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Tim Hannagan: All eyes on a 'heat dome' forecast

By Tim Hannagan Senior Analyst

07/13/2010 12:05pm

Following a week's vacation, I’m glad to be back with so much excitement building in the grain markets.

But, I put you on cruise control last week. My last report, before I left July 1, gave you everything you needed to know about the grain markets' movements from Friday, July 2 to Friday, July 9. I simply said no one will want to be short entering the July 4th week and speculators will buy 'long' on fear that the bullish June 30 crop report on acres planted and stocks on-hand was perceived so bullish that it told the trade the July 9 monthly U.S.D.A. crop report could be bullish as well.

This meant fear to 'shorts' who had to cover or buy out of short held positions while speculators buy. From my Thursday July 1st report to July 9th, we saw corn rally 40 cents, beans 60 cents and wheat 70 cents from the July 1st low to July 8th high of week. Those who bought my corn and bean Call option recommendations did well along with the futures players.

For those who took the quick profit into the report, fine, that’s your money management. Those who are holding onto the call options could get lucky as see a heat dome moving in this weekend thru next week. If true, this will add further weather premium to the market.

Last week’s success came from knowing what trend following funds and index funds would be thinking prior the July 9th report. If you know what their thinking or fearing you know how they will trade. Either buying long out right or covering shorts like in wheat. The market trades fear before fact. So, though the July 9th crop report was bullish by lowering corn and bean ending stocks inventory, our money was made by trading the fear of the report the days prior its release back to July 1st.  Last week’s gone, so I’ve turn the page.

The next big report to position for is early next month leaving weather the primary pricing force. Corn is in the middle of its key yield time with beans entering prime yield time now with 8% setting the pod . We had our first report on demand come out Monday with our weekly export inspection numbers. Wheat saw 14.1 million bushels inspected for near term export down from 16.8 the week prior and four week average of 14.5. Weak demand. If wheat’s going to continue higher from here it will be a followers roll to corn. Wheat will need to maintain its flow into the feed ration, as quality feed corn is becoming more and more difficult to obtain due to storage of last year’s crop under too moist conditions creating quality problems now.

Corn inspections were 34.5 million bushels, about equal our strong four-week average of 33 m.b. Not much I can say other than we continue the biggest corn export year on record, as China and others expand feeding operations for their mandate for more protein via meat. Soybean inspections were 6.5 m.b. versus 3 the week prior and four-week average of 5.2 m.b. China was in for 32% of the high protein crop number. China's bean imports for June came in at 6.2 million metric tons, a new monthly record and the highest this year.

With China's grain production to fall this year due to ongoing poor growing weather, we must expect them to further buy beans and other grains as insurance to meet needs. After the close of trading Monday, our crop condition reports came out. Our spring wheat crop came in at 83% in good to excellent condition unchanged from the week prior and 12% over a year ago. Corn condition was 73% G-E condition versus 71 the week prior and a year ago. Key Midwest producers were Illinois 65% down 3, Ohio 64% down 1, Indiana 62% unchanged. Iowa 71% up 6, Nebraska 86% up 3 and Missouri 50% G-E up 3 on the week. A slight improvement in some areas but the southern delta ratings got his hard with Kentucky 65% down 12 and Tennessee 49% off 13% on the week.

The key here is a heat dome is scheduled to enter the southern delta by the weekend looking to further deteriorate conditions already low and with the heat dome to enter the Midwest early next week and conditions in the eastern Corn Belt already well under the national average we could see further quality declines as well. The states that improved the average were the small producers. 38% of the crop is at key yield development time. So, the next three weeks will make or break this year’s yields.

Soybean conditions came in at 65% G-E condition down 1% on the week and down for the fifth consecutive weeks. Big losers were in the southern delta with Kentucky at 68% down 19, North Carolina 44% down 5 and Tennessee 62% off 10% on the week while a heat dome gets read to enter those areas this weekend lending to further erosion. Were  just  now entering the pod setting stage at 8% podding nationally with the early seeded crops in the smaller production areas in the south with key Midwest producers entering the pod setting stage at 25% podding or more by late next week.

This is coming sooner than expected by about 8 to 10 days so weather moves to the forefront of importance for beans as well as corn now. WXRISK.COM the weather site sees this heat dome hitting the Midwest by next Tuesday and possibly lasting into the following week. Temperatures in the western Corn Belt could see 100 to 105 and the eastern grain belt 92 to 97 and bone dry. So we could build our first weather premium in the market , as to date we don’t have one.

The rally in prices the two prior weeks came from two government reports raising demand prospects and lowering quarterly stocks and year ending inventories having funds recalibrate their positions to more longs and less shorts. Watch out for the long july short November bull spreads traders are holding.If the heat dome enters and stays awhile the damage will be to the beans in the field now that are delivered against the new crop November contract.

We could see unwinding of the spread pushing up the November much higher than the july strength as traders need to get out of their long july positions this month. Traders fat with last weeks profits are selling the daily rallies but new buyers on weather fears are buying the dips. Thursday and Friday is when traders usually start buying next weeks weather concerns. Either way be long into next week.

September corn has support at 3.68 with resistance at 3.90 , 3.98 then 4.08. September beans find support at  9.58 with resistance at 9.86 , 9.98 then 10.42. Wheat as I said is a follower to corn and funds cutting their massive short held position from 77 thousand contracts four weeks ago to 53 thousand shorts this week and more to cover. September support is 5.32 then 5.08 so be quick to liquidate .  Resistance is 5.50 then 5.78. 

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