Wednesday, May 15, 2013

Closing Market Comments - Wheat gets smacked hard

The grain markets closed weaker across the board today; CBOT wheat lead the pressure down 17 cents, MPLS wheat was off 8 cents, KC wheat was down 15, old crop corn was down 2, new crop corn was off 6 cents, old crop beans were down 2, and new crop soybeans were off 4 cents.  At 2:45 outside markets have the DOW up about 55 points, crude about unchanged, gold off 34 bucks, and the US dollar continuing its strength up 220 on the cash index at 83.815.

Bad day for markets; but not a huge technical day for most of the markets.  Some of the wheat markets did put in new lows for the month but not much damage to the corn and soybean charts.

This morning we had ethanol production numbers out.  Friendly across the board with ethanol production this week at 252 million gallons; up from 248 last week and thus matching the highest level since last June.  The bigger and more bullish story on the ethanol side is the fact that ethanol stocks are now at the lowest level since December 2010; they are down to 690 million gallons.

What makes the ethanol thing even more interesting is the recent conversations with ethanol plants.  First off you have huge nearby margins that have lead to some in the industry to ask if more ethanol plants will be put back into production.  But when I talk to local ethanol plants some of them mention comments that plants will be taking some possible down time in the coming months.  Some for maintenance which is normal; but most of the talk comes from the huge inverse that the ethanol market has. 

Meaning one of the buyers today mentioned that he couldn’t sell the ethanol for Aug-Sept; the ethanol futures have an inverse on the board.  With the September ethanol futures presently a 26 cent a gallon discount to the nearby futures.  Now I don’t know many producers that will actually sell me corn for less in August then they will for nearby delivery because of the cost to hold the product along with the risk of holding product in their bins with the typical heat we can see during the summer.  Plus things are going to be very tight in that slot; so the offers that I am showing to the ethanol plants are at a carry versus the nearby offers.  But most seem to have little interest; because as mentioned above they can’t sell the ethanol for that slot.  Plus last year many got on the wrong side of the market with the spreads. 

So the question should be at what point do these ethanol plants shut it down like some are making reference to.  If they do shut it down what could happen to ethanol stocks and ethanol price?  Just on the surface it looks like we presently only have a 2-3 week supply of ethanol.  Overall the above makes me bullish corn basis; but with all of the components and the huge inverse on the corn board from July to September it is tough to stay bullish basis.  Maybe it means that the way this thing plays out is for the September board to run up after the July goes off?

Bottom line is recent conversations with ethanol plants along with the ethanol numbers leave me scratching my head and lead me to think that the old crop corn volatility especially in the cash price has yet to see all of the fireworks go off.  I don’t know how it will shake out but it appears we have a catch 22 situation.

The other big news out today was the NOPA crush numbers.  They came in below expectations but still show very strong demand.  They came in at 120.1 million bushels; down nearly 9% from a year ago.  But still year to date up 5% from last year.  If we are to only reach the USDA’s current forecast we can only crush 433 million bushels from now to the end of August.  That would be a 22% decline; the only other year we have seen anything similar is in 1976/77 when we seen a 25 % year over year decline.  433 million bushels would also be the lowest in this time period since 1996/97; bottom line is that the market still needs to curb plenty of demand or in all likely hood the USDA present estimate of 1.635 billion bushels for crush will be exceeded.

The one comment I seen was perhaps the trade simply couldn’t source the soybeans.  Can’t crush what you don’t have.  Now whether it is bullish or bearish who knows?

I did see an article mention the fact that Goldman Sachs was now bearish on the Ag’s.  Now when we see stuff in the news it is usually already old; something that happened previously.  But we do need to find a way to encourage money to flow into the grains.  Everything now days seems to be going into the stock market and who would blame guys going with what has been a winner.  Perhaps it just means a pull back in the stock market would be good for grain prices?

Elsewhere we are still offering free delayed price on most of the grains and we have plenty of room for most of the grains.

Part of the weakness for the wheat market today seemed to come from thoughts that the prospects for the EU wheat improved and I did see a comment that parts of Russia got some moisture overnight.  Remember that Friday’s report showed a big year over year increase for world wheat production up to 701 MMT versus 665 MMT this present year.  Between Argentina, Australia, Canada, EU, Kazakhstan, Russia, Ukraine, and our self the United states production is pegged to be up 13.1 % .  These countries are the major exporters in the world; and you have the US down a little over 8 % on production; but overall the major wheat sellers in the world with us included are pegged up 13 %. 

Bottom line for wheat is everyone knows we have a train wreck in South Dakota and many other parts of the HRW belt; but at the end of the day the balance sheets don’t look to be greatly affected unless we find some additional demand.  Additional demand probably comes our way if we have issues else were in the world.  Today we don’t have much; but the crops around the world are by no means already in the bin either.

Please give us a call if there is anything we can do for you.

Jeremey Frost
Grain Merchandiser
Midwest Cooperatives


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