Grain Outlook: Prices up on fund rebalancing

Originally published in the November 20, 2009, print edition.

— The following market analysis is for the week ending Nov. 13.

CORN — Now where did we leave off last week? Oh right, money. That’s exactly where we can pick up this week. Two German banks were thought to be rebalancing exchange traded funds which rallied prices ahead of the U.S. Department of Agriculture monthly crop report as we rolled back from an excellent harvest weekend.

There is anticipation in the market that fund rebalancing after the first of the year (weighted heavier to corn) could translate into buying of 70,000 corn contracts. The U.S. dollar falling to 15-month lows after the group of 20 nations met last weekend and didn’t mention the U.S. dollar weakness, added to the attractiveness of buying commodities. What they did say was that it is too early to take away current spending intended to boost economic growth.

Energies suffered as funds shied away from them and concentrated on grains. Crude oil fell $1.08 for the week to settle at $76.35.

The November USDA crop report was mostly as expected, to a little friendly on the surface. On the 2008-09 balance sheet, ethanol use was lowered 23 million bushels and Food, Seed and Industrial use was increased by a like amount.

Ending stocks for 2008-09 were thus unchanged at 1.674 billion bushels. For the 2009-10 crop year, the yield fell by 1.3 bushels per acre to 162.9 bu./acre versus 164.2 bu./acre estimated in October. This was a greater decline than the average guess of 163.2 bu./acre. This is the first time in over 40 years that the USDA has raised the corn yield in September and October and not increased it in November.

This dropped the production number to 12.921 billion bushels, down 97 million bushels from the October 13.018 forecast and the average guess of 12.94 billion bushels. Exports were cut 50 million bushels which calculated to a 1.625 billion bushel carryout, down 47 million from October. The average on-farm price was raised by 20 cents to a range of $3.25 to $3.65 per bushel.

The USDA does not change yield forecasts on the December report, but they can change category numbers. The final January yield is already expected to show an increase in yield based on reports from the country.

The market responded to the report with a short-lived push lower before outside investment money returned to reverse prices higher. Eerily, the week began to look very similar to last week. That similarity continued into the weekend, but at less of an extreme than last week.

Goldman Sachs this week released price projections for the next 12 months. For corn, they are looking at $4 for both three and six months out and $4.50 for 12 months out. Their soybeans number is $10 across the time period. In general, Goldman Sachs is forecasting strong returns for commodities for two years.

OUTLOOK: Seeing gyrations in the market like we’ve experienced over the last two weeks is unusual during harvest, but we’re in a new game. Corn seems to have become the darling of the funds. When their buying appetite is met, be prepared for big swings. The fundamentals suggest that $4 corn is high enough, but they aren’t running the show. Support in the December contract is in the $3.60 area with resistance near $4.05. For the week, December corn was up 23 1/2 cents at $3.90 1/2, July was 24 1/4 higher at $4.23 3/4 and the December 2010 contract gained 19 1/2 cents to $4.37.

SOYBEANS — Soybeans were pulled along with the corn market this week as money flowed to commodities once again. Gold raced to another all-time high of $1,123.40 per ounce and up $21.60 per ounce for the week. The USDA report was a bearish surprise with 2009-10 yield increased by 0.9 bu./acre to 43.3 bushels per acre versus 42.4 bu./acre last month and the average guess of 42.65 bu./acre. Crop production rose 69 million bushels to 2.219 billion bushels. The October estimate was 3.250 billion bushels and the average estimate was 3.262 billion bushels.

Other changes to the 2009-10 balance sheet included increases of 5 million bushels to the crush line, 20 million to exports, and 2 million to residual. Resulting ending stocks were up 40 million bushels to 270 million bushels. This is almost double last year’s ending stocks number. Average on-farm prices are forecast at $8.20 to $10.20, 20 cents higher than last month.

When fund buying eased at mid-week, the soybeans garnered strength from new Chinese buying as well as a substantial buy made last week. Trade talk did pop up that dried distillers grains were getting rejected in Europe (no comment or confirmation from Europe) due to vomitoxin problems and feed demand would be switched to soymeal ratcheted beans another step higher late in the week.

Reportedly, there have been some problems in the eastern Corn Belt. While it seems the perception of a problem is outweighing the current reality, this will be watched. If this is the case, it isn’t expected to significantly increase meal demand, but the quick response was buy beans and sell corn to reverse positions taken earlier in the month.

The only area we’re monitoring for weather is western/southwestern Argentina. It has been dry there, but forecasts show a better chance for rain in the coming week. The B.A Cereals Exchanged estimated that Argentine bean planting was 34 percent complete as of Nov. 12.

OUTLOOK: The range for the January soybean contract is $9.50 to $10.25. Going forward, South American weather and Chinese demand will be the fundamental factors to watch. While we want to ride the fund-induced rallies, when they have had their fill the lack of buying could cause result in a good sized correction. This week, January soybeans were up 32 cents at $9.87 and November 2010 beans were up 43 1/2 cents to $9.97 1/4.

Nystrom’s notes: Changes for the week: Crude oil down $1.08 at $76.35, heating oil down 3 3/4 cents, gasoline down about a penny, natural gas down 20 cents, Minneapolis wheat up 37 1/2 cents, Kansas City wheat up 39 1/2 cents, Chicago wheat up 41 3/4 cents, Dow up 223 points, and the U.S. dollar index down 0.52 points.

Phyllis Nystrom is a market analyst with Country Hedging in St. Paul.