Tuesday, February 5, 2013

Closing Comments 2-5-13 - Pre-USDA Report Thoughts


Markets closed mixed today in a rather choppy trading session for the grains.

When things where all said and done corn was off 5 cents, soybeans were up 7 cents, KC wheat was off a dime, MPLS was down 5 cents, CBOT wheat was down 5 cents, equities bounced with the DOW up 99 points, crude was up 50 cents, the dollar is near unchanged, and gold is off 3.00 an ounce.

A disappointing day for the grain markets with a lack of headlines.  More so today’s weakness seemed to be follow threw selling from yesterdays turn around that the grains had.  We also seen a slight improvement in the South American weather forecasts; but it would be hard to blame that for the weakness in corn when we saw beans able to close higher.

The grain markets did do one thing positive and that was close about 4-7 cents off of their lows for corn and the three wheat contracts.

There is some precip for some HRW areas in the forecast that along with the weak HRW demand didn’t help out the wheat markets.  Canada reported lower than expected stocks this a.m. by about 1 MMT less then trade average; but that wasn’t enough for wheat to see much strength today.  One commentary that I listened mentioned the fact that India has a huge excess amount of wheat in stocks and much of it might come to the export market.  It wasn’t too long ago that they imported wheat; but now they seem to be a competitor.

Basis for the spot feels defensive for both HRW and spring wheat; as mills seem to have plenty of product as the railroad have caught back up the past few days.  To arrive basis for the planting months still feels firm; but nearby has a weaker tone as supply is moving. 

Corn basis feels firmer as producer selling slowed down on the price break today.  But I also had a local ethanol plant tell me he now has coverage out until the end of April.  I have to wonder how the regional effects of big crops/small crops is playing out.  I know that it has caused a lot of shifts to were our final destination is on corn.  The past few years a lot of corn out of our area went up toward ethanol plants in the northern part of the state because their corn crops were smaller; this year hardly any corn from our area is going that way.  It is all going either east or south if on trucks; or going on rail into some feed markets.

Bottom line is we should look for corn basis to be choppy and rather volatile as we go forward.  One other thing that will add to the volatility will be the spread between old crop and new crop.  As example if you wanted to lock in basis for August or after wheat harvest delivery of old crop corn you could lock in something around 1.20-1.30 over the December futures.  So what likely happens is that we see some super strong basis sometime this summer but we quickly or at some time fall apart into new crop basis levels which likely trade in the -50 to -80 under range. 

This presents some risk and potential opportunity.  As example if you think we will have another drought card show up this year perhaps the play is to lock in basis against the Sept or December futures on old crop corn.  Because my logic would say that a drought doesn’t do anything for old crop values; but it certainly could be a reason for the funds to decide to get long new crop corn.  Now were or when to lock in basis might be another question because we are extremely tight old crop; so perhaps that means one waits and looks for 1.50 or 2.00 over the December board???

At the end of the day the one thing one doesn’t want to do is give up the old crop new crop inverse.  So that means that one needs to either lock in basis or get stuff sold sometime before that inverse goes away.  As long as the inverse is around it is a good sign of more demand then supply.

The other thing that probably added a little weakness to our markets today is Friday’s report.  The USDA will have an updated supply and demand report out on Friday.  Below are the estimates

The U.S. Department of Agriculture is scheduled to release its estimates on Feb. 8 at 12 p.m. in Washington.
*T
              Crop Production                Previous
                                           USDA Estimates
                Average       Range        2013      2012
ARGENTINA
Corn              26.4      24.0-28.0      28.0      21.0
Soybeans          52.9      50.5-55.7      54.0      41.0
BRAZIL
Corn              71.3      69.8-73.5      71.0      73.0
Soybeans          82.7      81.0-84.0      82.5      66.5


Carryout forecasts
Figures in the following tables are in millions of bushels.
                   2013 U.S. Inventory Forecasts
              Analysts Estimates
              Average        Range      Previous USDA
                                        2013    2012
Corn             616        502-697      602     988
Soybeans         130        103-140      135     169
Wheat            717        512-783      716     743


I do think there should be some risk that the USDA decides to be a little aggressive on the wheat exports and corn demand (ethanol and exports) because they have simply been horrible.  Perhaps they use a wait and see approach; but I think the risk has to be to the side of the USDA decreasing demand.  When we look longer out we also have to keep in the back of our mind that many are talking about 95-100 million acres of corn; with a yield of 140-170 that gives us potential production of 12.5-13 billion bushels to maybe as much as 16.5-17 billion bushels. 

If we are anywhere in that above production range we need to find a lot of demand year over year as this present year we are only projected to use about 11.1 billion bushels and that number could be falling with the slow ethanol production and lack of exports.   What is scarier is that history had never seen us drop the usage like we did this past year; but now potentially we have to up usage more than ever or risk having a huge carryout.  I guess we have been in the process of seeing how quickly we could curb demand or slow down demand over the past several months.  The very near future could be us seeing how quickly we can do the opposite.

I don’t want to sound to bearish for new crop prices; but I do want guys to realize the type of risk that we potentially have.  So the focus shouldn’t be to fear sell; but rather to realize that one might want to take advantage of any future rallies we may have because as things stand today the fundamental picture for prices 8-12 months from now isn’t for higher prices.  Sure some things could and probably will happen that will take the lowest possible out come out; such as drought persists, or strong outside markets that cause inflation talk and money flow into commodities, or any other black swan event such as import tax on Brazil ethanol or something else that could really give the ethanol industry a boost.

Don’t forget we will have our weekly MWC Marketing Meeting in Onida tomorrow Wednesday at 3:30

Thanks

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