July 3, 2008
Sep KC dropped 32 3/4 cents this week, to close at 912 1/4. Dec was down 31 cents to finish at 935. In Chicago, Sep lost 24 1/2 cents, closing at 887 1/2, while Dec fell 25 1/4, closing at 910 1/4.
The biggest news by far for the grain markets this week was the acreage and quarterly stocks reports, although they had little direct impact on wheat. All wheat acres were pegged at 63.457 million acres, which was 328,000 less than the trade guess and a little friendly. That was offset by quarterly stocks of 306 million bushels, which were 31 million more than the trade was looking for and a bit unfriendly. Neither of these numbers were anything special; wheat was actually affected much more by the corn numbers than by the wheat numbers.
In the short run, wheat's prospects are likely to be dictated by corn. If corn heads to new highs, I don't see wheat going in the opposite direction. If corn drops off from here, wheat will be vulnerable to harvest pressure and the prospects for an upward revision of the production estimate in next week's Supply and Demand report.
So far I still like the way this market is acting, given the size of this year's harvest. The prospects for CRP acres getting released is of some concern for 2009 prices, but so far the trade doesn't seem to be overly afraid of it, judging by the fact that July 09 futures are trading more than 50 cents premium to July 08. The bottom line is that in the short run the market will follow corn around, but I think the long term prospects are favorable enough that sharp breaks can be bought.
Sep corn finished the week at 757 3/4, down 10 cents from last week's close. Dec also finished the week a dime lower, at 777.
Last week I wrote that we'd probably see a limit move in corn in one direction or the other, and it turns out that direction was down. The report was bearish for both the supply and the demand sides of the balance sheet. The USDA estimated planted corn acres of 87.327 million, which was 1.666 million more than the average trade guess and at the high end of the range of trade guesses. Quarterly stocks of 4.028 billion bushels were 134 million bushels above the trade guess, indicative of demand destruction. As expected, traders are second-guessing the report, but the market still sold off more than 50 cents in response to it. The market had to trade these numbers even though everybody knows the numbers will be revised, because they are still the most current information we have. More accurate information will be coming, but it will be awhile before we see it. After gathering most of its data in the first 2 weeks of June in preparation for this report, the USDA had to quickly survey another 1150 producers in 6 states to try to get a more accurate picture of how many acres were actually out there and could be expected be harvested, but they realize that a more extensive survey needs to be done a little later. They intend to survey about 9000 producers in mid-July in order to provide a more accurate picture in the August crop report. Even when we get a better idea about planted acres, we'll still be guessing about abandonment and yields. The USDA is predicting 9.6% abandonment, up from 8.4% previously. But that's still well below the abandonment rate in the flood year of 1993 and the drought year of 2002.
With that report out of the way, we are now entering into a new trading phase: weather during pollination. The extended forecasts for the corn belt predict above-normal temperatures ahead, but the worst of the heat is currently expected to stay west of the corn belt. Precipitation is currently forecast to be below-normal in the western belt, but so far there isn't any indication of a high pressure ridge getting established in the Midwest that would shut off precipitation entirely.
But this is almost irrelevant, because extended forecasts are notoriously inaccurate and fickle. By the time Monday gets here, the extended forecasts will probably say something else. They can change a lot over a 3 day weekend, which is the reason that the Independence Day break has a history of producing significant moves in the market when trading starts up again. Which direction it will be this year is anybody's guess.
Even if the forecast looks benign on Monday and the market is sharply lower, I don't see it going into an extended downtrend until enough time has passed that it looks like we'll make it through pollination without a serious weather problem. Chances are we'll see at least a scare at some point this month, but bulls should keep in mind that the nearly $2.00 per bushel rally from May 29 to June 27 has already priced in a lot of damage. Bulls should also keep in mind that we continue to see evidence of demand destruction. Last week's Weekly Export Sales report showed the smallest corn sales number of the marketing year, and the latest figures on US ethanol production show that it fell almost 3% in April, even though production capacity increased slightly. Again, those figures are for April, when corn prices were about $1.50 cheaper than they are today.
I suggest having 50% of expected production covered with put options, with the intentions of adding to that on a pollination scare this month.
Aug beans finished today at 1649, a gain of 70 cents for the week. Nov beans rallied 71 1/2 cents, to finish at 1631. The headline numbers made the soybean report appear bearish on the surface. Planted acres were estimated to total 74.533 million, which was 276,000 more than the trade guess, and quarterly stocks of 676 million bushels were 13 million more than the trade guess. But the USDA was fairly aggressive in reducing its harvested acres projection. The new estimate of 72.1 million acres would seem to indicate that the carryout is still going to fall below pipeline levels of around 100 million bushels, unless a price is found that will ration out the supply. It should be noted that this report assumed a national average yield of 42.1 will be obtained, and that is questionable. Also questionable is how much of the approximately 3.7 million acres that were still unplanted on Sunday will see a planter, and how much double-cropping will occur this year.
Soybeans aren't seeing as much demand destruction as the corn market is, so the path of least resistance is up.
Fed cattle sold for $101.00 to $102.00 in the south this week, up $3.00 from the week before. Boxed beef was solidly higher. Estimated packer margins are $82.90 in the black, according to HedgersEdge.
Cash prices for fed cattle continue to climb, in tandem with beef prices and packer margins. Beef seems to be losing momentum though, and packers are asking for extra days on some of this week's cattle purchases. That suggests that the market may hit a temporary plateau soon.
But the key word there is temporary. Placements have been falling, so the supply of fed cattle is shrinking while export demand has increased sharply. Look for fed cattle prices to keep climbing over time.
Have a great holiday!
Jeff McReynolds
McReynolds Marketing & Investments
The information contained in this letter, while not guaranteed as to accuracy or completeness, has been derived from sources believed to be reliable and arrived at by careful consideration. Losses as well as profits are possible, and market conditions can change rapidly. Any trade recommendations included in this letter are the opinion of the author, therefore the use of this information and advice is the sole responsibility of the user.
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