Well, it was quite a week. Widespread long liquidation in the commodity markets ruled the week. The pressure in the silver market was astounding. The July silver had over a $15 trading ange this week. Only 15 months ago it wasn’t even worth $15. The AG markets faired a little it better than that, but with the bullish fundamental setup many of the AG markets have, it is difficult to rationalize the pressure.
Next week is the May supply and demand report, which is our first look at the new crop estimates. The average trade guesses for the old crop numbers are basically steady for the corn and wheat at 665 million and 844 million bushels respectively. The old crop soybean ending stocks guess is slightly higher than last month at 153 million. The new crop estimates will be what drives the market and it will be very interesting to see what USDA comes up with. The average trade guess for corn ending stocks is 811 million, but the range of estimates is from 574 million to 1.025 billion bushels. For the wheat the average trade guess for new crop ending stocks is 674 million and the range is from 432 million to 800 million. For the soybeans the average guess is 176 million and the range is from 122 million to 250 million. In each case the low estimate is extremely bullish and the high guess is more than adequate. It looks like no matter what the numbers are there will be a lot of surprised people and therefore a lot of volatility.
The July corn lost 70 ¼ cents and the December fell only 29 ¼ cents, so the bear spreaders were at it again. With the record tight stocks to use ratio the July corn was much stronger that the new crop, but due to a few poor export sales reports, slower than desired ethanol production, and a very poor start to the corn planting, the fundamental outlook doesn’t favor the old crop nearly as much as it did a month ago. If the planting pace doesn’t pick up soon, trader’s perception may begin to lean towards ideas that the new crop fundamentals are more bullish than the old crop. In 2008 the new crop led the way higher and we may get into that situation again.
This week’s pressure certainly has the charts looking bearish. Traders have had the bottom of the open chart gap at $7.01 as a downside target for quite some time. $7.01 held as support on Thursday, but failed miserably on Friday. Chart wise, the only thing supportive is that the market is now oversold. Otherwise, the next major support lies at the $6.60 - $6.67 area in the July contract. Weekly chart support doesn’t kick in until about $6.07, so we will need to see something supportive out of next week’s supply and demand report in order to avoid a move down to that level. The late planting has some traders thinking USDA will start out with a sub trend line yield, which would be just the spark the market needs.
The Wheat Quality Council tour was this week, and as expected, they didn’t find much good wheat. Since the crop condition ratings didn’t improve after the rain we had, I have no doubt they will decline again in the next report unless there was so much wheat abandoned this week that the conditions have to improve by default. This weekend’s hot, windy days definitely won’t be adding bushels to the crop, which the Tour estimated at 257 million bushels for the State of Kansas. My guess is that it will end up being about 230 million when it is all said and done.
The average trade guess for HRW production is 767 million with a range of 650-960 million, so there are still some people that don’t know just how bad it is. If production ends up at the low end of the range then milling wheat will be extremely valuable a year from now.
The wheat chart still looks a little bearish. The July KW lost 28 cents this week, but it held above $8.50 on a closing basis, which is had to do to avoid further liquidation. Friday’s big gains indicated to me that fundamentals were starting to take over. Money flow and technical trading can dictate direction for a while, but at some point the fundamentals have to win out. However, it is very likely that we will retest Friday’s lows, so we are not out of the woods yet. A close below $8.50 would suggest a move down to $7.75.
The July beans started the week testing the upper end of the trading range, but were drug lower by the fund liquidation. It doesn’t help that most of the fundamental news lately has been negative with talk of Chinese demand slowing, a poor export sales report, and ideas that acreage may increase due to slow corn planting. However, if these lower prices attract any demand at all, we will probably see the beans jump right back up to the recent highs. Our stocks situation is still too tight to be able to handle fresh demand.
I am cautiously optimistic about the cattle market. We have seen a healthy pull back and now the technical indicators are oversold. The market still made a lower low of Friday, which is a concern, but the two mid range closes in a row give me some hope. A positive close on Monday will indicate the move lower is done for the time being and we should see a move up to $115 in the June live cattle.