|
Published: March 27, 2008 12:36 pm
Grain Outlook: Commodities lose favor with investors
Originally published in the March 28, 2008, print edition.
Editor’s Note: Tim Emslie, Country Hedging market analyst, is sitting in this week for Phyllis Nystrom, the regular “Grain Outlook” columnist.
·
The following market analysis is for the week ending March 20.
SOYBEANS — Commodities fell out of favor with investors last week. After commodities were called a “safe haven” for investment money in the national press less than a month ago, the CRB index of 19 commodities saw its biggest weekly decline in more than 50 years.
The week began with financial turmoil stemming from the collapse of Wall Street securities firm Bear Stearns. The liquidity and credit concerns triggered by that collapse led to commodity selling to raise cash and limit risk exposure.
Later in the week, the Fed cut the interest rate 75 basis points, but that was perceived as less than expected, leading to a stronger dollar. The stronger dollar-weaker commodity dynamic snowballed as the week went along.
At the end of the week, Fed chairman Ben Bernanke was getting credit from some analysts for restoring confidence in the financial system after the S&P 500 Index posted its first weekly gain in a month and the commodity “bubble” deflated. The money that had been pouring into commodities recently was a sign of a lack of confidence in the economy, and that phenomenon came to an abrupt halt this week.
Agricultural commodities were caught up in this milieu, with a major liquidation of speculative length seen in corn and beans. The nearby soybean contract was down $1.45 3/4, with nearby beans, meal and oil contracts all losing roughly 10 percent of their value during the shortened trading week.
You’ll notice I’ve said nothing so far about internal soy complex fundamentals in describing the week’s trading action. Outside influences were much bigger factors in the trade, but there were a couple of notable developments.
First, export sales continue to be solid with this week’s sales reported at 16.2 million bushels, well ahead of the 4.1 per week needed to match the current U.S. Department of Agriculture projections. The solid exports, combined with the weak futures market, led to sharp gains in basis at the Gulf. Gulf basis was up at least 30 cents.
The second interesting development from the week was that the decline in bean oil prices brought biodiesel production back to within shouting distance of profitability, when the $1 tax credit is figured in. The run to 70-plus cents bean oil made biodiesel production wildly unprofitable, but renewed biodiesel production near these levels should put a floor on bean oil prices, depending of course on what petroleum markets do.
OUTLOOK: There are two main questions for the last week of trading before the March 31 USDA Planting Intentions report. One is whether or not the commodity liquidation by speculative buyers has run its course, and the other is the perception by market participants as to which crop is winning the acreage battle.
Based on the government crop insurance coverage levels, beans appear to have gained an advantage. However, beans squandered some of that advantage last week. My own thought is that some stability in the outside markets will allow beans to focus more on its own fundamental and technical factors.
CORN — Nearby corn was down nearly 52 cents for the week, and the new crop contract lost slightly more, primarily on the same type of commodity liquidation that hit the soy complex. Open interest in corn futures is off about 84,000 contracts from the peak it hit about a month ago. Weekly export sales were a solid 29.5 million bushels, ahead of the roughly 21 million bushels per week needed to meet the current USDA export projection.
The corn market is keeping one mildly apprehensive eye on the weather patterns in the eastern Belt and the Delta. Far southeastern areas of the Corn Belt received several inches of rain over the last week, and a fairly active pattern looks to continue for the remainder of the month.
On average, 20 to 25 percent of the Delta corn crop is planted by the last week of March, which probably won’t be the case this year. While it’s probably still too early to trade weather, it’s not too early to note the historical correlation between early planting and increased acreage.
OUTLOOK: If the outside financial markets can provide something more closely resembling stability, look for corn to trade the way it often does prior to major USDA reports — choppily. The new-crop balance sheet remains tight, but as demonstrated this week, fundamentals only define a vague range, with technical factors and money-order flow dictating the exact price level.
Don’t forget that even in this volatile environment, seasonal patterns (early season risk premiums, weather rallies, etc.) still have validity, and market accordingly.
•••
Tim Emslie is a market analyst with Country Hedging in St. Paul.
• Click to discuss this story with other readers on our forums.
|
|
|
Photos
|
|
|
Print this story
E-mail this story
Discuss this story
