Tuesday, August 14, 2012

Market Comments 8-17-2012 USDA report thoughts after the fact

Good morning; it is Tuesday the 14th  around 8:30 and presently we have the grain markets slightly firmer as they try to bounce a little bit from the selloff the past couple of sessions.

Presently Dec corn is up 2-3 cents, beans are 6 higher, KC wheat is up 1-2, MPLS up 4-5, and CBOT wheat up 4.  Outside markets have the equities firmer with the DOW up 26 points, the US dollar is near unchanged, and crude is up about a dollar a barrel.

The big news in the past week has been the recent weather changes and more so the big report that was out on Friday.  The USDA report that was out last week was bullish for the row crops; but maybe not bullish enough to say that we need to go up now.  The report estimated balance sheets for corn and beans about as tight as ever but also the pegged carryout numbers came very close to trade estimates. 

Bottom line is last week’s report did a good job or started the job of defining our supply size.  Now the next thing for our market to do is try to determine demand.  Last week’s report showed corn and bean demand being cut big time.  Perhaps too much if we see a price break that adds back any demand.

I think our weather markets are nearing the end and the markets will soon focus on weather in other countries and more importantly at this time should be demand.   Good demand hopefully or lack of demand will start to lead the headlines.  It should really provide some rather volatile markets as we move forward.  Because it really is a chicken and egg thing or catch 22 thing. 

If you think about it the report out on Friday basically said that supply will be so tight and prices will go up so high that demand will be cut.  What happens to demand under basic ECON 101 if we get a price break; much like we have the past few sessions.  I know it doesn’t hurt any end user’s profitability unless their output (ethanol/ddg/etc) happened to be down more than the input this case corn/beans.  So a price breaks don’t do the job or rationing off demand. 

Really at the end of the day the report told me for the next several months we need to stay at levels that curve demand year over year and don’t bring on any extra demand from the nearly 2.5 billion bushels of demand that the USDA has cut over the past several months.  In June the 2012/2013 usage for corn was pegged at 13.775 billion bushels while on Friday the USDA pegged it at 11.225 billion bushels.  The markets job will be to make sure that we don’t go low enough to entice enough demand that we run out of product too soon.

Having said the above you can see that I have an underlying bullish tone for the market.  But it should be pointed out that each of the last couple of years we have had the USDA print carryout levels on corn around the 600-800 million bushel type carryout and by the time we were all said and done both of the last couple years ended up seeing an ending carryout closer to a billion bushels and that happened without 10.00 corn.  It happened with corn typically around 6.00-6.50 on the board the majority of the past year; while trading from mainly 6.00-8.00 the year before.  Bottom line is near the top of the markets each of the past couple years most thought the markets would need to go higher and well they didn’t.  I would agree that this drought isn’t nothing like we have ever seen before.  But I would also point out that sometimes demand can be curved faster than supply is cut.  Case in point the sunflower market the last year or so; in which we say sunflower trade at 50 cents or so; only to have the smallest crop since the early 70’s and yet prices for the majority of the year traded from 25-30 cents or about ½ of what they where a year ago before the small crop.

Bottom line is high prices curve high prices and things always look the best at what ends up being the top.  So never stop practicing good solid risk management in your grain marketing plan in a way that allows you to feel comfortable whether the next move is a couple dollar break or a couple dollar rally as either is possible and both are probably probable if you consider the volatile markets of 2008 and how this year from a fundamental standpoint could make 2008 look tame.

As for market direction as we move forward watch for yield estimates to help the market  more determine the supply.  If that supply get’s smaller more reason for us to bounce.  If we have already seen the smallest production number while then more reason to think that perhaps a top has been put in.  But at the end of the day I think it will come down to demand and that with supply should be difficult to balance out without some rather sharp moves; probably in both directions.

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