The market has been busy! Fed trade has facilitated a significant rally since establishing a near-term low of during the week following Memorial Day. July’s opening with trade occurring at $114-5 marks a $10 surge in just five weeks. Much of that upside has been supported by wholesale beef prices; the Choice cutout is pushing the $180 mark once again (see graph below).
Given the market’s run of late and some of the overarching fundamentals, the next few weeks could prove critical in terms of setting the tone for the remainder of the summer. That said, there exist some headwinds for the market to maintain these levels, let alone trade higher yet. First, the June unemployment report was especially detrimental to any hope for a substantial uptick in consumer spending. Second, from a seasonal perspective, domestic demand typically softens following the Fourth of July holiday.
As such, if cutout prices begin to weaken from here there’ll be renewed pressure on fed cattle negotiations. That potentially could make sellers reluctant to deal on a weekly basis and further compound potential for building the front-end supply – especially in light of cheap corn (relatively speaking) and the sizeable premium in the futures market.
Once again, though, the major market theme of the past month revolves around the corn complex. Corn prices got pounded from several perspectives. The “perfect storm” metaphor comes to mind as the reversal stemmed from convergence of several important influences - many of them external.
General unraveling in commodities markets began several months ago with broad uncertainty about future economic growth and interest rate trends. All of that came to head in the middle of June with concern about Greece’s debt crisis. That subsequently catalyzed a broader risk-off investment mentality in both commodities and equities while also bolstering the U.S. dollar (negative for commodity prices). That development was followed up with the International Energy Agency’s announcement of pending release of 60 million barrels of oil from emergency reserves. Traders reacted with worries about the oil market over the short-run which subsequently drew the corn market down. Meanwhile, outside investment has been especially shaky leading up to the scheduled end of QE2 (June 30); as a result, there’s been increasing trepidation about commodity investments. And finally, the culmination of market-moving news came on June 30 as USDA surprised traders and analysts on both fronts: stocks and acreage. And lastly, ethanol policy will likely be shifting in the coming months. Seemingly, all things bearish have been thrown at the market.
So where does that leave us? One, from an old-crop perspective there’s ostensibly additional inventory: USDA reported June 1 stocks to be some 350 million bushels higher than the average trade guess. Traders interpreted the report as indication that much of the market’s work has already occurred: demand has indeed been rationed in recent months; that subsequently takes pressure off the need to amplify rationing any further in coming months. Two, from a new crop perspective it seems that the nation’s farmers have been busy planting corn: USDA reported that 92.3 million corn acres have been sowed in 2011. That estimate is approximately 1.6 million acres ahead of analyst expectations (not to mention June’s WASDE estimates).
The market turned sharply lower as June closed out business; however there remains large skepticism about the USDA estimates. First, USDA’s inventory mark implies huge usage decline during the previous three months. That’s especially difficult to reconcile given substantiated data surrounding both ethanol and meat production. (The best explanation probably comes from Dan Basse, AgResource, who notes the additional stocks are likely a statistical artifact; the number stems from commercial entities holding unusually large corn inventories resultant from logistical challenges because of flooding.) Second, USDA immediately reported that it would be resurveying Minnesota, Montana, North Dakota and South Dakota; the equivalent of approximately 15.7 million intended acres, or nearly 17% of the nation’s total. Regardless,
Meanwhile, the bulls have been fighting ever since arguing the correction has been overdone. First, much of the corn crop in the eastern cornbelt was either 1) planted late, and/or 2) planted in unfavorable conditions (mudded in), and/or 3) planted with short-season varieties. Second, there currently exist fourteen states that are battling drought or dry conditions to some degree (AL, AR, AZ, CO, FL, GA, KS, LA, MS, NC, NM, OK, SC, TX); the combined corn acreage is equivalent to 12.9 million acres (14% of the 92.3 million acre estimate). Lastly, there’s the issue of late planting and pressure on harvest as fall progresses. Therefore, weather will be critical going forward for new crop development. And lower prices have also encouraged buying from international trade partners – most notably, large sales to China.
Perhaps the most significant issue at stake here, though, is not the absolute price of corn but the broader principles of managing risk and protecting equity. I noted last month that, “We’re in uncharted territory here and finding our way continues to be the theme of the day. Decision-making is all about sorting through mixed signals.”
The influence of never-ceasing news, increasing speed of commerce, intricacies of global trade and inherent connectedness among various markets makes for some dicey conditions. Moreover, those factors all interact in way never before seen. And as noted several years ago, “That makes [markets] increasingly dynamic and volatile…[and they] move too fast to provide any reprieve from the now-constant requirement to be well informed and hyper-vigilant about risk management and decision-making…”
Never a dull moment in the markets! Stay tuned….