Published: August 01, 2008 11:30 am            

Grain Outlook: Air coming out of corn market

Originally published in the Aug. 1, 2008, print edition.

The following market analysis is for the week ending July 25.

CORN — In case you missed it, the hissing you heard emanating from the market this week was the air coming out of the bubble.

December corn has plummeted $1.16 in the last two weeks and crashed over $2 from the contract high of $7.99 1/4 on June 27. Weather, a firming U.S. dollar and fund position liquidation were major contributors to corn’s 15 percent loss so far this month.

While not every region of the United States has had ideal conditions over the last 10 days, enough have to make traders realize that the crop is getting bigger, not smaller. Timely rain followed by warmer temperatures was just what the crop needed. However, there are areas that missed the rain and will need a shower soon to avoid stress.

Conditions as of July 20 were rated as 65 percent in the good-excellent category, a 1 percent improvement from the previous week. Ratings should be expected to hold steady to improve this week. Weather will continue to be the headline as we head into the thick of pollination.

There was little fresh news from outside markets to feed the bull this week. Bearish factors were noted as the U.S. dollar staged a recovery and energy markets extended their slide lower.

Speculation surrounding possible rule changes to regulate “speculation” in the energy markets also spread to the grain markets. It looks like the Commodity Futures Trading Commission will try to nail down what a “legitimate” hedger is and then place stricter limits on those that don’t meet the qualification.

At this time, only energy markets are under the microscope, but the government is awakening to the fact that any rule changes they make for the sake of the energy markets may spill over to the grain markets. Ethanol is not considered an energy contract.

There is also a bill being considered that would ban pension funds from investing in commodities. The U.S. Senate also voted this week to continue debate on a measure to reduce oil prices by limiting trading in oil markets by investors and speculators.

A decision from the Environmental Protection Agency on whether to grant a nationwide waiver on the Renewable Fuels Standard has been delayed until early August as they wade through public comments.

A judge has ruled that 1.8 million acres of Conservation Reserve Program ground will be open to haying and grazing in 2008. This is the amount that was approved prior to July 8. Will this curb the possibility for future penalty-free early outs? The U.S. House ag panel passed legislation that would increase CFTC’s oversight powers, but it is expected to be defeated in the Senate.

Export sales this week were routine while basis levels were mostly flat to lower for the week. Spot ethanol margins are off their highs in spite of the fact we set another new record of ethanol blended in gasoline. This week 6.2 million barrels per day of gasoline were blended with ethanol, a 34 percent increase over last year.

OUTLOOK: Liquidation of this market hasn’t attracted new business or uncovered a reason to halt the slide. The next weather issue will be the timing of the first frost; however, this won’t be front page news until we head into the last half of August.

A bit of history: Since 1990 the high in December corn has occurred 11 times prior to the month of August. The next support level for December corn is $5.50, then $5.20 with a close over $6.36 3/4 needed to turn the tide back to the upside.

SOYBEANS — Soybeans have lost 16 percent of their value since November beans peaked at $16.36 3/4 on July 3 as weather improved, the U.S. dollar strengthened and the crude oil market plummeted almost 17 percent from their contract high.

The condition of the soybean crop was 61 percent good-excellent as of July 20, up 2 percent from the previous week. Conditions are anticipated to show additional improvement in the week ended July 27.

The monthly crush for June was as expected at 140.9 million bushels, but meal stocks at 424.3 thousand metric tons were sharply higher than estimated. Soybean export sales were better than forecasts at 6.8 million bushels.

Basis levels were weaker in the Upper Midwest while Brazilian numbers were red hot. Are Brazil’s supplies tightening? The Argentine strike may be over, but farmers seem very methodical in their selling strategies and the market has not seen the wave of selling they were anticipating.

We also have not seen any switching of U.S. bean sales back to Argentina. The Gulf is the next cheapest source of beans, but no one has been banging on our door yet.

Weather in the Delta is drier than wanted, but overall U.S. growing weather has been decent. August will be the critical month for determining soybean yields.

OUTLOOK: Fund liquidation, weather — or lack thereof — and outside markets have this market searching for a bottom. Soaring soybean premiums in Brazil may be the first sign that the break is nearing an end. August weather will grow in importance as we approach the critical bean development period. November beans need to rally back over $14.38 to mark a turnaround, otherwise look for support levels at $13.59 and $12.71.

Nystrom’s notes: Crude oil has dropped 17 percent from its $147.27 record high. The next U.S. Department of Agriculture report will be released on Aug. 12.

        

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