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Outlook from the CBOT Floor for July 9, 2012

07/09/2012 @ 10:14am

The Grains Review
For the week of July 9, 2012
By Matthew Pierce
Coming back from the weekend it's game on again for bulls. It’s all about weather with only a modest break in temps seen over the weekend. Spotty rains in central IL and IN offered some fields 1” while their neighbor got a tenth. The erratic weather pattern continues to such an extent I’ve seen private estimates as low as 139 for corn. On Friday Informa lowered their estimate to 153.5 about matching Goldman Sachs and CropCast. Using current harvested acreage we get a 13.6 billion production. Current usage is estimated at 13.77 billion. Something has to give here. There are a few in the mid 140s with LanWorth in that category with this a distinct possibility if rains do not start in the latter half of July. My point here is the USDA has no choice but to lower yield on this Wednesday’s WASDE report. The damage is done in many areas with irreparable harm dramatically lowering yield.

Looking to demand, as price moves higher due to supply problems there is chatter of changes to the Ethanol mandate. This is just a discussion but at some point they have to face the reality that current blend levels are unreachable unless corn prices break or crude rallies significantly. Outside of Ethanol, feed margins are negative across the board stalling or contracting Chicken, Hog and Cattle operations. The one bright spot for demand is Japan. They need to cover 4-5 MMT of feed demand in the 4th quarter alone. Historically they are 30-40% covered. This coupled to possible Chinese demand is the bright spot. The situation with corn is pretty rough. Photos I have seen from clients and on Twitter show very stunted and spotty fields. There are a few bright spots but a few great fields will not cover the losses in numerous scarred fields. Look for crop progress today to drop ratings another 3-5% offering a bullish catalyst into the numbers. The COT comes out after the close which should show a massive gain in corn after solid gains in OI this past week. Estimates are currently around 125K long.

Then the USDA numbers on Wednesday morning. I expect the USDA to raise old crop stocks slightly while cutting demand due to price spikes. This is their attempt to quell a firestorm with a water gun. Nothing can stop this onslaught except drenching rains which there are none forecasted. Do not look for the USDA to lower yield to reality but a number under 160 is very possible. They will lower it and use their lower harvested acreage but a number under 160 alarms everyone because it will show a steep negative trend. The numbers, though expected to be bearish, should do little to derail weather momentum into the end of the week.

In beans, the market is getting a major boost from weather and spread momentum in meal. Looking at yields here, an average number around 42 is expected on Wednesday’s report. It’s early to clip beans much more with their key season yet to hit. With a 42 yield, increased acreage and a 145 old crop carryout we have only a 60 million bushel new crop carryout. That is using current demand which I know changes. The bear side of demand is raising prices cutting desire for edible oil coupled to a slightly slower macro growth rate in China. The bull for demand is Brazilian forward sales well over 96% which leaves little for the world market until we harvest in Sept. Demand from China is the only real factor to watch for.

Something else to watch is Dec oilshare. This market has been recently pounded to dust with a move back to 38% slightly overdone?!?!? The chart looks terrible but remember the corn chart looked terrible just a month ago. Crude oil is starting to climb which offers bean oil a measure of support with a slowing crush helping this as well as meal. Look for crop progress to lower ratings another 3-5% for beans with the COT showing a position in excess of long 225K this afternoon. The WASDE report should be more moderate for beans than corn but momentum is growing in both as chances for El Nino increases by the day. If El Nino comes and sets up camp, late season rains will dissipate as pressure builds in the western growing region.

In wheat the market is rallying more on floor momentum than individual fundamental support. There remains an issue in Russia and slow plantings in Argentina but no smoking gun like North American row crops. Domestic HRW and SRW harvest is all but done which should alleviate a bit of pressure from wheat markets allowing them to follow corn and beans again this week. The Spring crop saw scattered rains help conditions but they are still expected below the current crop progress levels shown. Look for ratings to drop this afternoon along with row crops. Outside of that, WASDE should be quiet for wheat with international production estimates expected to fall slightly led by EU losses and FSU declines. This will trim world stocks only slightly so do not look here for support. Wheat is a follower with their expected fund short down to almost nothing. Lacking this incentive to cover, wheat should lose to corn this week.

Get more of Matt's insight - www.grainanalyst.com

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