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A lot of this and that for grain market

This week, the market is faced with a lot of this and that.

First, the EPA announcement of the RFS knocked the corn market for a few days.  Let’s be clear about the long-term effect this has on ethanol production and the corn market.  Assuming the RFS announcement becomes the final regulation, the “mandate” of 12.7 to 13.2 billion gallons becomes a minimum production number (technically the minimum amount of RINs blenders must accumulate).  The economics of blending ethanol and the economics of ethanol production could very well mean more is produced than the RFS mandate.  Remember, ethanol production was above the mandate until the last half of 2012.  The Wednesday report from EIA (released at 9:30 a.m. Central) will be watched closely as profitability becomes the most important factor.

Secondly, the corn basis is what the bears are watching right now.  In the past two years, with tight supplies, corn basis has gotten a lot of attention in the summer months, as cash market participants attempt to ration the last little bits of supply.  This crop year, dislocations in supply mean corn needs to flow in different directions.  Our home base of Fort Dodge, Iowa, is acutely aware of this.  The town is in the middle of a poor production area in Iowa (a combination of prevented planting and drought-induced poor yields).  Plus a new wet milling corn plant has recently come on stream.  Until supply chains adjust to this, corn basis is very strong.

Soybeans, once again, seem caught between the tightness of the North American crop and the coming large South American crop.  Purchases by China continue to be larger than last year, so until the South American crop progresses a little more, the market is caught between a tight situation for a few more months and a more burdensome supply situation after the first wave of Brazilian harvest.  And burdensome it could be!  More and more discussion is swirling around the idea of second-crop beans (not corn) in Brazil.  Also, the market believes farmers will plant more acres of soybeans in the U.S. in 2014.

The market will quickly enter a holiday mode and may not come out of it until 2014.  There will be no new U.S. crop sizes in December.  Weather in South America will be a concern, but beans are not yet filling pods.  Farmers will start settling up the books, paying for inputs and figuring how much corn they need to sell in early 2014 to meet cash flow needs.  

The risk of loss in trading commodities can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.

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