Will Tomorrow's Report Bring a "LIMIT" Move in the Grains?
Oct 10, 2012
Corn traders are trying to determine just how much corn "supply" the US is going to produce. The range of guesstimates is from as little as 9.9 billion bushels to as many as 11.2 billion bushels. Bulls are obviously arguing the crop is sub 10.7 billion and further demand rationing will need to be done in the months ahead. Bears are arguing the crop has improved and total production is actually north of 10.8 billion bushels. In addition, they are claiming no further demand rationing needs to be made. Prices are already too high, as is apparent by the falling number of bushels being used for ethanol production and the potential for US corn exports to fall below 1.0 billion bushels. The bears are also urging us not to forget the extra corn supply that is being shipped in from Brazil in much larger than normal quantities all along the East Coast. Even though the bears make a compelling argument, the spreads and the cash market seem to be telling a story that actually favors the bulls. If there was plenty of quality corn available and so little demand, why are the spreads so tight and the cash market still so strong? I am not saying we need to be wildly bullish at this juncture, I am just saying something doesn't smell right. I continue to believe there is still some price appreciation left in this market. Therefore, a 10.8 number might not be viewed as all that bad either.
Soybean traders across the board seem to be thinking come Thursday we will be digesting an extra 125-135 million more bushels of soybeans as the USDA pumps up the yields. The trade however seems to already be trading a US soy yield number that is now north of 38 bu. per acre, almost 3 bu. per acre above the previous USDA estimate of 35.3. Therefore an additional 125-135 million more soybean bushels might not be all that bearish. Point is, we could see a 37.5 bu. soybean yield estimate viewed as neutral to bullish. My only fear is that traders will immediately add another bushel to the yield estimate, thinking we could see an even further increase before year-end, as this is the normal USDA move. If they bump yields higher in October, they tend to follow suit by bumping them even higher again before year-end.
The point I want to make out of all this is that not only are the production, yield and acreage estimates all over the map, but more importantly how the trade will react to these numbers once they are released is also a complete mystery. With the funds still aggressively long, we are almost certain to see a "LIMIT" type move no matter what the numbers are. Make absolutely certain you can comfortably handle the massive swings that could occur during the next several days as the market attempts to readjust and funds slosh around in the waters, creating major waves.
Personally, I believe the trade is underestimating the "RISK" still associated with the South American crop, especially considering they have only just started planting their corn and soybeans. Unfortunately, we don't get a say in the matter and are left to play the cards we are dealt. Moral of the story...I want to be bullish, but I have to respect the power of money-flow and honor the fact I have been knocked down and have struck out several times trying to hit the nasty curveball often thrown late in the game by the USDA. Always better to be safe than sorry! I would suggest swimming in and getting as close to the shoreline as you possibly can without completely getting out of the water.
For the rest of this story and more insight into understanding your marketing tendencies, sign-up here to receive a RISK-FREE 30-Day trial of my daily Grain and Livestock commentary. So many advisors want to tell you exactly how to market your crop, I want to teach you to better understand the markets and how you should respond. If you are looking to be educated and not just told what to do, simply click here and get started!
Van Trump Report