November 16, 2011
By: Craig Haugaard, Grain Origination Manager
CORN: 5 lower
Last week in this space I believe that I posed the question, “What impact would war in the Middle East have on commodity prices?” If yesterday’s action was any guide I suppose we have to assume that the answer is that it would be positive for them, at least initially. Yesterday corn followed crude oil as it worked higher. It was able to do this in spite of the fact that the dollar was nicely higher for the day as well. As the tension seemingly continues to ratchet up between Israel and Iran, experts are trying to determine what the Iranian response would be to a preemptive strike on their nuclear facilities. A story in the Washington Times yesterday had the following as their lead paragraph:
Iran is contemplating violently shutting down shipping in the Persian Gulf as one of several counterattack options if Israel strikes its nuclear facilities, regional and intelligence analysts say.
If that were to come to pass and oil shipments out of the Persian Gulf were shut off we would see crude oil skyrocket initially and one would assume take corn prices along for part of the ride. I have no clue what the chance of that type of confrontation is but with all the analyst laying yesterdays market strength at the feet of the stronger crude oil market it has me reflecting on the state of the world once again.
Once we get past the outside market influences and look at the specific corn fundamentals the picture seems a little clearer. When it comes to corn this year we have two very distinct markets, the old crop and the new crop. Yeah, I know that sounds like something that my slow cousin Jimmy would say but in this case it might even make sense. The old crop has relatively tight supplies and as a result we see the old crop futures trading above $6.60/bu. for the most part. On the other hand the assumption is that corn acres will be up once again next year and that the initial estimates that we will get from the USDA this coming winter will look pretty darn bearish. As a result I suspect we will see a fair amount of spread action with traders buying the old crop and selling the new crop. As you can see on the following Chicago March/December 2012 spread chart, the March 2012 futures are currently trading for roughly $0.71 more than the December 2012 futures. I would look for that to potentially run out to the type of numbers that we saw in September when the March futures traded as much as $1.20 over the December 2012 futures. The bottom line is that I don’t want you to get so enthralled with the price levels for old crop corn that you refuse to consider selling any new crop corn at these levels.
We still have to consider the demand side of the equation and right now we are seeing lagging export numbers as cheap feed wheat and other corn exporters are going after business we usually get. It was interesting to note that the Ukraine yesterday sold corn to South Korea at a price that was $0.53/bu cheaper than what the USA offered them. That type of price discrepancy will keep us pretty limited in the amount of export business we capture. It is also worth noting that wheat harvest is going on in Australia right now and it is raining so perhaps they are creating more feed wheat in that nation.
Technically, all three of my indicators are bearish although yesterday’s action has them bouncing up.
SOYBEANS: 7 lower
Was yesterday the opening salvo in an attempt to buy acres for next year? I really have no clue and just wanted to use the word salvo in my opening comments to win a bet. We could talk about the slow export pace and the good South American weather but you already know all that stuff so let’s look at some cool charts instead. Here is the deal; the first chart below these comments is the monthly spread between the spot soybean futures and the spot corn futures. This chart goes back to 1986 and as you can see the majority of the time soybeans have traded at 2.35 to 2.6 times the price of corn. The red line is drawn in at 2.08 which is how many times the November 2012 soybeans futures price is currently above the December 2012 corn futures price. The second chart that I am showing you is the actual price differential chart between the November 2012 soybean futures and the December 2012 corn futures. As you can see the spread has started to move towards a more normal spread although it still has a long ways to go. The reason that I am showing you this is that some analysts that I am visiting with believe we will see the new crop soybean futures go to $13/bu. If that happens and we see the price differential move to the more tradition 2.35 times the price of corn we could in effect see the December 2012 futures actually slip to $5.53. In other words, from an historical perspective it would not be out of line to see the November 2012 soybean futures at $13 and the December 2012 corn futures at $5.53. That would be $0.90 higher for the bean futures and $0.30 lower for the corn futures and the spread would be fine from a historical perspective. The reason that I am sharing this with you is that I don’t want us to fall into the trap of thinking that an acreage battle has to rally all grains straight across the board. You need to make the best decisions that you can for each commodity and we at Wheat Growers are going to try and give you the tools you need to do that.
Technically, two of my three indicators are bullish.
WHEAT: 5 lower
A stronger corn market helped pull wheat to a better close yesterday. I really can’t find anything fresh and exciting to talk about in the wheat market. The weather in HRW country seems to be improving and that could eventually weigh on prices. On the other hand we have an ongoing drought in portions of Europe as well as the rains in Australia that could be some milling quality wheat to end up as feed wheat. I really don’t have story here expect to remind you that we continue to get killed in the export market and that from a chart perspective it appears to me as if we are still trapped in a trading range type of market.
The information contained above was taken from sources which Wheat Growers believe to be reliable, but is not guaranteed by Wheat Growers as to accuracy or completeness and is made available for information purposes only. There is a risk of loss when trading commodity futures and options.