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Outlook from the CBOT Floor for June 25, 2012

06/25/2012 @ 9:21am

The Grains Review
For the week of June 25, 2012
By Matthew Pierce

Coming back from the weekend we have a real weather situation on our hands. Heat blooms over the central states will reach into the low 100s this week which adds severe stress to an already murky situation. Weekend rains did help in eastern NE, western IA and into western MO but there was nothing east of the Mississippi. Tropical Storm Debby looks to fizzle out over northern FL into the far SE corner of the US having minimal impact on weather in the central states. If anything, this will pull all gulf moisture to the SE of where is it needed leaving the central states under a high pressure dome that is subtle but building in size and severity. There is a chance for rains in northern plain states on the 8-14 day models but this is minimal and will not help the flooding situation in and around Duluth which is the driving factor right now in Minny wheat. This is a weather market like we have not seen in some time with world weather another contributing factor to the bullish potential of this market.

World weather is a mixed bag at best. Small increases in dryness in Argentina and Brazil stress winter wheat there while Ukraine finally admitted their problems this weekend. The Ukraine government weather forecaster stated Ukraine 2012 total grain production at only 43-44 MMT which is a 22% decline year on year. 12.2-12.3 MMT of this production is wheat versus 22.3 MMT last year. Just goes to show the problems are real. Russian wheat popped 10$/tonne over the weekend as supplies are stretched thin. Australia remains on the export sideline for wheat due to high domestic bids for feed consumption and problems in NSW through wheat germination. India remains the world’s bright spot for production but good luck getting it out of the country due to terrible logistical situations. They will export but not enough to rely on for SE Asian countries. This is just one reason EU wheat surpassed a yearly high overnight gaining 4.50 Euro/tonne. Dryness in Spain lowers total EU soft wheat production which squeezes currently ample supplies but we have all seen how quick wheat can explode. This market also holds a 50K short adding to upside potential.

The one bearish weather factor noted this morning is expectations for two rain systems in the Chinese north central plains. This would ease dryness in some of their major corn, cotton and wheat production areas. This rain if it hits on Weds-Fri would help them significantly. If it rain dissipates they have a reason to shoot higher into the stocks report on Friday.

Outside of weather the world is dealing with the Muslim Brotherhood gaining political power in Egypt which no one seems to care about because crude and thus macro momentum is bearish. The USD is higher against the Euro after Greece lost their austerity soccer match this weekend (HaHa). Macros are the only real negative with world commodity prices higher on demand and questionable supply. In southern Brazil we saw bagged beans reach a seasonal record high price as forward sales are well ahead of historical pace. RGDS is 95% sold already which puts even more pressure on US supplies moving forward.

Looking at the week ahead, all eyes are on the USDA stocks and acreage report due out on Friday morning at 7:30 CST. The second issue this week is the extended hours. We will be open until 2PM starting today to match the electronic close. A minor change but it aggravates European and Asian traders which have to stick around later into the evenings and nights. Crop progress is out this afternoon with very negative (Bullish) expectations for conditions. Heat stress, flooding in MN and drought in central states all add up to a very bullish early week impact. After crop progress it all depends on what the USDA says on export sales on Thursday which should be fairly poor and the report on Friday. The report has planted acreage expectations with corn expected to show a modest jump while beans could see a 2 million increase due to double crop acreage. I agree the numbers will be higher in both but reality says double crop beans in southern IL, N. AR and into southern IN are in real jeopardy. Also with wheat jumping in price producers may look to simply maintain their winter wheat plantings which would cut into double crop potential. What I feel is more important than acreage is old crop stocks. This will be the defining factor for spreads for the rest of the summer. If the USDA lowers stocks at all for corn or beans both spreads could easily see new chart highs. I doubt this will occur simply because the USDA will hedge their bets hoping to stem the weather related bullish momentum. The USDA could cut Ethanol which is ludicrous but possible in their warped world. They could also cut exports which would add to the old crop balance sheet taking all steam out of old/new spreads. This is not reality but since when does the USDA subscribe to a realistic point of view. Over all it will be a very interesting week with weather, the USDA, crude, the Euro, Brazilian supplies, domestic supplies and Russian prices all major factors. The bull situation is only beginning with weather getting worse, not better into corn pollination.  Last note, remember that the floor is open at 7:20 CST on Friday due to the report.

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