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Tim Hannagan: Markets could have one more 'leg up'

This week's USDA Weekly Export Sales Report shows the effects of world grain production problems. 

Wheat exports last week were 854,000 metric tons, up 61% from the four-week average and new crop sales for after June 1, 2011 were 572,000.  New-crop year sales are unheard of this time of year, but long term wheat production and availability remain in question. Total sales were 1.426 m.m.t. with sales to every corner of the  earth. Egypt was in for the second consecutive week after avoiding U.S. wheat the past season, as they bought heavily on Russian ports. 

Sales begin to pile up at U.S. ports, as the U.S. is the number one port of origin for quantity and quality wheat. With Russia announcing this week they will suspend exports of wheat and other grains until the drought damage is determined, this sets up the U.S. to fill the hole in world exports, as the European Union wheat countries continue to extract production from drought. Canada’s plantings are down 19%, Australia’s wheat getting hit from dryness and the worst drought on record in the expansive Russian wheat prairies. The worst of the Russian news may not be over. 

The spring summer crop is a disaster but planting of the winter wheat crop begins in September. If the drought continues into early October, talk of planting being down 20 to 30% could surface. That would bring talk of the Russian export ban continuing into 2011. 

The wheat problem is not over and may become much worse the next 50 days, setting near-to-longterm wheat export projections to soar. 

Corn sales were 1.294 m.m.t., old and new crop year sales combined. The new crop year begins September 1st. Our key Asian customers were in for 765 t.m.t. It’s a bullish number and continues the U.S. on a record corn export year. 

Beans came in old and new sales at 1.200 m.m.t. versus 1.4 m.m.t. the week prior and too remains on a record export pace on the year. What we look for on demand for corn and beans is what will the dramatic price increase in wheat mean to usage. Six weeks ago, wheat was 1.05 over corn on the price spread making wheat an ingredient into the feed ration for animals. Now that wheat is 3.60 cents over corn, wheat’s priced out of the feed ration. 

This means more corn and soymeal will be going to feed. With Asian feedlots exploding on numbers of hogs and chickens, they were heavy buyers of feed quality wheat. We have to expect corn and beans sales to Asia, especially China, to increase as they back off on the feed quality wheat. 

Just a note, expect next Thursday's weekly export sales numbers to be higher than this week’s report. Exports announced this week, will show up on next week’s report already indicating how China alone bought 1.156 m.m.t. of beans and 232 t.m.t. of corn. When the rest of the world sales add in, it could be monster reports. 

Next Thursday, the USDA monthly crop report comes out prior the open.  Traders will not want to be short ahead of it on fear lower crop condition numbers in July will lead to lower crop production numbers from the July report. Equally a concern is will the government report sharply lower ending stocks of all three grains or marginally lower. 

With  foreign exporters suffering crop problems, there is room to sharply increase export projections and lower ending inventory. The government usually is conservative but the fear of being aggressive is there given the world situation. 

WXRISK.COM, the weather site, sees next week as hot and dry into Thursday, as the heat dome moves into the Midwest. Some weather models have the dome lasting 6 to 10 days . When we enter Monday, U.S. and foreign weather will be viewed as friendly to pricing as well as a potentially bullish crop report Thursday. But keep in mind the over bought conditions and longs in the market fat with profits will surely take some profits ahead of the report. 

If everything holds as we see it without any changes we should trade higher Monday into Tuesday with profit taking Wednesday. If weather forecasts change then we start the week lower but trade higher into Wednesday as traders buy the break and get long prior the report.  If the weather remains unfavorable here, as beans and corn enter the final days of yield development, and Thursday's crop report sharply drops ending stocks, we have one more leg up on prices before pre-harvest price corrections occur. 

December corn could push to 4.70 by week's-end and November beans 11.25.

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