We had a wild week. Most of the time it felt like the direction of the Dollar Index was controlling the direction of the grain markets. Lots of times there is an inverse relationship between the Dollar and the grains, but it seemed to be especially true this week. This week the cash Dollar Index fell to just above the December low where it should have found support, and did. The Dollar Index then bounced off the support and is in the process of making a correction. There is little indication at this time that we are going to see a change in the long term trend of the US Dollar, which is down, but we are due for a correction and it looks like we are getting one. Wednesday is the June supply and demand report. It is hard to guess what changes we may see in the June report since we have the June acreage report at the end of the month. Acreage changes in the June supply and demand report are uncommon, but they do happen. This year it is possible that we will see a cut in corn acreage and an increase in soybean acreage due to the planting problems we have seen this year.
Last year USDA cut the corn yield estimate by 5 bu/ac from the May to the June report dropping it to 148.9. This year we are starting out at 155.4, and although this was adjusted down due to slow planting progress, we may see a cut in the yield estimate next week.
On the demand side we could see an increase in the export estimate for old crop corn and soybeans. It will be particularly interesting to see what they do with the soybean export estimate and how tight the ending stocks estimate is. I think it is too early to see any new crop demand changes unless we see a major change in the new crop production estimates.
A cut in the wheat production estimate is possible since we have seen a decline in the HRW and SRW condition ratings and the planting problems in the HRS region. There probably won’t be any wheat demand changes this time around.
CORN:
Trend: Short Term Up – Long Term Up
Sentiment: New highs for the move.
It took about 3 months from when the March lows were made to do it, but the corn finally traded just above the January highs this week. The July contract gained 7 3 4 cents and the December picked up 8 ¼ this week. Trend indicators are still up, and after Wednesday’s sharp break, technical indicators are not nearly so overbought. If we see a close that is clearly above the January high, I will be comfortable in saying that the December corn is headed to the $5.25 area.
I am not at all certain that we will see either an acreage or yield change in the corn in the June supply and demand report, but if we were to see reductions in one or both of those it would certainly be bullish. It won’t take much of a change to get new crop ending stocks to fall below 1 billion bushels, particularly if we see an increase in old crop exports. We don’t have nearly the bullish euphoria that we did last year, and rightly so, with all the economic problems facing us, but there are signs the world economy is getting better, and although corn supply and demand fundamentals are not nearly as bullish this year as last, with just a few changes, the supply and demand tables could end up being much more bullish than when we made the all time highs. Keep that in the back of your mind.
Action: If you have fear of something bearish coming out of the report next week, buy an at the money July put options. They are relatively inexpensive and will protect you through the report. Otherwise you should be roughly 35-40% priced on new crop corn/milo since we reached $4.70 in the December futures. Cover forward sales with March calls on a close above $4.85 in the March contract.
WHEAT:
Trend: Short Term Up – Long Term Up
Sentiment: Too much, too fast
The wheat market ended up losing ground thisweek. The July KW dropped 12 cents for the week after about 40 cents higher on Monday. I think it was a case of moving up too much, too fast in the past couple of weeks. The wheat fundamentals are not the most bullish, and yet the market was acting as if they were. The other problem is that harvest in progressing and even when we have short crops we still often have some harvest pressure. 12 cents isn’t much harvest pressure, so we may see more weakness in the next couple of weeks, but for now it looks like a bull market correction. As long as the corn
fundamentals stay bullish, the wheat isn’t going to have sustained weakness.
News is limited. Traders are watching the Dollar Index and waiting for harvest to begin in Kansas. Other than that, there isn’t much to talk about. Exports are still poor, and about the only way to improve them is to have a shortage of corn that leads to more feed usage of wheat. Technical considerations and the bullish corn supply and demand situation are the only things that keep me somewhat friendly to the wheat market.
Action: We reached, and traded through, my $6.90 - $7.00 objective, so you should have priced 10-25% of your crop. The next objective is the $7.60 area, which ooks possible if the corn can keep moving higher.
SOYBEANS:
Trend: Short Term Up – Long Term Up
Sentiment: Old crop shortages?
Soybeans were strong and the bull spreads worked very well. July soybeans gained 41 ½ and the November lost ¾ of a cent. It is the same old story, old crop demand, new crop acres.
Old crop export sales were a net -24,000 MT and the July contract was still higher, because in all likelihood we aren’t going to have zero sales for the rest of the year. Any sales in the future will reduce ending stocks and increase the chances of domestic shortages. It is a good thing livestock numbers or down, or we would be seeing much more extreme demand rationing. Look for the bull spreads to keep working because of the old crop export sales and because of the possibility that we will see an increase in the new crop soybean acreage estimate at some point. It could happen next week, or it could be in the June acreage report at the end of the month. With that threat of even more acres I think we are at a good place to sell new crop soybeans. With good summer weather that market has the most to lose.
Action: I wanted to cover 20% of new crop production with $10.00 November puts when they reached 50 cents. I want to change that to 70 cents with the intention of legging into a $10.00 - $8.00 bear put spread for 40 cents.
CATTLE:
Trend: Short Term Down – Long Term Down
Sentiment: Nothing good to say
$82 cash trade and lower boxed beef. Feeder cattle were ugly. The only positive thing I can think of is that boxed beef movement was better. August live cattle are now very oversold, so I still don’t want to put any hedges on at the current level.
Unfortunately it looks like a $2.00 bounce is a selling opportunity.
October LC lost quite a bit of ground, which took the August FC sharply lower. The feeders are now very oversold as well and due for a recovery. Look for a move back to $100 in a week or so.
Action: Be patient with hedges due to the oversold condition of the market, but be prepared to sell rallies, particularly in the August LC.