The Grain Market - Longer Term Pondering.
The corn market has a very dynamic longer-term positive demand outlook due to the rapidly expanding ethanol demand base. There is little argument in the trade about that concept. There is however argument about the “timing” of such influence and the extent prices may need to rally in an effort to secure the needed US corn acreage increase.
It is interesting to note that during the last few weeks, basically since the August USDA report, the trade has been willing to ignore this long-term bullish potential and choose instead to focus on ideas the 2006 crop would be large enough to delay the market’s need to “buy acres” or be concerned about tight supplies. In light of that, it is interesting to recognize corn made its low tick within 3 trading sessions of the August report, but the bearish trade rhetoric has continued until Thursday’s close. The point is that the trade has not recognized the corn market’s lack of desire to be comfortable with abandoning or delaying longer-term supply concerns. To that extent, this past week’s market action suggests the trade’s tone could be out of step.
If prices begin to firm next week and violate this week’s highs, the trade appears poised to quickly respond and respect such market strength and buyers will be quick to fear longer-term bullishness and seek to rebuild some of their upside price protection. Because the longer-term bullish story is well-known, understood and accepted by most everyone to at least some degree, when the market begins to act bullish there is a quick surge in buying interest and an equally quick decline in selling interest—which is the formula for swift price moves.
Cash basis tone has been very firm during the last 3 weeks, as declining prices have caused producers to look at sub-loan cash bids, extremely large carries, and ponder perceived longer-term bullish potential and then conclude the apparent obvious—why would I want to sell my physical bushels for sub-loan values? Many producers have seen their overall financial condition improve during the last few years for several reasons. Many bankers find themselves with good profit margins on loans due to interest rate developments. Such a combination finds the banker quite willing to extend the US producer credit. It appears there will be much less old-crop dumping than one might expect with a 2.0 bil bushel carryout.
Export demand has been exceptionally good and we are off to one of the best-ever existing new-crop export sales pace for this date. Exporters report that foreign buyers also recognize the rapidly expanding US domestic demand base for corn and they seem motivated to maximize their early purchases. Ethanol enthusiasm isn’t just a US excitement, it is global. Tightening global wheat stocks and new-crop wheat concerns in Australia and Argentina are also enticing buyers to be aggressive with their purchase plans.
US corn yield expectations are always two-sided at this time of year, but there appears to be a growing sense that recent yield optimism may have been a bit premature. The FCStone production estimate released Friday afternoon of 10.887 bil bushels (151.0 bpa), represents a reduction from the August USDA data. There is a fine line between comfort and panic regarding 2006 US corn supplies due to longer-term bullish potential. Consequently, early yield reports and tone will be watched and reacted to very quickly by market participants. Informa will release their production estimates next week, possibly Wednesday. The trade will also hear more yield reports from the country before the September USDA production data is released September 11th.
Regardless of exactly what the 2006 final production is, it is the 2007 crop balance sheets that will quickly earn the market’s main focus once the 2006 crop has been put away.
Consider these reasonable possibilities (table is in Millions):
1) Notice that demand will expand 640 mil in 2006…another 785 mil in 2007…and many analysts expect the demand expansion will continue another 500 mil in 2008…before possibly leveling off, or at least expanding at a slower rate.
2) Ask yourself if current sub-$2 cash corn bids encourage farmers to aggressively expand corn acreage.
3) Ask yourself if current $2.95 Dec 07 futures, along with wide basis, is enough to entice a large acreage shift.
4) If 2006 corn yields are seen as “disappointing”, will that tend to make the producer a little less excited to commit to a notable acreage shift in 2007?
5) Does the above set of possible scenarios cause you to think the trade will be comfortable about 2007 developments, or more nervous than normal?
6) What price level is needed for producers to respond in a manner that can satisfy projected demand?
7) Who will be more motivated to take action during the next 9 months—producers to make sales, or users to seek upside price protection?
As the 2006 growing season winds down, traders begin to remove all “what if” concerns from their thinking, which leads to weak price trends. Near-term fundamental focus is on excessively large carryout projections. Yet the market’s ability to maintain loftier than expected price levels during most of the last 11 months keeps traders a bit uneasy about developing a completely confident bearish outlook. It is especially difficult for traders to be too bearish soybeans when they are bullish corn and wheat.
Let’s look at the soybean situation/outlook expressed in the table below and see if anything surprises us.
1) We have an excessive supply situation that is likely worse than what the last USDA report suggested, which means the balance sheets may get more bearish before they improve.
2) It will take dramatic developments to eliminate the bearish fundamental inputs for the 2007 production season.
3) It is possible that soybean prices need to stay depressed into the spring of 2007 to help do their part to discourage soybean acres, even if the motivation is more driven by the need for more corn acres than by the need to reduce soybean acres.
4) Global stocks are also very excessive, allowing the US to lose market share of global demand, if need be, to reduce US soybean acres and increase US corn acreage.
5) Unless a major change occurs in the global balance sheet, you can see that the long-term corn demand could be satisfied by making a major shift in Midwest acreage away from soybeans and towards corn. This would likely require a willingness by the US to accept a smaller market share of global soybean demand, which may be an acceptable position if total US farm income doesn’t suffer because domestic demand is so great that the lost exports aren’t needed to maintain profitable returns for Midwest producers.
Short-term, the market’s focus will remain on global price trends and production concerns in Australia, and to a lesser extent Argentina.
While Corn has a protracted bullish scenario developing that will last through multiple crop years, the wheat market’s bullishness is primarily a “current” marketing season phenomenon. Current wheat/corn price relationships and high flat price of wheat will help to maximize winter wheat acreage this fall. Global price trends will also help to maximize global production possibilities. With a favorable/acceptable fall 2006 planting season, the market will begin to shift focus beyond current bullish factors towards more plentiful supplies in 2007.
Thus, new-crop wheat futures may have limited further upside potential, but could spend the next several weeks “up here” in an attempt to encourage as many 2007 acres as possible. Longer-term, improved wheat supplies in the 2007-08 marketing season could help to ease the corn supply situation, as wheat prices will need to get to a relationship value to corn that can shift some global corn feed use back towards wheat.
In summary, the arrival of the energy segment and its large and expanding demand for agricultural commodities could significantly transform flat price trends and inter-market price relationships during the next few years. Longer-term, it is clear that the “powers-at-be” plans for US ethanol consumption can’t be completely satisfied by corn-produced ethanol alone. The ethanol industry will extend its reach to other products in search of supplies needed to meet long-term national energy goals for ethanol use. Until these other alternative ethanol sources arrive as a large and viable supply to possibly compete with corn and lead to reduced profit margins for the ethanol industry, grain prices will experience price buoyancy, especially if supplies ever experience a serious production threat. Once the 2006 harvest has been “put away”, many current market features, such as wide basis, large cash/futures carry and a heavy price tone could quickly change.
YOU SHOULD BE AWARE THAT THERE IS A RISK OF LOSS IN FUTURES TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. FUTURES TRADING IS NOT SUITABLE FOR ALL INVESTORS. THE RISK ASSOCIATED WITH FUTURES TRADING IS SUBSTANTIAL. ONLY RISK CAPITAL SHOULD BE USED FOR THIS INVESTMENT BECAUSE YOU CAN POTENTIALLY LOSE ALL OR MORE OF YOUR ORIGINAL INVESTMENT.