Published: June 03, 2008 03:19 pm            

Grain Outlook: Energy market under microscope

Originally published in the June 6, 2008, print edition.

The following market analysis is for the week ending May 30.

SOYBEANS — A couple of hot topics were noted in the holiday shortened week, including the situation between the Argentine government and the farmer unions, and initiatives announced by the Commodity Futures Trading Commission. When the dust settled for the week, July beans were down 4 1/2 cents for the week and up 49 1/2 cents for the month, and November beans were a penny higher for the week and up $1.29 for the month.

The CFTC announced initiatives this week to increase transparency in the energy futures markets. The announcement included:

• The CFTC is six months into an investigation surrounding the purchase, transportation, storage and trading of crude oil and related derivative contracts, with a focus on possible market manipulation.

• They (CFTC) would expand their surveillance of the energy markets. Energy traders will have to provide them with monthly reports of their index trading.

• They had reached agreements with the UK’s Financial Services Authority, Nymex, and ICE for greater market information sharing. In part they stated that, “increased transparency of such trading activity (indexes) may help the CFTC determine whether adjustments to trader reporting or classification are required.”

If there are changes to the classification of index funds, the changes may not be limited to just the energy markets since these funds have money in other markets as well, including agricultural markets. What will be the fallout if index trading is reclassified and positions must be reduced? This situation may or may not have an immediate impact on agricultural markets, but it merits close monitoring.

The farmers in Argentina rejected a government proposal that did not go far enough (in the farmer’s opinion) to solve the higher tax problem. The proposal lowered the export tax cap on the sliding scale, but given current prices it means nothing according to the farmer unions. Reportedly the tax would be reduced if prices approach the $600-per-ton area. With current prices quoted at $460, this change would have no immediate impact for the farmers. At present values, the export tax on beans equates to 40.5 percent.

The U.S. dollar pushed to three-month highs versus the yen this week on ideas that interest could be raised if consumers expect inflation, according to the Dallas Federal Reserve president.

Soybean basis improved on additional interest by China for U.S. beans when the Argentine situation didn’t look like it would be resolved any time soon. China bought at least 132,000 metric tons of U.S. beans for new crop this week. Export sales were 9 million bushels for the week. Total commitments stand at 1.1 billion bushels.

OUTLOOK: July beans have a wide range of support/resistance at $12.75/$14; November $12.85/$13.75. Any changes to how the government regulates index funds, the continuing saga in Argentina, behavior of the energy markets, and weather are the directional indicators to watch.

CORN — Corn traders returned from the Memorial Day weekend with their selling shoes on. The July corn contract was only down 1/2 cent for the week and down 13 cents for the month of May while the December corn was down 3/4 cents for the week and down only 1 3/4 cents for the month.

The U.S. Department of Agriculture announced this week that haying and grazing will be allowed on 24 million eligible acres CRP acres after the primary nesting season ends for grass-nesting birds. There are currently 34.7 million acres in CRP. Sign up begins June 2 at local Farm Service Agency offices. The trade does not expect this to impact more than 30 million bushels on the corn balance sheet. Canada’s House passed legislation that mandates a 5 percent ethanol blend in gasoline by 2010 and 2 percent biodiesel by 2012. To meet this mandate, it’s estimated they will need an additional 100 million gallons of ethanol.

The farmer strike in Argentina that has been more closely associated with the soybean market, may soon begin to affect the corn markets as well. The longer the strike is in effect, the higher the likelihood that corn demand will become more focused on the United States. How this situation develops still depends on the Argentine farmers and government.

On the technical side of trading, May marked the first month that corn has closed lower than the previous month since August of 2007; breaking an eight-month string of higher monthly closes. This will capture the attention of technical traders and add a little negativity to the mix.

Export sales totaled 18.8 million bushels this week, bringing total export commitments to 2.285 billion bushels. The USDA estimate is 2.5 billion bushels. New crop sales were reported at 9 million bushels. Total new crop sales at 118.8 million bushels is only 3.4 million bushels behind last year’s pace.

OUTLOOK: Corn retraced much of the week’s losses on the last day of the month on position evening and weather/crop development concerns. Support in the July contract now comes in at $5.69 and resistance at $6.11; in the December contract support is $5.98/$5.84 and resistance $6.35/$6.55.

Nystrom’s notes: Gasoline set a new all time at $3.5200 this week. Crude oil was down almost $5 on the week, but up over $14 for the month. The CFTC remarks limited buyer’s interest as the week drew to a close.

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

        

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