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Tim Hannagan: Fewer crops, higher markets

Thursday’s storm of reports began with weekly exports sales report, telling us how much of each grain was sold for future shipment, corn exports were 1.200 m.m.t. old and new crop sales. The new crop year for corn and beans starts September 1st. 

So, they combine the two to get a good export feel. Key Asian customers that account for 70% of our exportable feed grains were in for 625 t.m.t. of the total. It’s not an overly bullish number but consistent with a record export pace and a good number prior a U.S.D.A. crop report when importers usually back off. Soybean exports, old and new combined were 2.607 m.m.t., with key world buyer China in for 1.762 of the total, and the highest since June 2008.  The last two years China backed off on their aggressive buying spree in August and September as the U.S. crop would come to early harvest in September putting large quantities of beans available at harvest low prices. But, this year China has picked up their buying with purchases of 2.700 m.m.t. the last 22 days.

 I suspect they fear an increase in demand for U.S. beans from foreign drought stricken countries who normally don’t buy driving prices higher into early harvest, when prices should be lower. In the 1970’s when a U.S. export sales by U.S.D.A. said to UNKNOWN DESTINATION, it meant Russia. They wanted to keep their intent as quiet as long as possible to avoid speculators driving up prices. The last three years all the UNKNOWN sales have ended up in China. Since august 1st we have seen the UNKOWN DESTINATION stamp increase four fold. It’s been in beans, wheat and corn sales. This has talk that some of it could be Russian purchases. After all, if drought is cutting their wheat crop in half along with hay and potato production, we have to assume corn and bean production for domestic use is equally as damaged. The drought in Russia and the historic floods in India, where their rapeseed crop for high protein is in jeopardy all will lead to larger U.S. exports but how much can’t be figured out easily. 

The wheat exports were 1.329 m.m.t. a new marketing year high and the highest weekly sales number since September 2007. With the number two and three world wheat producers, India and Russia both suspending exports the U.S. becomes the world’s primary port of origin for quantity and quality wheat. This now won’t change before June 1, 2011 when foreign port new production comes in sight. Beans and wheat both are seeing some panic buying as world production remains in question. After all it’s only too fresh in their minds of the 2008 historic rally that had importers that hesitated paying $12 plus wheat, $8 corn and $12 beans. 

Foreign importers can cancel long term purchases if  prices fall without penalty in the world market. So, expect mountainous purchases as insurance against another potential mega fund buying spree in the futures. The market is trading fear now before fact.  Seasonals point to lower prices into the beginning of U.S. grain harvest in September. But, if the LA-NINA inspired drought continues into late September in Eastern Europe. 

Russian winter wheat planting could be off 20 to 50% or more forcing the export ban to become indefinite. The current ban is thru year’s end. Failures of the planting progress could add 2 to $3, on wheat pulling corn up 80  and beans up 1.40 along for the ride on a rare out of season rally. Current forecasts have the next 10 days as hot and dry with 30 day forecasts the same but long term forecasts can change. Should a hint of a change to cooler wetter conditions we could remove enough fear premium in wheat to take 1.25 off quickly, so, weather reports will be traded aggressively.

 The U.S.D.A. monthly crop reports was next on Thursday but came in-line with expectations and was traded on the first half hour of Thursday's opening before traders began buying the foreign port weather implications. They raised corn production 120 m.b. from the month prior, beans 88 m.b. and all wheat 49 m.b. over the July report. When you consider these crops produce billions of bushels the small increases on the month equal the amounts that fall off the trucks on the way from field to storage elevators. Ending stocks or our carryover inventory for new crop year corn was 1.312 b.b. down 61 m.b. from last month and 1.426 this year. The key here is were down for the third consecutive year and fifth consecutive month. Were not done. Expect our 2011 ending stocks under 1 b.b. before next spring. 

Wheat carryover came in at 952 m.b. off 141 m.b. from the July report. On paper it says were going to be lower than this past year but still no threat of running out as were double two year ago. The problem is no one expects this number at a 23 year high to stay here. In 2008, drought in Russia and Australia took ending stocks to 30 years lows. Though were starting with bigger stocks, the drought, floods and overall production problem areas is far greater now than then. 

Beans came in unchanged on ending stocks for next year at 360 m.b. as increased production offset a 65 m.b. export increase. Production numbers lock in on the September report as the crop season is over but demand will continue. The current U.S.D.A. number addresses U.S. production and usage, not foreign feedlot and usage expansion. Our current year ending stocks were put at 160 m.b. down 15 m.b. from July. Last falls  government reports had ending stocks at 270 m.b. Were already 110 m.b. lower as usage from foreign ports came in. Expect the 360 m.b. current estimate to see a much more aggressive decline as each month passes. 

The bottom line on Thursday's U.S.D.A. crop report is the government again confirmed that for the third consecutive year demand will offset production. That record production is progressively being offset by record world consumption. We're staying close as we plant more and more but we're slowly losing the battle and now we're faced with world production problems. There is just no room for production shortfalls.

 Wheat is entering a whole new market now. Those who read my PFG 2010 crop review released to the public last December saw our price projections for the year met right on time. I wrote that the bear market was over and over production would lead to less acres seeded and strong wheat into the feed ration consumption. The industry did not see and report the enormous wheat feed usage until spring. We were three months ahead of the industry.  I did not predict a bull market but an end to the bear market and large trading funds going from short to neutral on their portfolios with prices hitting  6.75 to 7.10 by July. We hit  6.95 on the last day of July and 7.10 August 2. Long term research success doesn’t get any better or timely and the long term option players know the value of these yearly reports projecting what prices and fundamentals will be 6 to 12 months out. 

Remember we were contrary to the industry that was bearish wheat for 2010 . But, most of the traders are near term daily and weekly traders. So, the weekly updates fine-tune our long term stratagies. Since our long term wheat objective was met with funds going from a all-time record short held position early in the year to unchanged , we have seen new fundamentals enter the market the last three weeks. The crop problems on foreign ports may now lead to trend following funds going from being short the market and now neutral to buying long. The threat of continued dryness as the winter wheat crop planting season into September  has already pushed wheat to the 8.50 high area last week basis December futures with the bulk of buying coming from Index funds  now long 209 thousand contracts. 

Note, Index funds are different from trend following funds .Index  funds only buy long never short but trend following funds go both ways. It was our yearly projection of 7.00 wheat this year that was based on trend following funds getting out of their record short position but now they and Index funds are poised to build long positions sharply if the weather over seas dictates. This would take us from a market no longer bearish to potentially very bullish. Any rally in wheat prices pulling corn and beans along would be over by September 20, as the preferred winter wheat planting dates would be over and fear trading would be complete, leaving winter wheat production changes from that point to be determined when dormancy breaks in March.      

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