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Tim Hannagan: New grain year

Thursday's USDA monthly crop report came out as expected, a real yawner, yet a few surprises based on pre-report estimates by the brokerage houses. 

This report was all about the amount of grain from monthly adjustments that would be left over come the start of the new grain marketing year. It's the ending stocks that essentially represent our grain savings account to be a buffer from a weather problem or unexpected demand. 

Wheat's new marketing year begins June 1, with the start of our winter wheat harvest. The crop report put ending stocks on that day to be 843 m.b., up 25 m.b. from the months prior. Traders had expected a 8m.b. drop. They raised global stocks in key US competing exporting countries Australia and Argentina. This had them lower our US exports. It's a non-issue, whether the number was 20m.b. more or less, as we're still sitting on ample stocks; over 800 m.b. 

It's now all about production and the weather's  ffect on emerging winter wheat fields in the Southwest. Next week's forecast for Texas north to Kansas, 90% of our hard red winter wheat acres, is much warmer than normal and dry. As we break dormancy on the weather change, badly needed rains are needed. Most weather gurus see the rest of March as warmer and drier than normal. Crops went dormant with the lowest crop ratings in recent memory, so wheat will be challenged to find better than perfect weather the next 80 days, when the growing season finishes off. 

Soybean ending stocks for September 1, the beginning of the soybean new marketing year and harvest, were put at 140 m.b., unchanged from the months prior and 151 a year ago. They simply left everything from exports to the crush alone. Traders had anticipated a slight increase in ending stocks as Brazil ,the worlds number two producer exporter, has increased their crop size, the last month. This automatically has traders thinking they sell it at our export expense, like years past. 

But, we're in a different world marketing environment now with the new theme: A COUNTRY THAT SAVES, PLAYS. Meaning, countries are saving more grain and exporting countries that build reserves have grain to play with in our volatile twelve-month demand scenario we're experiencing. Brazil used to sell everything at harvest and store nothing. They would watch prices rally yearly into summer highs and witnessed the US exporters cashing in on yearly high prices, while they sat empty. So, though Brazil's crop is larger, they actually are selling less beans for near-term delivery and holding back inventory to sell later, leaving US exports a little better especially to China. 

Corn ending stocks come September 1 were pegged at 675 m.b., unchanged from the month prior and well under the 1.7 billion bushels a year ago. If old crop year ending stocks are done declining, old crop future rallies are limited. But note,  the 675 m.b. is a 15 year low and the 2012 September 1 ending stocks of 865 m.b. are among the lowest  beginning ending stocks of a new crop year in modern history. If we plant the 92 million acres the USDA suggested at the recent AG forum conference and have a yield equal the five-year average, ending stocks will fall 100 to 250 m.b. or none.   

The crop-year psychology changes with the season. Last year saw us start with more than ample ending stocks, but increased demand due to less than favorable growing weather in key exporting and importing nations, has put beginning ending stocks ahead of this new season at critical low areas for corn and soybeans. Last year's enormous bull rally continued through into this January, February and March as each month traded last year's bullish news. 

It appears with this week's larger price break than recent profit-taking breaks, funds are turning their psychology to the new crop year. Wheat breaks dormancy next week with southern Delta fieldwork and planting of corn and beans beginning late March. Prices will go as high the next five months as it is hot and dry. Or possibly, the worst of inventory problems are over should ample acreage increases be met with sunny, warm days and timely rains. 

It's a new marketing psychology and if you were not ready to capture last year's bull market, be ready, as this year's historical low inventory stocks starting point sets us up for historical price swings rallies, should weather problems ignite the market. 

The tragic earthquake in Japan, certainly will cut corn exports to the region as shipping ports and roads are wrecked. We export 70% of our exportable feed grains to Asian markets with Japan in for over 17 million metric tons annually on the world market. How fast the trade negativity on export losses disappears is important as once digested thinking turns to how much more they will buy as a result of losses of stored grain at ports and in farmlands. 

Technicals read like this. Many corn support is 6.54 which is about a 40% correction of the November to March high rally. A close under and 6.38 is next with 6.05 after that. Resistance is 7.10. We had 13.20 as support all this week for may beans. A close under and next support is 12.95 then 12.75. Resistance is 14.00. May wheat support is 7.00 then 6.75 with resistance at 8.00.

Tim Hannagan is a senior grain analyst with PFGBest.com.

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