Grains rally despite improving weather
In a very positive development this week for grains, we rallied despite a drastically improving weather forecast.
In addition, rapid planting across the US the past 2 weeks means we no longer have a late planted crop. In fact, all grains now have planting progress at or ahead of normal.
Emergence is actually ahead of normal, making USDA look silly in their May report as they cut corn yields below trend, based on slower than average planting. Now that planting is caught up to normal and emergence ahead of normal, will they raise yields back up again in June?
Also, negative on the supply side is a US wheat crop that will probably be record large by the time harvest comes around. US winter wheat crop ratings are the highest since 1999, our previous record large crop year (47.8 bu/acre yield). Since USDA's projected winter wheat yield in May was only 43.5 bu/acre, its possible we could see as much as a 10% hike in projected production yet this summer. That sure takes an edge off an already tight feed supply.
So, if planting/growing conditions have improved so much the past two weeks, why are grain markets rallying? Perhaps the most bullish development for grains was USDA's report last Friday which hiked corn ethanol demand 200-million bushels for 2007/08, compared to its estimate two months ago. This 7% increase in projected demand was not taken lightly by the trade, especially since the season hasn't even started yet.
If USDA is still making drastic hikes in ethanol use, perhaps they really don't have a handle on the pace to date? It seems like USDA is saying that no matter how much corn US producers produce in 2007, we will use it all up either in ethanol production or feed use. You can't ask for a more bullish picture than that!
There has been no cut yet in the rapid development pace of US ethanol demand, as prices have yet to go above $4 cash corn to ethanol plants. With profitability still great, does that mean even more ethanol development coming yet?
The market might feel a need to take prices still higher to try to curb the ethanol demand expansion, no matter how large the 2007 crop is. If prices can rally while the 2007 crop looks good, what will prices do if there ever is a real threat to the crop?
Now that weather forecasters are starting to agree that La Nina is developing, is it long before we start hearing the chances of a 2007 summer Corn Belt drought? Overall, grain markets are looking a lot more bullish given the huge ethanol demand (now projected at 3.4 billion bu for 2007/08).
Fund traders were taking their cues from USDA, piling back into long grain positions with a vengeance this week. Tuesday's upside reversal in corn and wheat prices could be the start of another leg higher in grains. Soybean prices already seem to have turned trend back to 'higher', as soybean oil futures soared to new multi-year highs this week following sharply higher palm oil futures (the major world vegetable oil).