Published: July 23, 2008 04:54 pm            

Grain Outlook: Summer weather still moves markets

Originally published in the July 18, 2008, print edition.

The following market analysis is for the week ending July 11.

CORN — This last week proved that even in this era of demand-driven commodity bull markets, summer weather still makes a difference in the corn market.

Traders went home for the long 4th of July holiday weekend mildly concerned about the possibility of a ridge forming in the Corn Belt, but found no sign of any serious heat when they returned on Monday. As a result, the corn market opened the week down hard, and the subsequent long liquidation ultimately led to weekly losses in the December contract of nearly 70 cents.

Fund liquidation, as opposed to new farmer selling, characterized the sell-off, as indicated by falling open interest throughout the week. Recovery didn’t come until Friday, with a little help — once again — from some heat in 11-15 day forecasts.

A ruling last week from a federal judge in Seattle halted the U.S. Department of Agriculture’s planned release of some Conservation Reserve Program ground for haying and grazing in response to a lawsuit filed by a coalition led by the National Wildlife Foundation. The plaintiffs are seeking to preserve the CRP for nesting birds, and contend the USDA overstepped its authority in releasing the restrictions.

While the specifics of this case probably don’t have a direct effect on corn production next year, the legal maneuverings brought to light the fact that any future policy changes in the CRP program are likely to get tied up in the court system. This could ultimately prove to be bullish since it makes early-out provisions more difficult to execute.

The monthly USDA supply and demand report on July 11 increased the old crop ending stocks by 165 million bushels to 1.598 billion bushels, 100 million more than expected, by cutting ethanol and feed/residual usage.

The new crop ending stocks were increased to 833 million bushels despite the first ever yield reduction on a July report. The 833 million bushel carry-out was slightly above trade expectations.

In the absence of significant yield variation, there is a bias toward increasing ending stocks projections for the new crop marketing year, with ethanol being the prime candidate for reduced usage.

OUTLOOK: Eight-dollar new-crop corn proved too expensive in the absence of any serious weather threat, but we’re in the process of evaluating what end users think of $7 corn on this second look at it. The fact that much of the crop is appears to be on track to pollinate later this year — late July and even early August — will keep weather in the spotlight even longer than usual this year.

Keep in mind, however, that the seasonal trend starts to turn lower after early July, simply because most years the weather cooperates. Most agree that yield prospects have been improving since the early June floods, despite the fact that the USDA cut its yield forecast last week.

I expect that the growing season high is already in. Trendline support in the December contract is seen at $6.50, with the top of a gap at $7.47 providing chart resistance.

SOYBEANS — Soybeans started the week with a sharp sell-off in conjunction with corn on improved weather outlooks and general commodity liquidation. But even with generally favorable weather, the soybean market was unable to maintain the heavy losses due to the extremely tight underlying fundamental situation.

At the low point, weekly losses were nearly $1.50 for the new crop contract, but ended the week totaling just 35 cents. Soybean meal managed to make new contract highs on the late week recovery.

On the USDA balance sheet released at the end of the week, old crop ending stocks were maintained at what apparently the USDA believes to be the pipeline minimum level of 125 million bushels by the unprecedented move of changing residual use to a negative number. In other words, the residual use category is now supplying another 35 million bushels to ending stocks.

The interpretation is that last year’s crop was actually bigger than the USDA reported. But the fact that this addition of bushels was necessary to maintain a bare minimum level of ending stocks illustrates how tight stocks are.

The new crop balance sheet provides little relief. Ending stocks are projected at 140 million bushels, but since projected yield was lowered 0.5 bushel an acre, usage had to be lowered by 67 million bushels from last month. These reductions in usage will probably require higher prices to be accomplished.

OUTLOOK: With both old and new crop balance sheets scraping the bottom of the bin, how this crop yields will make the difference between further rationing or just sneaking by.

Crop development is generally behind normal, but relatively warm, wet weather has been helping improve yield prospects recently. With the crop not made until August, and the underlying fundamentals allowing no margin for error, look for soybeans to remain well-supported with the highs still in front of us.

        

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