Monday, July 30, 2012

Markets stumble over the week, but fundamentals still bullish

It was a volatile last week in international grain markets, with all commodities experiencing three sessions of strong profit taking declines and a further two sessions of price recovery. Weekly declines in CBOT futures were: - Wheat -37¢ (July +145¢), Corn -2.5¢ (+161¢), Beans -85¢ (+210¢) and Winnipeg canola -$37 (+$21). Domestic new crop wheat prices hit their peak last Monday, and gradually declined $13 over the course of the week, canola declines were more severe -$30, and now $38 from the high set earlier this month. Any sniff of rain in the US Midwest the funds are looking at getting out of their profitable long positions and  hitting the ‘sell’ button. The later maturing beans (compared to corn) will benefit with any moisture, however rainfall totals continue to under whelm. And with more heat set to resume this week, the optimum window for moisture will be fading fast.

When the market has surged in a near vertical rally over the past month, it doesn’t take much of a change in weather or investor confidence to turn prices around from current lofty levels. This may be only temporary, but never rule out the chance of negative economic news out of the EU/US overpowering the tight S&D scenario. However it must be said that with more heat forecast this week, the % of the crop being at the point of no return is increasing by the day.

Forecasts coming out of the Black Sea region continue to be downgraded, and although question marks were first raised back in May, it has been a bit of a sleeper issue with the US drought taking center stage.  Russian 2012 grain outlook has now been estimated at 77 - 80mmt, -7% from last month, winter grain harvest is estimated at 21% complete, with the average yields at 2.3t/ha (-35% from 2011). Expect the spring wheat harvest which ramps up in a couple of months to be more heavily impacted from the dry spell. It is also being reported that Russia will sell grain from state intervention stocks to cool rising domestic grain prices. Canadian spring wheat prospects continue to look ideal while some early harvesting has taken place in the northern US.

It seems international wheat buyers have been cooling there heals of late, with the rally catching many by surprise. The market can explode if panic buying starts to emerge. Tenders that are trickling in may soon become a tsunami, as many fear the worst is yet to come.

Although earlier this month, the USDA pegged US corn yields at 146bpa, which would have equated to a crop of around 330mmt. Current forecast range between 134 (302mmt) to 122bpa (275mmt), using the USDA's 2012 harvested area of 88.9m acres. This is at only -8% from planted area, which is in line with historical averages. This will simply not happen, with abandonment and growers cutting their losses and choosing to bail/silage the drought ravaged crop. The final harvested area will be will continue to be the great unknown, and has the ability to really swing the final tonnage forecast.  Remember that the funds have a light position in corn relative to the heavy long in soybeans, and this is very important factor when bearish news hits.

Soybeans weather remains the key as to whether yields have a chance of recovering from here. Although July temps in the US Midwest are set to create a new record, soybeans still have a chance to utilise any rainfall in boosting yields. The 16-30 day forecast looks bullish, with above normal heat and below normal moisture for a large percentage of the US Midwest. Further worrying the trade is yield potential will continue to drop over the coming weeks. Earlier this month, the USDA pegged the crop at 40.5bpa (83mmt), but current range is between of 38.5 (79mmt) to 35.7bpa (73mmt). And although some damage would be irreversible, as in all dry years it won’t be until harvest until the full extent of any damage and yield penalties will be known.

Domestically, growers would be happy with the % forward sold. Even with the dollar at a four month high, forward prices are still at an historical high level (decile 8.5). With current agronomic conditions looking OK after an average July rainfall and warm conditions helping to speed up plant growth. But long range forecast are not promising much relief in the spring. With little subsoil moisture build up (apart from NSW/QLD) the crop can’t draw on any reserves when conditions start to turn. WA is the swing factor not only domestically but will have big factor on the global market, with under a 1mmt taken off the state forecast after a very dry month. Downgrades to the Australian crop may be the other catalyst to up prop up futures in the back end of this year.

1 comment:

Ina said...

This is gorgeous!