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 Jan. 29.
CORN — The post-U.S. Department of Agriculture report decline continued last week, with corn futures shedding another 8.25 cents in subdued, winter-doldrums-like trading.
Supply increases, in the form of the January USDA production number and good growing conditions in South America continue to be the main bearish fundamental. An Argentine forecaster raised its crop forecast to 18.1 million metric tons this week, above the most recent USDA estimate of 15 mmt.
The big production increase on the January USDA report caught the funds with a net long position that was the biggest since mid-2008, and the forced liquidation of that position has been a reinforcing feature of the corn market decline over the last half of January.
The last Commitments of Traders report shows the non-commercial net length has been trimmed from more than 180,000 contracts prior to the report to 56,194 contracts as of Jan. 26.
Demand got some relatively positive news on two fronts during the week. First, export sales were a solid 35.5 million bushels, a decline from the previous week’s marketing year high, but still above the average level needed to meet the USDA’s projection. Second, the latest monthly ethanol production statistics showed November ethanol production at 991 million gallons, up from 964 million gallons in October, and up nearly 18 percent from November 2008.
Ethanol producer margins peaked in November according to our estimates, but ethanol production remains on pace to hit the USDA’s projection of 4.2 billion bushels of corn use during the marketing year. If production holds at the November level through the rest of the marketing year, the USDA’s corn use for ethanol estimate may need to be revised up by 50 million bushels.
China’s moves to restrict bank lending continued to reverberate negatively through commodity markets during the week. Bank lending surged during the first half of January, causing policy makers there to increase reserve requirements and even instruct some banks to halt lending through the end of the month.
The concern is that the recent pace of lending for infrastructure spending is creating an asset bubble, although the main focus seems to be the potential for housing, or other urban asset bubbles, rather than agricultural commodity prices.
OUTLOOK: Farmer sales have slowed with the last half of January price break. West Coast basis bids were steady on the week. However, the selling from funds that were caught long going into the January report has been more than sufficient to keep pressure on prices. While there has been increased buying from end-users, the futures market has yet to find chart support. Look for support at $3.50, with resistance at $3.70 on any oversold bounce.
SOYBEANS — Nearby soybeans lost 37.5 cents on the week, a weaker performance on a percentage basis than corn futures, due primarily to the continuing lack of threat to South American production.
Production estimates for Brazil and Argentina held mostly steady at record levels over the course of the week. Hot temperatures were seen in Argentina, but soil moisture remains sufficient in most areas.
Demand numbers were strong, with exports seeing another strong week at 24.75 million bushels. Commitments to date are at 92 percent of the USDA marketing year estimate. Meal and oil exports were strong as well. Some think that export numbers will fall off for the remainder of the marketing year, since South American supplies are becoming available. South American basis levels have fallen off; indicating exportable bushels are becoming available.
Domestic demand estimates got a boost as well when the monthly Census crush numbers were reported above expectations at a record 173 million bushels for December. The strong meal export program to date has most marketing year crush estimates slightly above the USDA’s 1.71 billion bushels.
OUTLOOK: Soybeans could continue to lose value relative to corn as the window closes for U.S. exports. The major support level to watch is last fall’s low of 8.78 3/4.
Additional items: Outside markets provided downward pressure for the ag markets this week. Crude oil was down 1.65, and the U.S. dollar index was up about 1.5 percent. Poor crude oil and stock market performance was in spite a report on Friday that fourth quarter GDP was up 5.7 percent, the fastest pace since 2003.
Tim Emslie is a market analyst with Country Hedging in St. Paul.
