Speculative or weather market?
Weather recently has been variable to say the least, with some dry areas across the central/eastern Corn Belt that has hurt crops the past week, reversing some of the crop yield potential improvements made since mid-June.
Pro Ag yield models indicated a significant drop in soybean yield potential last week (about 0.5 bu/acre), dropping to about 43.1 bu/acre. However, that is still well above USDA's projected 40.5 bu/acre, so we still could get a negative Sept. USDA report for soybeans. Corn yield also has stopped rising, currently stabilizing at 158-159 bu/acre the past few weeks and indicating the crop improvement since June is ending. Basically that means that rather than hitting record large levels this year, it's likely the 2008 crop will simply end above average, but not record large. We still are above trend yields by 2-4%, but this will not be the bin buster that it appeared just a few weeks ago. That takes some of the pressure off the bear market, with potential harvest lows likely above some of our most negative assessments just a week or two ago.
Although Pro Ag is becoming less bearish than we were a few weeks ago, it still is difficult to be bullish heading into harvest of an above average 2008 crop. Prices have spiked so high early this year, we've started to curtail demand in a significant way, from ethanol plants, feeders, and exports (just about every use). With a crop still above the most recent USDA report, we're not likely to get friendly news in future USDA report, with yields likely to be hiked in future reports.
One has to question whether or not the market is paying attention to weather, or is it just such a large dollar movement market that speculative interests are influencing it the most? After all, corn prices dropped $3 in just a couple months from June to Aug. 11. Then prices went up $1.25 from Aug. 11 to just last week at the same time that Pro Ag yield models continued to rise. That doesn't sound like a market following weather! Instead, we might have a market that has been swung to both extremes (bullish and bearish), confusing as many people as possible it seems. Sometimes a markets role is to keep people off balance, unknowing what will happen next. This appears to be the case for this erratic grain market as well.
Corn and soybeans seems to have established some downside momentum along with wheat the past few weeks, although corn seems to have hit a support level around the $5.50 mark. Until the frost dates pass, it might see some bounce for a time before we break through the $5.50 Dec mark. Overall, the long term trend remains down, with the intermediate trend turning down as well. Short term, though, Pro Ag could foresee a 1-2 day bounce in grain markets as we already are touching on some support lines, and it may take a few days to break through these levels. Current Pro Ag yield models are still well above the last USDA reports, as our corn yield estimate is at 158-159 bu/acre (vs. 155 USDA) and soybeans at 43.1 bu/acre (vs. 40.5 USDA). With the Sept. crop report due shortly, its unlikely to be supportive as private estimates come out this week, so it will be difficult to rally the market much, either. Pro Ag remains long term bearish due to the recent improvement in the crop yield potential the past few months and the overall good condition of 2008 crops. Prices also ballooned so high in June that it's difficult to hold these lofty levels through a harvest. Instead, it's likely grains will continue to break into the corn/soybean harvest. Once harvest is 50-75% complete, it's possible to bottom the market and then slowly start our ascent to higher levels. We should make a high again sometime in March - June timeframe, a more typical seasonal rally for grain markets.