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Unsold bushels to cap rallies
Corn and soybeans closed mixed on the day and wheat closed lower. The USDA report was a little bearish this morning. Corn, wheat and soybean supplies look to increase both in the U.S. and the World. Corn and soybeans were sharply lower early in the day, but old crop corn and old crop soybeans helped prices recover by mid-day. Corn, soybeans and wheat are all on very large breaks. There was some short covering ahead of the weekend and we will have to see if the good weather forecasts hold up through the weekend. If the forecast continues to call for good weather next week, we could see another sell-off Sunday night. If the weather forecast calls for drier or hotter weather, we should see a rally. It would not surprise me to see a 15-20 cent corn rally and a 30-40 cent soybean rally sometime next week. If we do see those rallies, I would make some sales if you are behind.
Corn closed 2-cents lower on the day, and 20-cents lower on the week. Since the late planting, the U.S. weather has been ideal for most areas of the Midwest. Weather forecasts continue to call for rains throughout the Midwest and keep any threatening temperatures out. This can certainly change overnight, but if this trend continues corn should continue to break. Again, corn is on a very large break and is due for a rally. I would again use a nice rally next week as a selling opportunity. There are still a lot of unsold bushels out there and that should cap any rallies as long as the weather stays good. Corn has now broken $1.50 since the beginning of June. This has helped margins return to the ethanol industry and has attracted foreign importers. The feeding industry has also improved from horrible feeding margins to around break-even levels. Eventually, this will help corn prices but I think it is still too early. Just as the bearish fundamentals were ignored when the market was going up, any bullish fundamentals will likely be ignored on the way down. If the weather remains good, analysts will start talking about a national yield of 155, 160 or higher. This will put carryout estimates well over 2 billion bushels. Whether or not yields end up that high is not the point, the point is that the market will start trading those numbers. With the outside markets remaining weak, it will be hard to find a bull shortly. This attitude could cause prices to break much deeper than the fundamentals would suggest they should. December corn is already at 2 ½ year lows and the funds are now building short positions. Without any major weather problems around the world, it will be hard to "turn" the corn market… at least for now. The break in prices has caused option volatility to break, so if you haven't made any sales and need to I would look at buying back some calls. The next major support level for Dec. futures would be the contract lows of $3.04.
Soybeans closed 1-cent higher on the day and 91-cents lower on the week. The tight old crop story had caused the new crop prices to rally to extreme highs. Although old crop soybeans could still do anything, new crop prices may not be able to follow any large rallies. If the weather remains good, soybeans could be dollars a bushel too high. In my opinion, the 250 million bushel carryout for the '09-10 crop year will continue to increase as we head through the year.
The USDA already has record demand written down for next year. These numbers look too high to me. New crop soybeans sales are huge. This is why the USDA has a record export figure written down. However, I believe that we are seeing the world importer "front load" their purchases for next year. For months, every analyst has talked about how "tight" the soybean supplies would be again next year. If you thought we were going to "run out" of soybeans would you wait to make your purchases or would you make them now? We saw the same type of buying last year in the wheat market. When prices rallied to $14/ bushel, large importers started to secure supplies for a year or even two years out. Although this was bullish while it was taking place, it ultimately proved to be very bearish.
After the world finishes preparing for the "tight" situation, there won’t be anyone left to buy. A good crop in the U.S. and good crops in South America could help global stocks increase by 20-25% next year. I realize that we still have a long way to go before we 'make' the U.S. and South American crops, but at this time we should assume normal weather. The old crop tightness will still make the soybean market very interesting and very volatile, and good weather will still be important. I just want to make the point that it would not surprise me to see soybean prices break to $7 by this fall. Again, we have had a very large break and are due for a rally. I would look to make sales as November futures reach the $9.40 to $9.60 levels. As always, give us a call if you have any questions.
Wheat closed 3-cents lower on the day and 9-cents lower on the week. It is hard to find anything bullish in the wheat market. U.S. and global stocks continue to build. We are now looking at a carryout above 700 million bushels here in the U.S. With large corn supplies and large global supplies, wheat is having a difficult time increasing demand. Global weather has been good in all of the major producing areas, beside Argentina. Argentina however has finally started to receive some decent rains this week and should receive more next week. Record high wheat prices over the past two years have caused a massive increase in global production. As with corn and soybeans, wheat is on a very large break and due for a rally. Typically, wheat bottoms in July. Although this could certainly be the case this year, I wouldn’t expect a major rally off of the lows. The wheat market will need a new fundamental to turn prices higher from here.
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Gavin Maguire is director of E Hedger, a commodity trading and marketing firm based in Chicago.