Monday, July 22, 2013

Closing Grain Market Comments - Bottom in or has the free fall just started?

Markets closed mixed today in a tale of two stories. The tight old crop situation for some of the row crops and the weather being the two stories out there. 

When everything was done corn was down 3 cents, KC wheat was down 3 cents, MPLS wheat was lower by 4 cents, August soybeans were up 30 cents, November soybeans were up 15 cents, crude was down a buck, the DOW was about unchanged up 2 points, the Dollar was under some pressure with the cash index at 82.216, and gold was up 42 bucks an ounce.

August soybeans were the bright spot for our markets and they helped pull some of the other markets well off of their lows.  The old crop soybean situation is just extremely tight.  No other way to put it.  Now trading the old crop beans is tough because basis seems to move 20 cents or more a day.  I did talk to an end user at one point today and he mentioned how bids were getting weaker 20 cents a day; yet he also really seemed to want an offer so that the beans I was working on didn’t go to another spot.

The bottom line for old crop grains like soybeans, corn, milo, and even millet is things are thin.  If an end users needed the product they have to pay up.  If they don’t it is tough to move things. No offer is unreasonable; yet at any time all the offers could be way too high.  Just a very high stakes poker game with many components.   The end users need to have enough so they don’t run out; but they also don’t want to have any extra once prices become cheaper.  When will prices be cheaper?  Sometime when they are covered or once new crop supply starting hitting them.  Bottom line is the old crop situation for some of these grains will remain explosive and volatile with lots of head games.  We might see basis bids drop 20-50 cents in a couple days only see it bounce as much or more should the buyers actually need something.

As for the weather it is really debatable.  But the headline that the funds seem to be trading is that we have cool weather during pollination; with many areas also getting moisture to go along with cool weather.  Don’t get me wrong plenty of areas have issues and have missed moisture or maybe even got too much.  But as a whole the headline is a much bigger crop then a year ago for corn.  The question many are asking is our corn crop this year only 33 bushels more than a year ago.  I guess we really won’t know that for some time and as far as I am concerned we are now just enter the phase when we should start guessing the crop size.  The real estimates shouldn’t start until about now or maybe not even until the Aug crop report.

As for the bean crop many are talking the opposite; talking that the bean yield the USDA has is too big.  That the bean production number should come down.  Same thing here I really thing we are jumping the gun even guessing at the bean crop size this early in the game.

Elsewhere we did have export shipments this a.m.; overall ok to good for wheat at 23.1 million bushels; which is more than the 19.7 that we need on a per week basis to hit current USDA estimate.  The corn and beans shipments were light of what we need on a per week basis; beans came in at 2.8 million bushels and corn came in a 8.9 million bushels.

The other big news was this afternoon was crop conditions. 

Here is CHS Hedging link with recap.

I didn’t see any major surprises; we had corn conditions drop 3% in the G/E slot.  Very much as expected but a drop in conditions nevertheless.  Corn silking came in at 43% versus the average of 56%.

Spring wheat conditions dropped 2% and soybean conditions dropped 1%.  Pod setting was at 8% compared to the average of 19%.

As mentioned I don’t see any major surprises in the condition update.  I think weather will be more important than this afternoons crop condition report; and those forecasts can change with little notice.

The North Dakota Wheat Quality Council tour is this week, with field observations beginning tomorrow. CHS Hedging will be reporting from the tour via Twitter at @hedgeit and @hedgeit_jhof

The thing that our area will want to watch is what type of protein North Dakota will have; not sure if they will have any estimates and really it is probably going to be determined over the next 30 days.  Right now it looks like ND doesn’t have much stress.  So when I guy that has high protein winter wheat or high pro new crop spring wheat asks me if he should bring it in and sell it or take it to his bins and store it my response is typically.  “Probably store it and hope ND doesn’t have any pro; but also realize that your flat price risk probably comes from corn and soybeans as I don’t think we have 8.00 wheat if we happen to have 3.50-4.00 corn.”  I just don’t see that happening.

So the bottom line for wheat and protein is that yes it might make sense to gamble and store some hoping to get paid another 10-50 cents or more for your protein.  But realize that by trying to gain 50 cents for your protein you might be risking a buck or more in flat price.  It doesn’t do any good to store wheat and get paid 50 cents more for protein if you take a buck less in the base price. 

I don’t mean to say that wheat’s going down either; more so I think one needs to realize where the risk lies.  Wheat in my opinion is close to fair value and maybe even fundamentally undervalued.  But I also don’t think that wheat can rally by itself.  It needs corn and beans to be at the very least somewhat stable in price.

As for the price of corn or beans I think we are entering unknown territory.  I believe that the corn crop ends up someplace between 13.5-14.5 billion bushels; based on current weather forecasts.  If that is the case I really struggle to try and determine what they funds might do and what is fair value.  I look at crude oil and think well maybe corn right here is more than fair; heck maybe corn is cheap.

I look at China’s demand and think that maybe all of the grains are cheap at these levels.  But then I look at possible record production coming off of a year that we had to curb demand and I wonder how can prices do anything other than see pressure.

The bottom line for corn and the rest of the crops the likely follow at least a little bit is we are dealing with a situation that we have never had before in history.  We don’t know how short the funds might go; the only thing we can do is look for other clues and practice risk management that helps one stay profitable and comfortable.  By nature it shouldn’t be easy.

One thing that they say we need to make tops or bottoms is everyone leaning on one side of the market.  I don’t know that clue has been met; yes we have the funds record short; but have the farmers sold enough new crop corn for us to put in a bottom?  Have producers really made any new crop fear sales to speak of??? 

I hope that over the next few months and years we can find some sort of medium level that helps us build demand yet is profitable for producers.  I am fearfully that we keep doing what we have always done.  That is overdo market moves; both to the upside and to the downside.

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


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