WASDE Week

This is a sample entry from John Payne’s newsletter, This Week in Grain, published on January 7, 2013.

I hope you had a fantastic holiday season and a happy New Year. It is WASDE week! This is one of the most critical WASDE reports we see all year. The USDA will provide us their final view of the 2012 crop. For all of you bulls out there, I hope the recent downswing in prices hasn’t put a damper on the outlook for the year. The back end of this week will provide plenty of data to either put a bottom in this market, or attempt to break your spirit. With massive short interest entering the markets over the past 3 weeks, I expect any bullish surprise will have front month grains pushing on the limits. This report has provided limit moves five out of the last six years. These reports can provide the impetus for price reversal; we will have a pretty good idea of what the funds are thinking by the close on Friday.

REMINDER: THE WASDE REPORTS WILL NOW BE RELEASED AT 11 AM CENTRAL ON FRIDAY, NOT 7:30 AS IT HAS BEEN IN THE PAST

The bearish prognosticators are projecting one final yield bump in the US Corn and Bean crops to somewhere north of 125 for corn, and 40 for soybeans. This type of number would push production numbers above levels not thought of during the latter part of the summer, when many analysts were barking about massive crop losses bringing production totals for corn under 10 billion bushels for corn and 2.25 billion bushels of beans. Where have those days gone?! A bump in corn yields, without any reduction in harvested acres would have the old crop corn production pushing on 11 million bushels!

The bullish prognosticators will be pointing to harvested acres. Thelast reports showed that number at 87.5 million for corn and 75.7 million acres for soybeans. The bulls have been screaming about this number for the past few reports, claiming the USDA is way too high. I have a feeling both could be correct, creating a neutral effect. The bpa numbers could be revised higher, while harvested acres are seen smaller. The number to watch is the bushel production number, as anything below 2.75million for beans and 10.5 million for corn may cause shorts to cover. Anything above 3 million for beans and 11 million for corn may have the existing corn bulls ringing the bell to sell out.

The macro trade will be somewhat muted this week, as there aren’t many economic releases scheduled. The ECB governors will be meeting this week, with a statement scheduled for Thursday morning. Earnings season will also begin this week.

THE SCHEDULE

Thursday, January 10
7:30 – USDA Export Sales Data
7:30 – Unemployment Claims
19:30 – Chinese CPI

Friday, January 11
7:30 – US Trade Balance
11:00 – USDA Crop Production /Grain Stocks /January WASDE

CORN— Front month corn futures were battered last week, closing near lows on the back of continued weakness seen from US Exports. The last two weeks have seen only 100 K in sales booked COMBINED, below the lowest of expectations. This combined with a realization that South America appears to be having a good growing season, has prices on the run. In the past three weeks, March corn has come down from 734’6 to 680’0, closing on Friday’s low. New crop corn lost more than that, seeing prices fall from the 630’0 level to a close on Friday at 571’4. The 600’0 which was support in the past provided none. Technical corn traders will point to the price gap 690’0 and 683’0 being filled as bullish. I still believe wheat will lead corn over the short term. Will the end users step in and buy old crop corn here in mass? Or will they continue to feed hand to mouth with the belief prices this summer will be lower? The next week will provide us clues to all of this. TAS Tools navigator is still very negative, encouraging trades from the short side.

Old Crop Corn

Old Crop Corn

New Crop Corn

New Crop Corn

Bullish Fundamentals

  • US Corn is becoming very attractive to end users in China again. Keep your eyes and ears peeled for Chinese buyers; it could be a sign of short term bottom
  • The projected tightness in the current year’s balance sheet should be providing price rationing, not the action we have seen. If the trade starts to focus on what we have, not what we will have, the market should gain some traction
  • The aversion of the fiscal cliff, and a temporary extension of the farm bill. The continued “kicking of the can” should provide solid demand outlook for the short term. The focus will now be on the lifting of the debt ceiling. If Obama gets his way and is allowed to issue debt as he pleases, currency factors may be a help to bulls
  • Continued dryness in the Western Corn Belt. Right now no one seems to care. They will this summer if the weather patterns do not change.
  • Livestock producer margins have improved drastically. I expect the herd numbers to begin to grow. The USDA may touch on this via growing feed demand, in the report this week
  • Strong seasonal cash basis
  • Open interest at near term lows

