Published: July 01, 2008 06:06 pm            

Grain Outlook: Energy market speculation eyed

Originally published in the July 4, 2008, print edition.

The following market analysis is for the week ending June 27.

SOYBEANS — More rain for saturated areas, a lower U.S. dollar (possible interest rate increase in Europe and U.S. levels left unchanged), rising energy markets, and the upcoming crop report lit a fire under prices this week as November beans soared to a new contract high of $15.77 as of this writing.

The new contract high in the August contract is now $15.90, piercing the previous high set last week. August beans this week gained 39 1/4 cents as of Friday morning; November beans were 52 1/2 cents higher.

The Argentine strike is over, at least on paper. Trucks are flowing to the export houses and crushers, but no new farmer sales are occurring. There is still too much uncertainty about what the future holds since there has not been any agreement between the farmers union and the government on the export tax issue. Concern that this situation could escalate again is keeping buyers on the sidelines. If there is an agreement, we can expect some quantity of old crop sales be switched back to Argentina.

Soybean basis was higher this week on logistical problems. Export sales were a negative (cancellations) 10 million bushels for old crop and a positive 84 million bushels for new crop this week due to China rolling purchases from one crop year to another. With the cancellations, old crop sales are now at 100 percent of the U.S. Department of Agriculture forecast, down 1 percent from last week.

The U.S. House of Representatives voted to order the Commodity Futures Trading Commission to use its authority, including emergency powers, to immediately curb excessive energy market speculation. This now passes to the Senate for debate. What kind of action this will precipitate is a wild card — margins could be raised, position limits could be set, scrutiny of over the counter trades, more ability to look at trading on overseas exchanges that operate through trading terminals based in the United States. Can anyone as yet tell us what “excessive speculation” really is? We’ll probably have to wait until after the 4th of July recess to see how this pans out.

OUTLOOK: Until we get the acreage numbers and see how the trade perceives them, any outlook at this writing is moot. Once the figures are released, we may still be left to wonder how many additional acres will eventually get planted, particularly to beans and what percent will be harvested. The average trade guess for planted soybean acreage is 74.203 million acres versus the USDA’s last estimate of 74.8 million acres.

CORN — Corn found support this week as rains again targeted areas that didn’t need it. The September corn jumped to a new contract high at $7.79, and the December contract punched out to a new high at $7.99 1/4. The July 2009 contract set a new contract, all-time high corn price of $8.26 this week. The weather market in combination with effects of outside markets — U.S. dollar, interest rates, index positioning, energy markets — were the drivers for the sharply higher week. Also, the consumer confidence level fell to 50.4, the lowest level since February 1992 in a report released this week. As I write this, both September and December corn were up around 30 cents for the week.

While the leading U.S. ethanol producer announced that three virtually-ready-to-go plants (330-million-gallon-per-year total production) will not come on-line as soon as expected, another producer announced that two previously construction-delayed, 115-million-gallon-per-year plants are now grinding corn. There is on-going pressure in Washington to make rule changes to curb market “speculation” by index funds and large investment banks as well as make changes in ethanol mandates and subsidies. This issue will continue to draw attention even though many don’t foresee any quick remedies. The CFTC is scheduled to report to Congress by Sept. 15 while hearings and debate will continue after the July 4 Congressional recess.

Corn basis levels this week were mixed. Logistics due to high water were supportive. Reports of delayed ethanol plant openings were limiting factors. New producer selling has been slow with growers engaged in fieldwork and uncertain how much more crop they have to sell. Export sales saw a slow-down, with only 9.2 million bushels sold for old crop and 6.7 million bushels for new crop. Old crop sales remain at 96 percent of the USDA projection.

It’s interesting that the International Grains Council lowered their world corn production estimate 6.8 million metric tons from last month to 756.4 mmt, while increasing ending stocks 2 mmt from last month. Ending stocks are forecast to be down 25 mmt from last year.

OUTLOOK: Similar to the bean outlook, until we analyze the USDA acreage numbers, price direction and estimates are not worth much. Action or inaction by the government after the 4th of July recess dealing with index funds positions may also have a significant impact on where we go from here. The average trade estimate for planted corn acres is 85.321 million acres versus the last USDA estimate of 86.0 million acres.

Other observations: Wheat markets rallied to levels not seen since mid-April in spite of estimates that the world wheat crop is getting bigger, not smaller. The June acreage and Grain Stocks as of June 1 reports will be released June 30.

        

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