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Winter market blues?

Ray Grabanski 12/03/2013 @ 7:38am President, Progressive Ag www.progressiveag.com

Winter is making its debut in Northern states this week, with up to 1 foot of snow in northern regions including Montana, North Dakota, South Dakota, Minnesota, and Wisconsin, that will likely last into spring now that temps have dropped below 0 degrees. Most of the crop was out, but some remains to be combined in corn and sunflowers that might not make it out of fields until spring.  However, the market doesn't seem concerned with that as most of the crop is harvested elsewhere, and over 90% is harvested in all of these states as well.  

With markets slowing down in price movement, one has to wonder if the market is also getting bogged down in winter blues as price movement is becoming retarded. Corn is running to new lows recently, while soybeans have a bullish market development, with trends threatening to turn up and inverted markets well developed - even though harvest was just completed, and we've got 3.2 billion bushels of soybeans available to the world now! However, the January contract has a premium to March, which has a premium to May, which has a premium for each successive month until there is nearly a $2 discount for Nov 14.  

We indeed have an interesting technical situation in soybeans right now, with a weak monthly upside reversal in November, followed by a daily downside reversal yesterday, 12/2.  So which direction are soybeans going to go?

Already they are priced very high relative to corn (over 3.0 ratio, when normally the soybean/corn price ratio is 2.0 to 2.6). And corn is running to new lows (again yesterday). Can soybeans continue to gain on corn, putting more room historically between corn and soybean prices? Or will SAM producers shift production toward soybeans, and thus finally end the big bull market for soybeans?  Can China continue to import soybeans at the current torrid pace?

These are some of the questions that will be answered this winter, a most unusual winter indeed for grain markets as we find out just how worthless corn can be, and how valuable the golden soybean can become with China buying it aggressively throughout the first part of the season.  

Some of the answers to the questions will be determined by the South American crop production this winter, with their mixture of planted acreage of corn and soybeans the first important statistic, and then the actual yield of corn and soybeans the next important item. So far, weather has been quite benign in SAM, with planting season going pretty well. Weather so far has been cooperative, although recently there has been some dryness developing in northern Brazil as well as southern Argentina. But for the most part, the weather has been decent. It is becoming more important, though, and with the summer weather determining yields of corn and soybeans, this weather is just ahead over the next 2 to 3 months.  

Pro Ag remains bearish, especially soybeans, which are priced way above normal relative to corn.  We've taken off 75% of corn hedges at $4.25 Dec, $4.26 Dec, and $4.11 Dec (25% each) taking over $2 profits on all these hedges.  Final Pro Ag downside price targets for this year's crops had been $4.25 Dec corn, $11-$11.10 Jan. soybeans, and $6 CBOT wheat.  With continued weakness in corn, let's take off another 25% of hedges at $4.01 Dec corn or better.

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