It seems that China has been the major force in the markets lately. Whether it is the rate of their GDP growth or the amount of corn they are buying, or where they are buying their soybeans, any bit of news can move the markets. Moving forward that probably won’t change, and the things we have to pay very close attention to are moves to increase liquidity and economic growth and imports of ag products.
On top of what the Chinese decide to do next week, we will also have to deal with our own government and next week’s FOMC meeting. The financial markets and to an extent the ag commodity markets have been moving wildly based on the Fed’s verbiage or lack thereof in terms of QE3. Another hint of QE3 will likely pressure the Dollar and send the gold and silver higher, whereas no mention of it will have the opposite effect. I think that due to fear of a slowdown in the recovery of the US economy QE3 is becoming more likely, but it is impossible to guess what they will say next week.
Trend: Short Term Down – Long Term Down
Sentiment: Early Planting
The July corn lost 17 ¾ cents and the December corn only lost ¼ cent for the week. Much of the bear spreading can be attributed to ideas that early planting will lead to early harvest, which means there won’t be as much of a supply concern at the end of the crop year. We have to get through the growing season to find out if that is actually what plays out, but for now that is what traders are concerned about.
There were rumors of large purchases of old crop corn by the Chinese, but there was no confirmation of the business by USDA, which I am sure disappointed many traders. We may see something show up in Monday’s daily sales announcements, but it is likely that we don’t see any confirmation of the business until it is shipped. The commercial sources I am in contact with are convinced the business took place and since the Chinese seem to buy corn every time we have a major price break, I have no reason not to believe we let the Chinese off easy again.
Action: The recent lows are now critical support. If they are taken out one must add to new crop coverage.
Trend: Short Term Down – Long Term Down
Sentiment: Big stocks plus big crop equal big problem
The July KW lost 16 ½ cents for the week and the only thing to say that is positive about the market is that the market is oversold and that the losses could have been worse. If it weren’t for the buying that came with the rumors of Chinese corn purchases then their probably wouldn’t have been any buying at all. The only two supporting factors in the wheat are the facts that US wheat is the cheapest in the world and that wheat is generally cheaper than corn in the US. Since the Chinese have been buying large quantities of feed wheat elsewhere in the world, it is a little surprising that they aren’t buying more US SRW, and perhaps they will when we get the next supply glut at harvest.
My biggest concern in the wheat market is not for pressure in the July contract as we approach harvest, but for the deferred contracts after the July contracts expire. It looks to me like the only thing holding the wheat up is the July corn and once that goes off the board the deferred wheat contracts will quickly come down to the price of the corresponding corn contract. From a hedging standpoint, I think that the best plan is to either sell the carry in the futures or sell call option premium in the deferred contracts. Speculators should buy December corn and sell December Kansas City or Chicago wheat.
Action: Sell December KW $8.00 calls.
Trend: Short Term Up – Long Term Up
Sentiment: Strong demand getting stronger.
The July soybeans made a new high for the move Friday and finished 9 cents higher for the week despite Friday’s posted settlement being about 9 cents off the last tick. Regardless, it was an impressive move higher and the market appears to be well on the way to reaching the next upside objective of $14.70.
USDA has a long history of underestimating soybean exports and it looks like it is happening again this year. The Chinese and “unknown” destinations have been very good buyers lately and that will likely continue for the rest of the crop year due to the many problems in S. America. Production estimates keep shrinking, which means the world will have to count on the US for the missing supply. USDA might still be 50-100 million bushels too low with the old crop export estimate and it is basically a given at this point that next year’s exports will be record large by a considerable margin.
The best chance of tempering the soybean market is for the market to buy acres from the corn, but it is getting a little late for that. There is a chance of that happening since the corn - soybean spreads have widened so much, but it may take until the June Planted Acreage Report to find out if it happened or not. If the acres don’t get switched, plan on higher prices.
Action: Be very patient with new crop price protection.
Trend: Short Term Up – Long Term Down
Sentiment: Surging beef market.
It was interesting that there was cash cattle trade at the $125 level, but the April live cattle are still stuck near $120. There obviously won’t be any deliveries unless they are forced, which is definitely a possibility if the cash and futures don’t converge very soon. With the run up in beef prices there isn’t much incentive to take lower money, so I think the futures will have to rally.
Action: The charts still indicate that a long term bottom has been made in the market, so I advise to buy breaks in the feeder cattle, or at least buy call options. Be patient with live cattle hedges at least until the June reaches $120.
Schwieterman: China a major force in this week's markets
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