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Middle Tennessee | Sad day when I'm not even as bullish as Sat. Posted below to my blog,
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From harvest of the earliest bushels a few weeks ago we've known that the bears and hedge funds were right: the potent complements of weather down the stretch, genetic alchemy of seed conglomerates, and the power and skill of American farmers smashed the US corn production record from 2009. But if, as some are fond of saying, big crops get bigger, yesterday's numbers from the USDA show that in this case, barely so, with the production number up one percent from the forecast two months ago. Relief from worse scenarios gave daily trade with enormous volume and a small victory for the bulls, with futures price able to push off contract lows and eek a key reversal on the daily chart.
The long-anticipated match between farmers and their bins on one side and hedge funds short the market and coy end users on the other, has actually arrived. Beginning next week, the cautiously optimistic who have been watching for the seasonally overdue harvest low will look for a renewed bull camp to engage the bears on two fronts: the basis and the board. On the basis front, grain farmers with storage have taken a battle here and there, and the trade following Friday's report may signal at least a correction to the unrelenting price pressure. But with the December contract perched a dime above contract lows, and expected seasonal behavior under suspicion with the unprecedented hedge fund short position, it will take sustained and determined buying to curb the downward trajectory here.
While the US Midwest is still Center of the World where the corn market is concerned, that's not the case for soybeans where the world's largest producer, Brazil, is reportedly out of the gates with big acres and crop-friendly weather. Nonetheless, as corn has sunk soybean prices have kept their head above water. For indications of an infirm market for corn and grains in general, if it was necessary to look beyond new lows every single day in corn, the bean-corn ratio is another reminder. In the bull market years 2010, 2011, and 2012, the ratio was closer to 2 than 3, and in 2009 closer to 3. With the hard-hitting post-report soybean rally Friday, the ratio now is above 3. There are all appearances of a massive-scale spread trade in this complex. I don't know if the importers are blocking for the hedge funds, or the hedge funds are doing the blocking, but I believe there is some big money jacking this spread, and this trade may even be the primary dynamic in the individual markets. I think the ratio will reach 3.3 at least. I agree with those who may feel it doesn't make sense that this would occur now that South American planting is complete, and presumably larger than normal North American 2014 soybean acres are not necessary. But Friday's price action seems consistent with a larger pattern not yet showing signs of fatigue.
The wheat market recently reminded us that, without both hemispheres firing grain production on all cylinders, global demand can quickly emerge to overtake these markets. This occurred as largely unnoticed losses to Argentinian crop spilled over into huge and unforeseen shipments of wheat out of the US to Brazil. Wheat in Chicago rallied quietly 10% with the market absorbing South American imports and challenging weather to wheat sowing in the Black Sea. But if they sow wheat in the Ukraine, we drill it here in the USA, and with some alleviation of longstanding dryness in the Southern Plains, reports are optimistic on the winter crop, and the export inspections have stalled out. Wheat has already given up nearly all of the rally, even before the USDA refused Friday to make any real changes to export forecasts for the marketing year. It now looks like wheat could give back much of its large premium to corn, and giving additional bearish tone the grains. | |
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Closer to Three than Two
