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09-09-2013 07:37 AM - edited 09-09-2013 08:01 AM
Corn trade continues to digest NEW record yields being harvested by many producers in the Delta and Ohio River Valley area (specifically southern IL, IN and northern KY). This talk is obviously keeping many of the larger traders leaning over the short-side of the boat. Their contention is, even though current supplies are extremely tight, a 13.8 to 14.1 billion bushel crop is just around the corner. Lets also keep in mind many of the larger money-magers believe current USDA demand numbers are over-stated as well, especially exports. Most well versed S&D experts will tell you, since global inventories have grown, and most of the foreign exporters have limited storage space, they will be much quicker than US suppliers (with ample storage) to lower prices in an attempt to move supply. Meaning once again, our inability to be the worlds "low cost" provider will ultimately weigh on demand. This logic is hard to argue and has the bears thinking exports are still overstated by some 200-300 million bushels. Personally I am NOT as pessimistic or as bearish as most... I am not saying I have become bullish, I just think additional downside pressure may be short lived. Below are my Top-10 reasons:
- Record yield headlines might not last: I am not as sold as I once was on the fact the US corn crop is going to be 14 billion bushels. Yes the irrigated yields down south are massive. But I am thinking as the harvest starts to move north the "record yield" story is going to be a thing of the past. Keep in mind a large number of NEW corn acres were added in North Dakota this past year, from what I hear yields in that state are going to be far from record producing. Lets also not forget the yields in IA, IL, MO, WI & southern MN will be less than impressive as well.
- Fewer Harvested acres: I believe "harvested acres" are still overstated, best guess maybe by 1-2 million. My concern is also that a large portion of the "preventive plant" acres were in quality corn producing country. Meaning it could influence total production more than in any of the past several years.
- Contrarian Theory: Making money following the herd rarely proves to be a prosperous venture. Getting in front of the herd, yes, but following...No! From my perspective everybody and their brother has jumped on the "bearish corn bandwagon" the past few months.
- Pulled higher by soybeans: There is a possibility that we haven't read the final chapter in the 2013 soybean thriller. Yield estimates for soybeans are all over the map, currently ranging from 37-43 bushels per acre. No one seems to have a good grip as of yet on total production. My guess is a final yield of sub-40 bushels per acre could ultimate push soybean prices north of $15.00, in turn dragging corn back into the mid-$5.50's or possibly even pulling closer to the $6.00 range in an effort to compete for acres. There is also some NEW interest starting to build globally for US soymeal as Argentine "quality" comes into question and availability of beans during Nov and Dec is limited.
- Chinese Demand: China's demand for soybeans has been stronger than anticipated. Some now thinking their current demand could exceed the USDA 's estimate of 59 million metric tons, and is starting to make the USDA's projection of 69 million metric tons next year more believable. Lets also keep in mind their wheat demand was greatly underestimated (due to domestic production losses) and talk is now circulating that their corn demand could be grossly understated as well. Remember, there has been some fairly extensive flooding in the northeastern parts of China, which is prime corn producing country. Also we need to realize China's domestic wheat production problems will provide them very little substitute for corn. Meaning they might be forced into the import market more frequently.
- La Nina in full-force: With South America's planting and growing season right around the next corner (actually starting in some areas), I have to suspect weather headlines from South America will soon start to influence the trade in some capacity. If things start to turn more dry we could quickly see production estimates for South America start to ease. Keep in mind parts of Argentina are already well behind their traditional pace for moisture, so are parts of Brazil.
- Increasing ethanol demand: With ethanol margins extremely strong and threat of war in the middle-east keeping crude oil prices elevated, I am starting to think corn used to produce ethanol could be understated. Some in the industry believe if crude stays at these levels we could add 300-400 million bushels to corn demand. If nothing else certainly enough to offset what many believe are inflated export numbers.
- Shorter time cycles: As I have mentioned time and time again, traditional fundamentalist are finding it more and more difficult to time the markets. High frequency trading and shorter cycles are making longer-term perspectives tougher to manage. Ultimately the fundamentals of "supply and demand" float to the top, but drowning in the wakes has become a real concern. My hunch is until the headline waters become more calm or smooth I am afraid the fundamentalist will continue to gasp for air. Keep in mind we are clearly in a "transitionary" phase. The words "transitionary phase" do NOT go hand-in-hand with the words "calm" or "smooth," an environment the fundamentalist thrive tend to thrive in.
- Weather Extremes: As I mentioned above, "fundamentalist" thrive on predictability. Meaning everything looks good on paper...until it doesn't! From my perspective the "weather" is clearly in a cycle of UNPREDICTABILITY, which makes many "supply and demand" assumptions worth only the paper they are written on.
- The Risk-to-Reward: As corn prices drift lower and lower, perhaps to sub-$4 levels the burden of risk shifts clearly to the upside. Meaning $4.00 corn could have another $1.00 of downside risk, but some $4.00 or more of upside potential. Money-managers love limited risk to high reward scenarios. My thinking is just as higher-prices tend to cure higher-prices we will quickly see lower-prices cure lower-prices. Remember, everything is happening much quicker than in than in the past.
09-09-2013 09:11 AM - edited 09-09-2013 10:45 AM
An "A" for effort on this post.....In rethinking this, I believe you missed the number 1 reason..................USDA's numbers could be WRONG........
09-09-2013 12:36 PM - edited 09-09-2013 12:40 PM
95* again in central IA today. heat continues MO, IL - and they've had 24 or 19 drops of rain ( can't remember exactly) in the last 30-40 days.
some Corn will have gone from milk directly to dent in the last 2-3 weeks.
09-10-2013 07:56 AM
Demand in corn also remains in question, with most bears continuing to think "exports" are overstated. As I have mentioned the past several weeks, I am not in the same camp. Even though I understand the low cost supplies that are available from Argentina, Brazil and Ukraine, I am just not 100% sold on the fact US corn exports are going to move lower from here.
A crazy week of weather is in store for Argentina and southern Brazil. Featuring extreme heat, a rapid cooldown and bouts of rain, the week will changeable to say the least in many areas of southern South America. In the Southern Hemisphere, it’s the start of spring, however a taste of summer will bring unusually warm weather across the continent. Then, cold air is supposed to move late this week and next week and it may get cold enough for some places in the northern half of Argentina to experience a frost or Freeze Sunday night and Monday morning. The potential for a frost or freeze is not good news for the wheat crops according to grain analysts in SA. The wheat has entered its reproductive phase and a frost or freeze at this point in its growing cycle could hinder growth.