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Market Outlook from the CBOT Floor for the week of December 5

12/05/2011 @ 9:44am

Coming back from the weekend I see a trade still paralyzed by the continued debt issues in Europe with PMI data suggesting a continued and serious contraction. The US debt situation is little better with the Democrats getting the Republicans to bend on the payroll tax deduction through 2012. This is a good sign if someone told me where they are going to cover the budget gap this will cost. I love tax cuts and all but they have to justify the books so where is the money coming from? Sadly, the fundamental situation remains very quiet with demand all but nonexistent.


On the supply side there are still weather problems in Ukraine and eastern Australia with more rains expected this week. The latter is a quality issue more than quantity issue with the crop in the final stages of development. The Ukraine situation is more of a long term scenario that needs to be watched due to their aggressive export pace early in the season. Internal forecasters are stating grain exports at only 6 MMT versus an early season estimate of 9-10 MMT. The week ahead for Ukraine is cold but major region have received some snow cover to mitigate the immediate impact. Another situation to be aware of is the growing political unrest in Russia following results of a weekend election. Putin’s ruling United Russia party received the barest majority versus 64% in the previous national election. This shows the iron fist of Putin heading into his election in March is rusting at the hinges. Good for Russia. These are the only impacts coming out of the European fundamental side heading into the first week in December with EU wheat starting on either side of 181.50 looking to US wheat for any momentum. The only momentum US wheat should have is short covering as positions are taken off the table into year end. There is no real threat to the HRW region following solid moisture in the eastern reaches of the HRW and most of the SRW region. There is still a serious problem in Western KS, OK and TX so focus on that come spring with the changing weather pattern looking to stay around for awhile.

Looking at S. America, Brazil is looking at rains in central growing areas with about 20-30 MM expected this week. There are still dry patches to watch with RGDS an issue worth watching as they progress through December. Argentina remains in better shape overall than Brazil but neither are a real concern. The biggest concern is Mexico. Corn production is a serious problem with drought like conditions dominating the current situation and forecast. This could increase Mexican imports by another 2 MMT with this coming from nowhere else but the US.

Looking at Asian markets I see Palm oil on the offensive again. Palm closed up 60 Ringgits due to short covering and lower production estimates due to weather problems. This is sparking talk of a test of record highs in 2012 which is not a far flung idea as long as crude maintains a positive stance. Shifting to crude, the market is modestly higher but world tensions again rising due to Iran. Their assertions that they “shot” down a US spy drone are not agreed upon by US officials. Our officials state the drone crashed due to computer malfunctions. We will never know the truth but this will only add another log to the smoldering fire which looks to expand into 2012. Equities are helping the macro side with all Asian markets offering a modest reason to consider a higher move sustainable today. US retail sales are considered robust so far with cyber shopping blowing away expectations. This has the whole US economy on the offensive today but as traders have so recently witnessed this can change day to day. I feel the worst is still ahead of us until the EU debt situation resolves itself in some manner.

Looking at agriculture this week, there is little excitement nor expectation for any real excitement heading into the December WASDE report due out on Friday morning. Informa will offer their crop expectations today at 10:30 which will basically be ignored by the trade. There are no more crop progress numbers so traders have to depend on private estimates heading into the WASDE concerning any losses in corn from IN, MI, OH and PA. Until Thursday’s Export sales the trade has nothing else expected outside a few random tenders. Do not expect anything from China as their harvest is done amidst supposed record production numbers. Overall it is a lackluster week for agriculture with budding momentum from technically oversold conditions stunted due to world economic woes. Wheat could have a good week extending gains over corn (I eat crow here) as shorts are covered. Beans could rally a bit on technicals and weather woes in Brazil but this is a modest rally at best. Corn could and should rally modestly as well but likely lose to both wheat and beans if current trends continue.

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