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Tim Hannagan: The last bullish report

Thursday brought us a update on the demand side of grains with our weekly export sales report. It tells us how much of each grain was sold last week and becomes a gauge of near term demand. 

When harvest is in, demand and outside market movement in crude oil, dollar index, metals and stocks become 90% of the driving force for grains. So demand side fundamentals are very important. 

Wheat sales came in at 808 t.m.t. up 28% from the week prior and 7% over our four-week average. It was key to see Egypt in again as they are the largest world buyer of wheat monthly and  turned away from the US last year and solely bought from Russian. Russia's drought put an end indefinitely to their exports leaving the US as Egypt's primary port to turn to. Brazil the world's second-largest wheat buyer was in as well. 

Drought conditions in Brazil currently have them looking for wheat insurance as their crop as well as soybean planting remains in question. 

The weekly wheat number is good but with 20 year high US inventory of wheat, leaves the demand side as a sign of a quicker reduction in  ending stocks, but not a bullish pricing number. 

Corn exports were 607t.m.t down 34% from the week prior as importers out of Asia back away ahead of this week's big crop report. Traditionally, buying slows the week prior these USDA reports as countries wait to see if numbers come in suggesting they should slow their buying pace or pick it up. In the big picture expect corn exports to stay strong into years end. 

Soybean sales were 947 t.m.t  off 46% from the week prior as importers awaited this weeks crop report but key world buyer China remained active in for 624 of the total as they meet needs for protein and extend coverage as dryness continues during bean planting season in number two world producer exporter Brazil. 

What a week. 

Last week Monday, September 27 we saw new contract highs for the year on corn and soybeans. The Friday prior we said get ready for the week to unveil a profit-taking break as month and quarter end enters into late week. We saw December corn fall from its Monday high of 5.28 to 4.54 with November beans high of 11.45 to 10.54. A bigger break than expected but as you know it was assisted by the very bearish quarterly stocks report that Thursday, September 30. Contract high rallies always bring measurable corrections. 

Last Friday, October 1, I released my weekly report and gave you the reasons why this week would see short covering and speculative buying taking prices higher into the much feared October 8 crop report. Well as you saw after opening up lower Monday short covering and buying all week took December corn from 4.54 to 5.28 and November beans from 10.42 to  11.35. The key to our  successes is looking forward not back. 

Last Friday, everyone  told you all bearish grains looked the week prior. We told you how bullish this week would be. It's all about funds trading fear of the reports and month-end profit-taking, which funds never miss. Today, October 8 revealed the funds fear of just how bullish the report could be. 

The USDA put this years corn crop at 12.664 b.b., down 496 m.b. from the September report and 446 m.b. under a year ago and lowered  our ending stocks, come the end of the marketing year September 1, 2011, to 902 m.b. This was down from 1.116 b.b. last month. 

Being under 1 b.b. is a very bullish long-term number for higher prices next year, but it's all about near-term for most traders. We look to finish off the current new rally with higher prices Sunday night into Monday day session, note, we have been going higher since Monday and  were getting closer to the top of this new rally. Funds normally take profits after the 10th of the month and before the last several days of the month as a rule. 

With limits on trading moving to 45 cents to start the week from 30 today for corn. We expect the buying to exhaust itself Sunday and Monday and then another correction. Soybean saw production at 3.408 b.b. down 75 m.b. from the September report. It was the ending stocks number dropping from 350 million bushels, last month to 265 m.b. today that surprise the market. The average pre-report trade estimate was 334. As I said two months ago, ending stocks come late next spring will be well under 200 m.b. versus trade consensus this summer that would exceed 400 m.b. 

Foreign demand for high protein oils such as soyoil for cooking and soymeal for the feed ration on exploding feedlots in Asia and Europe for meat  protein has been grossly underestimate the last several years by the industry. It shouldn't have been such a surprise to the trade that the government export projections were so high with ending stocks so low, as weekly in September we saw the Chinese in buying record tonnage of US beans.

 It's all math. But as I've stated 95% of grain research is from a domestic mindset that looks at acres planted here and domestic consumption and largely ignore the rest of the world. Like corn, beans too saw a big rally into the end of the week and  with expanded limits Sunday night and Monday we should exhaust the rally and set up a mid-month correction. 

Wheat was the tail of the dog with no production report numbers but ending stocks were put at 853 m.b. versus 902 last month. Stocks are not tight until under 400 m.b.  In the big picture, the high to start the week could be a high that holds into month-end as the November crop report won't be feared to be bullish as the October harvested acres would be the highest yielding acres in the upper Midwest and Western grain belt. Funds could be poised for a late harvest correction cutting 25% of their massive long positions built. Be ready.

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