A few days ago, I commissioned our resident grain trading expert, "Art Lomax", to write up a guest post that includes some basics about the grains as well as some of his personal opinions regarding the upcoming season. Thankfully, he obliged.
2012 Grain Outlook
So what’s the skinny on the grain markets for 2012? There appears to be a widespread concern that there will be an expansion of corn acres and production beyond demand leading to a big increase in corn ending stocks, and at the same time leaving a tighter bean situation with too small an acre base. And with wheat, another historically large global crop on the horizon for 2012. The wheat market seems to be trying to trace out a bottom, corn is transitioning to be the weak sister of the complex, and soybeans becoming the leader, especially with recent production problems in South America now placing a little more bullish sensitivity to US planted acres and early season new crop development in the US.
2011 was a good year for most US grain farmers. While some were hurt in drought areas and flooding in other areas, most farms saw record income due to high prices and record exports. World wheat, rice, and cotton stocks were replenished with the increase in supply reflected in prices. However, corn and soybeans just came off a short crop due to weather issues, and now the South American crop has been reduced due to drought and high temperatures in key growing areas. Soybeans over $12 and corn near $6 are still at historically high price levels. The seasonal high price for corn and soybeans occurred last September, and the lows will likely come later this summer. But in between, price volatility should be high. The topic of most interest now is how many acres of each crop will be planted.
On March 30, this question will be answered. The Prospective Plantings report, put out by the USDA, will report the expected plantings for most major commodities grown in the US. This report is particularly important, as it gives the first indications of what we will see in the US crop mix. Historically, this report has been a market driver, resulting in a “battle for acres”.
But remember, this report is only an indication of planting intentions. Another report comes out on June 30, which tends to be the final number on US acres. Other reports to look for throughout the growing season are the crop progress reports and the crop production reports. The crop progress report is a weekly report that covers planting progress, developmental progress, and the condition ratings for the crop. The production report is a monthly report that focuses on production, usage, and ending stocks. All of these reports, along with potential weather issues, will give the market plenty of news to trade. Throw in some middle east oil market disruptions, the Euro Union meltdown, unexpected Chinese buying, the accommodative Federal Reserve, and some election year shenanigans, and there should be plenty of trading opportunities in the grain markets this year.
Currently, the market is trading a bean acres number of 75 million acres, unchanged vs last year but down 1.6 million from last year intentions which were not achieved due to excessive moisture during planting. Increased winter wheat acres and more corn is why this number is unchanged. Even with trend line yields on these acres, US bean stocks are expected to decrease, especially now that the US will have to make up for the South American shortfall. Beans are pretty overbought right now and due a correction, but should be well supported on any pullbacks due to the expected increase in US demand caused by the reduced crops in South America.
Corn is probably trading 94 million acres vs 91.9 last year. A trend line yield on these acres would put US ending stocks next summer at 1.6 billion bushels, double the 801 million this year. Production estimates do not get a lot of argument but recognize that we have not been able to dependably produce the trend line yields used by the USDA for the last two years. But the bottom line is that corn acres should be big, and a USDA number of 95 million acres would be bearish. Also, corn use for ethanol is flattening and is expected to fall this year. Do not look for buyers to chase the market, and farmer selling could pick up. The USDA surprised the market several times last year. Be careful here.
One wildcard this year could be increased Chinese buying of corn and soybeans. This could be a positive catalyst to US markets if they decide to be more active in imports. The Chinese are very concerned about food security and keeping domestic food prices under control. Food shortages and high prices lead to political instability, like we saw last year in MENA.
The other wildcard would be weather. With rising global trade and increased demand for protein, the US and the world cannot afford another year of decreasing corn supplies. The balance between the grain we produce and the grain we consume is razor thin. We saw what happened last summer as corn had to trade over $8 to ration demand.
I am not trying to call this market one way or another, but just wanted to present the factors that will affect the grain markets this year, and look at the big picture. The US stocks/use ratio remain on the lower end of historical ranges, certainly not high enough to cushion a severe crop failure. Let’s all hope for record yields on record acres to provide more breathing room.
I hope this summary helps explain to those not familiar with the grain trade the dynamics that can affect the markets. I appreciate Mr. Ferguson giving me opportunity to share.
For those of you wishing to trade the grains this spring, of course the most direct way to do this would be futures and futures options on the Chicago Board of Trade (CBOT). Those unwilling to go that route can also attempt to profit by trading an ETF that goes by the symbol "DAG". It is composed of roughly 25% soybean futures, 25% corn futures, 25% wheat futures and 25% sugar futures.
Here are some charts of the grains plus sugar:
Lastly, I thought I should attach below a comment I posted in the previous thread regarding the Commitment of Traders report from late yesterday. The net change of positions over the course of the "manufactured corrective event" is breathtaking. It looks quite certain that the bottoms for the "event" have been reached!
"""HOLY TOLEDO! WHAT A CoT!!!
Large Specs down 32,938 or -14.26%
Small Specs down 11,963 or -17.00%
Cartel short down 37,235 or -9.54%
Cartel net short down 45,143 or -18.4%
WHAT A COMPLETE AND UTTER WASHOUT FOR THE SPECS AS CARTEL NET SHORT IS BACK TO 2.3:1 AFTER BEING 2.69:1 LAST WEEK.
Additionally, the last two days of OI changes show continued short covering and long initiation in gold. Combine that with price holding above 1680 and closing above 1710 and I firmly believe that it is safe to say: BUY BUY BUY! THE BOTTOM OF THIS "CORRECTION" IS IN!
Large Specs down 7,377 or -19.41%
Small Specs down 1,621 or -6.7%
Cartel short down 6,270 or -8.00%
Cartel net short down 8,797 or -19.73%
ALSO A HUGE CHANGE. CARTEL NET SHORT IS NOW UNDER 2 AT 1.98:1. LAST WEEK WAS 2.32:1.
Silver looks great, too. Getting the EE net short ratio back under 2 is significant. The last time this ratio was under 2 was the CoT survey of 1/31/12. That night silver closed at 33.32. This past Tuesday, silver closed at 32.78. Therefore, it would definitely appear that he worst is over for silver, too."""
Now, all of that said, apparently Santa advised traders yesterday to move to a net flat position based upon the uncertainty that the Greek "default" adds to the mix. Prudence would dictate that he is right. This upcoming week may be quite volatile and anyone using leverage could quickly be put in a world of hurt. Be cautious if trading but I wouldn't hesitate to use any additional weakness to add phyzz for stacking.
Have a great weekend and be ready come Monday! TF