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Ray Grabanski: Has summer grain rally ended or been extended?

Last week, we talked about how grains probably should be sold at some point in the coming weeks, with strong hints that the rally was probably getting a little overheated for the current situation.  The title of our article was "Time to Sell Grains?" and in it we hinted strongly that the tide was turning from our recent rally. The tide seemed to be turning because the corn and soybean yield potentials expanded that week while the market went sharply higher.

This week, our article is a little more pointed, talking about how grains may have already reached their peak during this summer rally, moving back near some long term resistance points on charts, and then failing to a degree this week. We faltered at price levels that seem to be difficult resistance areas for grains.  Pro Ag is openly wondering if grain prices are headed lower from here.

The evidence is no stronger than in the crop conditions ratings that come out weekly by USDA, where corn and soybean yield potential using Pro AG yield models has expanded rapidly the past two weeks.  Rains have fallen in a few more areas, spread out to previously dry areas and giving the soggy areas a chance to dry out somewhat over the past two weeks.  Also, this is a time where moisture use by crops is quite high, with corn especially using heavy amounts of water as it hits the key pollination stage (a week or two early this year).  So far, heat has not been suffocating to the crop, and while we have above normal heat in the US so far this year, it has not put a lot of stress on crops that have mostly been growing with adequate moisture below it.  Pro Ag yield models are once again moving higher, with soybean yields leaping the most this week and now at the highest level of 2010! Corn yield potential has also expanded the past two weeks, with corn yield estimates now above 164 bu/acre and now looking more comfortable for carryout stocks for 2010 again.

Wheat crops remain in very good condition, with harvest of winter wheat advancing rapidly and spring wheat crop conditions rated quite high yet.  It's likely that we will hit a new record large yield for wheat in the US, as our crop is developing in very good condition so far in 2010. Rumors of problems in other countries is providing a boost to wheat prices recently, with Russia and Germany rumored to have drought problems in 2010 that show up on satellite images.  Apparently they are having a much poorer crop so far in 2010 than they had in recent years.

So the market is still very close to recent highs, still offering some good sales opportunities for now that seem almost too good to be true compared to just a month ago.  Wheat prices are up $1.50 from lows to highs, Dec corn rallied 65c, and soybeans rallied $1 so we have seen some significant rallies to date.  The only question remaining is how much farther these grains can rally???

The one thing we do know for sure is that the grain rally started with concerns about corn supplies, as the June 30th acreage and stocks report indicated perhaps as much as 500 mb smaller supplies than expected prior to the report. That increased the sensitivity to this year's yield potential, with yields at the time declining to their lowest levels of the summer in spite of early planting.  On July 5, the smallest yield model estimates of the summer were put out by Pro Ag, with corn at 159.2 bu/acre and soybeans at 42.9 bu/acre.  These numbers were smaller than USDA's 163.5 bu/acre for corn, and presented a dilemma to the market as we were still shrinking the crop at that time.  A premium was needed for the market, and Pro Ag was quick to point out that the potential of the market to go higher (since our yield estimates were shrinking at the time) was certainly there starting in mid-June, when yield potential started to shrink.

But things have turned around quickly since early July, and now we are quickly reversing course since July 5 to now be producing higher yield potential via our Pro Ag yield models.  This spells trouble for the market, as we estimate we've gained 4.5 bu/acre the past 2 weeks for corn, or an estimated 350 mb.  That takes the pressure off the corn market in many ways to produce for the large demand that we have.  IF we continue to expand yield potential at that pace, we could easily hit 170 bu/acre for corn for the 2011 crop year.  That would be a huge change from the 159 bu and still shrinking yield we had on July 5! 

So regardless of strong demand for corn and soybeans, the dynamic turnaround in yield potential of the 2010 crop from July 5 to today indicates another potential turn in the market, and this time lower.  That signals to Pro Ag that some sales are in order, and the sooner, the better!

The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures.

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