Facility (EFSF), using both an insurance scheme and a co-investment program.
Another piece of good economic news out this morning came from the ADP jobs report that showed 206,000 new jobs being created in November vs just 130,000 being created in October.
The bottom line is that today's environment has the US Dollar and US Treasuries under pressure and is adding support to all commodity markets!!!
As you know I was one of the absolute biggest bulls in the market, well before most any of the others in the last run. I want nothing more than to be bullish, but I simply can not, the environment has changed...drastically changed! The "fundamental" stars are no longer aligned. You can no longer sit and argue the scenery hasn't changed! You have to consider the following and react accordingly:
The funds were at one point long 500,000 corn contracts, now they are holding less than 200,000 long positions. The funds were long close to 200,000 soybean contracts, now they are flat. The funds were long CBOT wheat, now they are short over 60,000 contracts. Still don't believe anything has changed?
Russia exported close to 4 million metric tons of grain last year, this year they will export closer to 20 million. Ukraine last year exported close to 4 million metric tons, this year they will export closer to 8 million, some thinking as high as 12 million. Ukraine setting new records in exports as government drops export duties. Kazakhstan last year exported close to 5 million metric tons of grain, this year closer to 9 million. Australian wheat is entering the picture, India has started to export in small doses, European wheat prices are dropping as they try to compete, China's crops are growing. Global competition is increasing each and every day. Still don't believe anything has changed?
The funds were huge proponents of a weaker US Dollar and Quantitative Easing. They made fortunes as the US dollar weakened and commodity prices soared. The funds are reducing risk and exposure at a rapid pace. The cost of swapping Euro's into US Dollars now the highest level since the economic fallout of 2008. No arguing a stronger US Dollar equals lower commodity prices. In fact, JP Morgan, one of the worlds largest traders downgrades ALL commodities to a "SELL" (Nov 23rd). Still don't believe anything has changed?
This past growing season we produced an extremely poor corn crop here in the US, somewhere around 12.3 billion bushels, on about 91 million acres. Thoughts are producers will plant more corn this next year (closer to 95 million acres), and run a strong chance of having much better yields. Thoughts of a 14 billion bushel + crop is now in the air. Still don't believe anything has changed?
South American Corn and Soy Production looks to once again be on the rise. They have gotten off to a great start, and look as if they will plant more second crop corn than ever before. Talk in the trade is that we could see an additional 10-15 million metric tons of corn coming from South America. Consider that last year Argentina produced about 22 million metric tons of corn, now many think it could jump to 30 million. Still don't believe anything has changed?
Argentina is supposedly getting ready to ink a deal with both China and Mexico that will allow Argentine corn to be imported. Remember, Argentina is a major corn producer, this deal would certainly take away in some degree from US corn sales. Still don't believe anything has changed?
The largest Futures Clearing Merchant, MF Global becomes the 8th largest bankruptcy in US history. Not to mention some $1.5 billion in customer money has come up missing. Faith in the entire system is now being questioned. Many commodity traders are without funds. Still don't believe anything has changed?
Europe is teetering, and close to falling into a deep recession as growth in many sectors cool. China's PMI data falls to 48%, a level not seen since early 2009. If Europe falls further Chinese growth will immediately grind to a halt. The Chinese government is no longer looking to cool down growth by raising interest rates, they are now trying to find ways to hold on to it. Global growth numbers being scaled back by all. Still don't believe anything has changed?
I am sorry, but my subscribers pay me to keep them informed and up to date on the latest developments and changes in the market. I hate to burst anyone's bubble or rain on your parade, but the "fundamentals" have drastically changed. Sure, we may end up short some bushels, and we may get a little bounce higher on tight supplies as producers kick and scream trying to hold on. But I can NOT condone or buy into the argument that the "fundamentals" have not changed. Trust me when I tell you they have changed...drastically changed. In fact, you don't have to listen to me, the market is screaming it! In the past 90 days wheat and corn has fallen by about $2.00 per bushel and soybeans by about $3.75.
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