Bearish Fundamentals

  • US Corn exports have been putrid
  • Strong South American production
  • Falling wheat prices, creating cheaper feed alternatives. I have been telling clients for weeks that wheat will lead corn down or up. I believe one can attribute the selloff in corn to the bearish December WASDE wheat numbers
  • The stronger US Dollar, which was fueled this week by talk from US Federal Reserve governors about an end to QE by the end of 2013
  • The assumption that the US Crop was not as small as we expected it to be. The numbers we get this week will drive prices until we hear numbers about US plantings
  • Record large US 2013 plantings. As prices fall, will farmers plant less this upcoming year?

Soybeans— Front month soybeans are sitting right on terminally key support levels. A break and close below 1360’0 should see follow through selling, with a possible target being the 1300’0 level. It was just three Sunday’s ago when a positive US crush report saw the market open above 1500’0. The selling since then has been ruthless. The trade will continue to focus on Brazilian and Argentinean weather, which has provided solid growing conditions. Thus, the weather premium that was placed on this crucial crop is being removed. Many are now thinking SA production to come in north of 50 bpa! This combined with early projections of Soybean plantings near 79 million acres for the US Crop has the bean counters (pun intended) staring at a world suddenly awash in soy. If the news flow remains static, we could see new crop beans sub-1200 before a seed is put into the ground. New crop beans have a slightly better technical picture, with close in support coming in at 1255’2.

Old Crop Beans

Old Crop Soybeans

New Crop Beans

New Crop Soybeans

Bullish Fundamentals

  • Incredibly tight US 2012-2013 carryout for both corn and soy
  • Growing Chinese feed demand as their herds remain large, and may possibly grow in 2013
  • Extension of the Biodiesel tax credit
  • The aversion of the US Fiscal cliff. The perception that the US will not make a move toward any austerity will provide back winds to all commodities
  • Soy meal demand remains strong, as improved packer margins and a strong cash trade will encourage larger feed demand
  • Pathetic South American infrastructure. Sure, SAM farmers can grow it, but can the ports support the export demand?
  • Seasonally strong basis

Bearish Fundamentals

  • The perception that the US 2013 crop will be very large
  • A larger than expected soybean crop in South America, due to the lack of a weather catalyst
  • The low water levels on the Mississippi. I don’t feel it is a stretch to link poor US corn and bean export bookings with the lack of though fare on the nation’s longest waterway. Because of this, end users must rely on the rails to get the grain to where it is needed. This situation is adding to transportation cost, shrinking end user margins and thus demand
  • Chinese cancellation of soybean bookings. This was the catalyst to the bean sell off late in the week
  • A stronger US Dollar, which makes exports more expensive to those who operate in currencies outside the dollar
  • The perception that US farmers will plant close to 79 million acres of soybeans, close to a record amount

Wheat— If one is looking to blame someone or something on the recent sell off of the grains, look no further than wheat. The cascade of selling was prompted during the last WASDE report, when the USDA announced a higher carryout. That broke front month wheat out of its 6 month sideways channel. Fast forward one month and 80 cents, you will find us at prices not seen since before the summer weather rallies. I believe that as wheat goes, so will corn. Right now, the feed markets may be the only story wheat and corn bulls can hang their hats on. Keep your eyes open for the feed numbers that come out with the report on Friday. FYI, the next month is seasonally bearish for wheat. I could see the March wheat contracts trading at par with the March corn, before its all said and done. Technically, there is nothing pretty about wheat.

New Crop Wheat (July)

New Crop Wheat

Bullish Fundamentals

  • Any bearish US Dollar moves due to a debt ceiling hike will bullishly affect wheat (I believe the debt ceiling hike will happen)
  • Tight corn and soybean supplies
  • World Wheat stocks are expected to contract when this season is all said and done
  • Very poor growing conditions in the Western US growing region
  • More wheat is being fed in any year since 1989
  • The funds are net short wheat, if they have a reason to buy the powder is available to spark a rally

Bearish Fundamentals

  • US Wheat exports are down y/y
  • A growing US carryout
  • A potentially large US/SA corn and bean crop
  • US Dollar volatility creating havoc in the export markets
  • Stocks to use levels near 40% (closer to 15% for Kansas Wheat)

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