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End-users 'got next'

On Friday, corn closed 2-cents higher on the day and 2-cents lower on the week. Corn traded down to contract lows on Monday, but prices recovered throughout the week.

Favorable weather outlooks continue to weigh on prices. However, corn remains cheap relative to wheat and soybeans and with the flat price of corn at 2 1/2 –year lows, the farmer has been reluctant to sell. Shortly, the farmer will be forced to sell the remaining old crop bushels. Without a weather scare next week, prices should be under pressure as we approach harvest. With large "carrying charges" in the corn market and cheap flat prices, the farmer will have a large incentive to store corn. This could help basis levels after harvest. End-users should look at taking advantage of a sharp break in basis levels as farmers move old crop bushels. Once this grain is moved, it might be hard to get the bushels after harvest if flat price is still low.

Although I think corn prices will continue to break for now, there are some bright signs ahead. Profitability is slowly returning to the end-users. The ethanol industry is running strong again and near capacity. Operating margins are strong and blending margins (used to determine discretionary blending) are also strong. Exports are picking up and should continue if prices remain low. Cattle feedlots are close to break-even levels in some areas after being deep in the red. Corn looks to lose acres to soybeans in South America. This is not enough for a bull market right now, but they are positive signs nonetheless. Without the crop getting hurt by a frost, we look to have a big crop. With global wheat supplies continuing to grow, global feed grains will be up sharply on the year. Oilseeds should gain a lot of acres next year versus coarse grains and this will eventually matter. However, demand is still weak and it will take time to fully rebuild. Ample stocks of corn, feed wheat and cheap DDG's combined with lower animal numbers should keep prices cheap for now.

Soybeans closed 16-cents higher on the day and 9-cents lower on the week. Good rains throughout the Midwest caused the soybean market to quickly take $1 of risk premium off the price. Strong purchases from China combined with continued fears of a frost are keeping prices supported. Although I can't argue with prices remaining supported now, I do not think this will last without a frost. First, let's talk about production. The crop is behind on maturity. This has many worried about having a frost that will hurt the crop. I couldn't agree more, an early frost would be devastating to many acres and a normal frost would hurt some. No argument there. However, many plants are still adding pods and filling. The majority of the Midwest has seen 2-8" of rain in the past 7 days. This will greatly improve yields if there is not an early frost. With soybean prices historically high relative to other crops, acres look to skyrocket in South America. Without an early frost in the U.S. and without a drought in South America, global stocks of soybeans look to increase to the extent that global wheat did last year.

Now, let's talk about demand. China continues to be a very aggressive buyer of soybeans, again no argument there. With a drought in Argentina last year, 750 million farmers to support and a lot of cheap U.S. dollars to get rid of, who can blame them? The combination of the Argentine drought and Chinese stockpiling took nearly 30 million MT off of the market. This obviously put all of the pressure on the U.S. for Chinese exports. Exports will likely remain very strong from Sept.-March as the U.S. will be the only supplier. But once South America comes online, our exports could be close to zero. This was a very unique year as we continued to export throughout the year. I guess China could always decide to stockpile more soybeans, but who knows? This buying spree created a very "tight" world situation. (Actually, the carryover was just transferred from the U.S. and South America over to China). The need to "ration" soybeans forced soybean meal to rally to all-time highs versus all other feed ingredients. However, not only did old crop soybean meal do this, but so did new crop. With much cheaper alternatives and a weak animal industry, soybean meal demand fell sharply. This will be a continued theme in my opinion. Soybean meal still remains expensive and we are way overestimating soybean meal demand for next year. Cheap corn, cheap feed wheat, and cheap DDG's are all replacing as much soybean meal as possible. With most end-users trying to "get by", most have substituted what ever they can to achieve this task. So, if we get into September and it looks like we won't have an early frost I believe the soybean market will have another sharp sell-off.

Wheat closed 9-cents lower on the day and 21-cents lower on the week. After 2 years of grossly overpriced wheat, the global producer has helped stocks increase dramatically. Cheap competition from global suppliers and pressure by the CFTC to "fix" the wheat contract and cause convergence continues to weigh on prices. "If" the wheat market does break to cash levels, we could see prices fall another $1/ bushel. The wheat market hasn't been a legitimate contract for some time, so your guess is as good as mine. Hopefully it does get "fixed" and we do finally see convergence.

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Gavin Maguire is director of E Hedger, a commodity trading and marketing firm based in Chicago.

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