This is a sample entry from John Payne’s newsletter, This Week in Grain, published on Tuesday, December 10, 2013.
The grain data came fast and furious all day! It started with Brazil forecasting their production this morning, followed by the USDA giving us their take on everything but old crop supplies (those will come in the JAN report). While the results of today’s report may have not inspired much volatility at 11 am, I did notice a few things that may become trends over what is left of 2013 and the start of 2014.
For those of you who like to see the numbers explained in video form, take a look at Drew Wilkins’ Ag Wire, available here: https://www.youtube.com/watch?v=cTWjdKMtJc8
Like I said before, 2013 supplies were not adjusted in this report. All increases in the carryout would have come from demand. The USDA did what we thought and raised demand slightly which resulted in a reduction of ending stocks from 1.887 billion bushels to 1.792 billion bushels. I expect the stocks to go back up after the next USDA report, when 2013 production is adjusted higher. If it were not for wheat, I believe March corn would have gotten through 4.40. We may see a more bullish stance from the market ahead of the new year as old crop selling slows and shorts cover positions. Seasonally, we do not see a low not set the last few weeks of the year. Regardless of price action over the rest of December, producers and specs alike should be prepared to short corn into the New Year. I expect lows to be penetrated sometime early in Q1.
CONAB and Brazil gave us their take on the corn markets this morning, raising production to 78.8 MMT (+3 billion bushels). Brazil has seen fantastic growing conditions year to date. There is nothing I see outside of very poor US planting conditions that will change the current market structure for corn.
Soybeans had a very mixed day. Brazilian production numbers were bumped from 88+ MMT to over 90 MMT (change of almost 80 million bushels). This brings the projected Brazilian bean crop to over 3.5 billion bushels. The USDA (again, did not touch on US supply) lowered their carryout on the back of demand hikes to the tune of 15 million bushels. Because of our razor thin carryout, this lowered our ending stocks by almost 8%! This was bullish, but the market had priced a lot of this in ahead of time, and the market actually traded lower into the U.S. close.
The result of the reports today, leave me looking at soybeans in three different ways:
- Jan-March contracts represent US old crop supplies. SAM production will not be able to meet users until sometime after the Jan delivery at the earliest, with most production not coming online until May. Because US supplies are so tight, I think Jan and March continue to trade at significant inverses to the deferred contracts until the next US crop report. I think the USDA raises yields in the Jan report, but we may be trading near 1380 on Jan before that happens.
- May-August contracts represent the South American supplies. We saw the market bear spread these contracts against Jan and March after the CONAB announcement this morning. If Brazil and Argentina continue to have favorable growing conditions, we could see these contracts weaken against the front months ahead of the Jan report. 3.4 billion bushels of soybeans would be a record, and will leave world carryouts at very sustainable levels. This should keep the March-July contracts soft, barring any US planting problems or SAM growing problems.
- Sep-Nov contracts represent US production for next year. I believe these contracts will remain “pinned” anywhere between 35 cents higher or lower from 1170 for the foreseeable future. If the bullish winds are blowing, bull spreads should work. If supplies appear to be sustainable, I expect the SAM contracts to possibly go to a carry against November 2014 Beans. I believe the contracts representing US new crop supply will need to price in acreage against corn. Because of this, I do not believe forward contracting is necessary at this point. The market will need to price in more acreage that what is currently being reflected on the board. It can do this by selling corn (deterring plantings) or rallying beans (encouraging planting). By my math, we need almost 7 million US acres to switch from corn to beans, on a net basis. Because of this, I feel new crop beans are supported near 11.50.
The results of both wheat reports were very bearish. The USDA increased carryouts across the board while leaving the supply side untouched. This was on the back of reports that Brazil’s wheat crop was bigger than expected by a few hundred million bushels. Being that Brazil has been buying wheat from the US in recent weeks, the market is anticipating the loss of demand. I believe the result of this will bring wheat back to the whipping post as a spread contract against soybeans and corn. July wheat in Chicago and KC both broke long term support today, and closed. I expect the down trend to resume.
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