Tuesday, January 15, 2013

Closing Comments 1-15-2013

Markets closed mixed today.

Corn closed up 7-8 cents, beans were down 4-5, KC wheat was up 15, MPLS wheat was up 14, CBOT wheat was up 16, and equities closed mixed with the Nasdaq off a little and the DOW up 28 points.

Not a bad day for the grains; but we did close a little off of the highs and to me it felt like momentum slowed down a little as producer selling also picked up a little.  Technically charts look much more friendly; but also nearing some areas that could be considered resistance zones as well as areas that should pick up producer selling and cause less end user interest.  Bottom line overall a good day; but don’t be surprised if we see a little more consolidation with maybe some back and fill trading over the next several days.

Story lines haven’t changed much; Friday’s USDA report left us with supportive fundamentals for the most part.  Some believe that things might be a lot tighter then what the USDA printed; I guess only time will tell on that.  Also supporting the market has to be the Argentina weather that seems to be a little dry and warm; with the same in the forecast.  The drought in the US is also still in tact; but it is also a non-headline story at this time.  It is something that could give us great support; but it really shouldn’t be a major headline story that gets the funds super interested until sometime in spring and lot could happen between now and them.

Basis is a little on the defensive for wheat; perhaps for corn a little too.  Spot wheat business is soft as mills seem to be plugged; I thought the snow storm last week might slow things down and it has a little but not enough to get mills interested in buying much.  If things continue look for wheat basis to take a small step back.

Corn basis is also defensive; but also very volatile.  We have seen corn movement pick up and the recent run hasn’t helped out the end users margin; but it is also very volatile.  Some days some buyers simply need corn and pay up; while other days other buyers don’t have much need.  Bottom line is we have seen and will likely continue to see corn going to non-traditional destinations.  This should keep basis rather choppy; leaving plenty of potential should demand stay strong; but also expose huge downside risk once coverage happens or if demand softens up.  I talked today to a couple of ethanol plants about corn for later this spring and summer and neither seem to have much interest.  I don’t know if they are just trying to buy things cheaper but they simply don’t have much interest in later slots.  Part has to be because it is their job to buy as cheap as possible but another couple reasons have to be lack of forward curve margins; meaning they don’t have interest buying later slots to just lock in a loss and not having a book on allows them to shut down should that be the best business decision at the time.

My personal bias for corn basis is that it will show some strength as we move forward; but one day all of the sudden I think we curb just a little too much demand and then basis could get ugly in a hurry.  Bottom line is good risk management and diversification might be the way to play this thing.

I also thing that one might want to be looking at locking in winter wheat basis.  I don’t know that we are at the top; but historically we are at good basis levels and the fact that winter wheat is par with spring wheat suggests to me that adjustments have and will continue to take place.  That means mills will continue to try and buy the cheap or par much higher quality spring wheat over the winter wheat as we go forward.

A good example of this today was the fact that I had a 13 pro winter wheat train today that I couldn’t get applied on contract.  Too high of protein.  I also noted that I had a 15.5 pro spot spring wheat train.  Because I couldn’t get the winter wheat train on contract I tried to spot it out.  First off the spot bids where a good 10-15 cents softer than they were last week; second even though the winter wheat basis was softer it was still 12 cents better then the spring wheat. 

If you ran a mill would you rather buyer the better quality higher pro spring wheat or the winter wheat?  Especially if you could buy the spring wheat a discount to the winter wheat.   Longer term I think these spreads fix them self; but demand, mill grinds, and blends don’t change overnight.  But the spread between winter wheat and spring wheat should fall under the ECON 101 theory that high prices cure high prices as do low prices cure low prices.

Overall this just simply means that winter wheat basis might not be a bad sale at these levels.  Perhaps with the bounce on the board now is a good time to look at min price contracts.  After all without very strong demand it is very unlikely that basis stays anywhere near this strong if we see the board decide to run.

Going forward I think we need to watch the US dollar as it’s chart looks like it might want to bounce here.  We also need to watch ethanol numbers and export sales later this week as we really need to confirm that demand is solid.  We don’t need to continue to see the horrible export headline news.  We need to give the funds a reason to get long and or stay long if we want to really see a bull market; but probably more importantly if we want a bull market we need to have solid demand.  Our supply seems to be well known so if old crop corn or wheat is going to run it needs to be because of solid demand.  I don’t think corn went high enough to curb enough demand from the feed sector or the ethanol sector; but I also don’t think it would take much.   If wheat is going to have a super bull story it probably doesn’t happen until spring or summer and if we curb do much demand before the talk starts on the horrible crop it might not matter.

Don’t forget we will have our weekly marketing meeting tomorrow (Wednesday) in Onida at 3:30.


Jeremey Frost
Grain Merchandiser
Midwest Cooperatives


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