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A brutal sell-off-Louise Gartner

07/01/2011 @ 4:24pm

USDA threw a serious curve at the markets with very bearish acreage and stocks reports this week. Market reaction was hugely negative, even though prices had already been under pressure for weeks. 

USDA obviously did not factor in most of the preventive planting across the northern Plains in this report. They did announce that they would re-survey producers in Montana, North Dakota, South Dakota and Minnesota, with those results entered into the August supply/demand report. It’s safe to say that acres will be down significantly in those states. 

I think it’s also safe to say that we’ve seen the largest acreage and production estimates we’re going to see for the year. It’s also safe to say that virtually all weather premiums have been removed from the market, which sets us up for some volatility if weather turns poor during the next six weeks in particular. 

However, even beyond the critical pollination stages of late July through mid-August, we still have to consider the late plantings and the likelihood of some acres not making it to full maturity before frost hits in the fall. This is particularly true for spring wheat and durum.

The price levels reached this week take us way down to levels we thought we wouldn’t see this year. But here we are anyway. The seasonal lows for wheat should be upon us and could have been seen this week. If not, likely in the next two weeks we’ll see the final push down. The week following the July 4th holiday is also often a turning point for corn and soybeans; obviously this year we’d be looking for a low. If nothing else, the market is due for a bounce, and even a 50% retracement would be a big move.

The markets did not rally long enough earlier this week to get the indicators out of oversold territory; this likely means that any rally will be short-lived and there will be another test of these lows in the near term. Again, the rally could be significant but will likely be just enough to get the momentum indicators out of the oversold region before looking at retesting this week’s lows once again.

This sell-off has been brutal, particularly when we thought just two days ago that the fundamentals were actually bullish. The reports might have changed the nature of the thinking for some traders, but there is no question that these numbers do not reflect the actual plantings that did or did not occur after the survey was taken.

I look for seasonal lows in the very near term, likely by mid-July. After that, more fireworks will be coming as we make our way through the key stages of the growing season. For producers who want to replace sales, these levels present a great opportunity to get that done. Hedgers are also encouraged to lift short positions at these levels. 

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