Louise Gartner: Prices see major reversal down
Well, there you have it. After a long drawn out bull run in corn and beans, and new crop wheat pushing well above this summer’s highs, a bullish crop report appeared to have established a top as wheat and corn put in key reversals down. Soybeans followed three days later with their own key reversal lower as the entire commodity space saw major long liquidation on rumors that China would be increasing their interest rate and the inflation fears at least temporarily subsided.
The November crop report held some surprises but this time it was for soybeans and not corn. USDA lowered soybean yields by .5 bu/acre, whereas the trade had expected an increase if anything. After subtracting an increase in exports, soybean ending stocks have quickly come down to very tight levels at 185 million bushels, almost half of the estimate just three months ago. In response, the average estimated price for soybeans has increased $2.00/bu in those three months as well.
The data for wheat was little changed with just some fine tuning. Average yields were lowered .3 bu/acre to 46.4, and total production came down 16 million, with 11 million out of spring wheat and 5 million out of durum. Ending stocks for wheat were set at 848 million bushels, not normally considered a tight number, but with the very tight corn stocks wheat will still likely follow the corn market. World wheat ending stocks were lowered 2 MMT to 172 MMT, with the major reductions coming from China and the Black Sea region.
Corn yields were lowered slightly more than expected at 1.5 bu/acre; feed usage lowered 100 million, ethanol usage increase by a like amount and exports lowered by 50 million. Ending stocks were taken down to a 15-year low at 827 million bushels.
Adding to the sea change in corn sentiment was the projection from Informa that corn plantings next spring will be 93.1 million acres, up 4.9 million from this year and close to the huge plantings during the rally of 2007. With such a huge increase in expected production for next year and the still uncertain status of ethanol subsidies, traders decided that maybe corn was a bit rich at these levels.
Technically, the charts look very bearish. Huge sweeping outside weeks lower in corn and wheat, with a major spike high and reversal down in soybeans are strongly suggesting that major highs were established this week. The daily reversals were just as dramatic with huge ranges and record volume in the corn complex – a classic sign of a top.
Even with fundamentals still strong for all the grains, it looks like prices rallied enough to ration supplies for now. Wheat was supported by dry conditions in the plains and Midwest and the strong demand for feed grains. This week saw very good rains across most of the central plains with forecasts for those rains to pass through the Midwest during the weekend. The dry areas are quickly shrinking with weather watchers now projecting that only about 6% of the total winter wheat area is short of moisture.
Seasonally, wheat tends to move lower this time of year as the Southern Hemisphere’s harvest ramps up and the world pipeline has two new sources of good quality wheat from Australia and Argentina. This year, however, the quality is suspect coming out of eastern Australia despite huge expected production. This could take the edge off of the tight feed grain supply situation at least in the short term.
The bottom line is that much of wheat’s support was tied to the tight feed grain supplies as feed manufacturers switched from corn to wheat over the last couple of months. There are adequate stocks of feed wheat with more about to come online. So, if corn has topped, I think it’s safe to say that wheat futures and lower quality cash have topped as well.
Higher quality wheat could be pulled down by lower spot prices in general, but longer term the premiums should hold well and will likely strengthen as we approach the spring months, normally when the basis peaks for cash markets.
I would look for grains to continue lower for the next couple of months, so look for rallies to be short lived and use them as selling opportunities.
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