Phyllis Nystrom

The following market analysis is for the week ending Jan. 8.

CORN — Corn open interest was up an impressive 105,000 contracts (as of Jan. 7) since Dec. 15 and prices only gained about a nickel.

This action doesn’t send a friendly vibe to the market, but the market is hungry for index fund rebalancing to start and that has lent support. Fund rebalancing is estimated to involve buying 60,000 corn contracts, 15,000 soybean contracts and 20,000 wheat contracts. The time frame is believed to run from Jan. 8-14.

On Jan. 11 the Brazilian government will discuss the possibility of changing the ethanol blend in gasoline to 20 percent from the current 25 percent requirement. This is in consideration because the price of sugar cane has skyrocketed and mills took advantage of sweetener prices and produced less ethanol. Brazil is the No. 1 exporter of ethanol in the world and the No. 2 producer of world ethanol.

The final 2009-10 U.S. Department of Agriculture crop report and Quarterly Grain Stocks as of Dec. 1 will be released on Jan. 12. The average corn production estimate from the Reuters survey is 12.821 billion bushels with an average yield of 162.4 bushels per acre. The last USDA figures were 12.921 billion bushels and 162.9 bu./acre.

Ending stocks are estimated at 1.587 billion bushels versus the USDA’s December 1.675 billion bushel estimate. The average guess for grain stocks as of Dec. 1 is 10.722 billion bushels. A few looming questions that need to be addressed are how will the USDA account for corn still standing in the field, how will quality adjustments be handled, i.e. low test weights, and what will they do with yields? All our questions will be answered soon.

Export sales were pathetic this week at a measly 14.4 million bushels. Total export commitments were able to hold at 19 percent above last year. No new crop sales were reported this week.

OUTLOOK: There is talk in the market that 60 percent of corn rebalancing has already been completed.

Could this be setting corn up for a classic “buy the rumor, sell the fact” scenario? Don’t rule it out with demand disappointing.

Corn spiked higher on Monday and then spent the rest of the week in back-and-forth trade. What the January numbers tell us should provide short-term direction. The first level of support in the March corn contract is $4.10, then $3.80 with resistance at $4.25/$4.40.

Corn this week settled at its highest closing level since June. The March contract closed at $4.23, up 8 1/2 on the week. The December contract was up 8 1/4 cents and settled at $4.49.

SOYBEANS — Soybean buyers rushed into the soybean market as we flipped the calendar to a new year, but by the end of the week the tide had turned.

Somebody’s trading system seems to have a penchant for buying on Monday and this week was no different. A sliding U.S. dollar and anticipation of index rebalancing that would begin the fifth business day of the month (Jan. 8) also added to buyer’s confidence.

However, later in the week, China made an announcement about focusing this year on controlling record expansion in lending and curbing price increases. The Chinese government then went on to sell $8.78 billion worth of their three-month bills at 1.37 percent, which was the first rate increase in three to four months. This signaled to the market that credit may be curtailed.

The U.S. dollar began to rally and soybean prices rolled over. China also implemented on Jan. 1 a new import permit system on beans, but so far it hasn’t hindered import activity. It’s a wait and see if other obstacles are set in place that could delay or restrict imports.

Conab, the Ag Ministry of Brazil’s reporting arm, raised their soybean production estimate for this year from 64.6 million metric tons to 65.2 mmt. This is larger than the USDA’s December estimate of 63.0 mmt. Look for an increase to the USDA’s number this coming week.

The nearly ideal conditions in Brazil raise doubts about whether China will actually take all of the U.S. beans that are on the books, and if they do, will they delay shipments. If current production forecasts are realized, Brazil and Argentina may combine to produce over 30 mmt more than last year.

Conab increased Brazil’s corn production estimate slightly from 50.2 mmt to 50.5 mmt.

Export sales were neutral this week at 26.7 million bushels, keeping total export commitments 55 percent ahead of last year. We have sold over 88 percent of the total USDA export projection for 2009-10. China accounted for 62 percent of the sales, but we haven’t seen any reported sales to them this week. Without them at the trough, demand will suffer substantially.

China has reportedly bought a record 20 mmt of beans from the United States already for this year or 70 percent above last year. It’s estimated that they have overbought 2 mmt to 3 mmt for first quarter delivery.

In the near term, weather is lending a helping hand to basis levels since logistics are a mess.

The average guesses for the January final crop report and grain stocks report are: crop production 3.338 billion bushels, yield 43.6 bu./acre, ending stocks 235 million bushels, and stocks as of Dec. 1 at 2.415 billion bushels. The last USDA numbers were: crop production 3.319 billion, yield 43.3 bu./acre and ending stocks 255 million bushels.

OUTLOOK: It’s hard to get friendly with a market that looks like its best export sales days are behind it and the competition’s crop is developing well. Fund buying or a quick weather problem in the southern hemisphere may be its only hope. March beans fell 26 1/2 cents this week and settled at $10.22. First support in the March is at $10, then $9.60. Resistance comes in at $10.50, then $10.75. The November contract closed at $9.99, down 15 1/4 cents.

Nystrom's notes: Nearby contract changes for the week as of mid-afternoon Jan. 8: crude oil up $3.39 at $82.75, heating oil up 8.5 cents, gasoline up 10.25 cents, natural gas up 17.7 cents, gold up $41, the U.S. dollar index down 0.75 at 77.48, and the Dow was up 149 points at 10,577.

The Quarterly Grain Stocks report and the final 2009-10 Crop Production report will be released on Jan. 12 at 7:30 a.m. Central time, after this column was written.

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