Thursday, February 21, 2013

Afternoon Recap from CHS Hedging's Tregg Cronin 2-21-13


Outside Markets as of 2:15: Dollar Index up 0.371 at 81.438; NYMEX-WTI down $2.28 at $92.93; Brent Crude down $1.88 at $113.72; Heating Oil down $0.0546 at $3.1015; Livestock markets are all sharply lower; Softs mixed; Gold down $2.10 at $1575.90; Copper down $0.0535 at $3.5545; Silver is up $0.027 at $28.595; S&P’s are down 4.00 at 1503.00, Dow futures are down 15.00 at 13,875.00 and Treasuries are firmer.

Ran out of time to get a full writeup together, so just a few comments and some articles.

Corn and wheat led downside pressure, due in large part to the better than expected moisture moving through the Plains and WCB.  Most areas in KS saw 8-15” of snow in places which were only forecast to see 2-5” a couple days ago.  Many wanted to point towards the USDA Outlook Conference and the acreage/yield numbers being released, but this didn’t seem to be it.  Acreage of 96.5 million is probably a little lighter than most thought anyway.  What was “bearish” was the part in USDA Chief Economist Joe Glaubner’s speech talking about next year’s ethanol demand for corn at 4.675bbu.  This is up 175mbu from this year, but well below the 5.100bbu estimate in the USDA baseline numbers from last week and lower than the 5.00bbu estimate being used in the trade.  He cited lower gasoline demand undermining ethanol demand, even with better supplies and lower prices.  With an ethanol number like that, carryout easily climbs above 2.0bbu with 95-97 million acres and normal yields.

Weekly ethanol production was supportive as it climbed 8,000bbls/day to 797,000bbls/day, but remain around 10,000bbls/day smaller than the level needed to hit the USDA’s projections.  Stocks also remain stubbornly high at 19.495 million barrels, down just 5,000 on the week.  Desperately need to get stocks down before margins will improve on a consistent basis.  Other trade chatter today said China bought 120,000-240,000MT of US corn for Sept/Oct/Nov 2013 shipment today.  Treating it as unconfirmed, but the $5.25-5.50 level on December corn is though to work into Chinese private coffers.  The IGC raised their world wheat and corn crops.  Sanderson Farms said the Sequestration cuts next month would close its operations as they are prohibited by law from operating poultry processing plants without the presense of federal inspectors.  Buenos Aires Grain Exchange left their corn production estimate for Argentina unchanged at 25MMT, while the USDA is at 27MMT.  Price of RINs jumped 38% to 41c/gal today.

Wheat also crushed on better than expected snows.  Daily sales announcement of 120,000MT of SRW sold to unknown destinations seems already priced in. Debate on whether it was linked to Chinese business, or whether it was part of recent Turkey business.  Iraq bought 300,000MT of Australian wheat, and Jordan bought 50,000MT of optional origin wheat although this doesn’t look like US according to US cash traders.  India’s exports expected to rise 23% next marketing year.  Reports from the country say the US wheat farmer isn’t panicking yet, but will be a willing seller of HRW and HRS on rallies.  Going to be very difficult to get back to levels where US farmer turns palms out seller.  We did see some scale in pricing by the exporter as Minneapolis dropped.

Soybeans and meal enjoy loan grain room strength on continued logistical problems in Brazil, spot business off the PNW (and possibly now Gulf) and necessity to keep domestic soybean stocks from dropping to dangerous levels before the end of the marketing year.  At the pace we’re going, it won’t be a question of if we’re importing from Brazil, but how much.  Vessel lineups are approaching 50-days in Paranagua, and is being called the ‘worst ever” by terminal operators there.  The threat of strike continues to hang over the market.  CIF bids perked up on the front end, but remain incredibly thin and tough to nail down.  The Gulf pull isn’t deep.  The Rosario Grain Exchange lowered their estimate of the Argentine production to 49MMT, while Buenos Aires Grain Exchange is 50MMT.  The USDA is 53MMT.

Calendar spreads firmed across the board with the most strength witnessed in wheat on a percentage basis.  While the fundamentals might warrant lower prices, it isn’t moving grain yet, so basis and spreads continue firmer.  Corn basis is very hot in several locations with marketing year highs being paid by ethanol plants.  While I think this trend continues until futures put on a rally to move grain, might want to be stress testing bullspreads on either opportunistic plays or moving short basis positions forward.  Don’t want to be left holding the bag, especially in a market like Minneapolis.

Full USDA Outlook Conference balance sheets released tomorrow morning, so expect some market reaction to that.  Export sales also out tomorrow morning with some grumblings of better than expected sales on wheat.  Might be the spark this market needs.  Otherwise, overall trend of commodities as an asset class is down.  Investors really have no reason for owning commodities right now relative to other asset classes.

Tregg Cronin
Market Analyst
651-355-3723 fax
CHS Hedging, Inc.
The Right Decisions for the Right Reasons
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