This Week in Grain – Ahead of the USDA Reports

This is a sample entry from John Payne’s newsletter, This Week in Grain, published on Friday, March 28, 2014.

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The week of anticipation is behind us! By Monday, we will have a better impression of what the market will be dealing with as far as supply is concerned for the short term (grain stocks) and the long term (planted acres). This report is big, and will impact the price narrative and money flow over the next two months, this much I promise you. The market has already priced a lot of the anticipation in, as volatility prices in options have spiked within the last few days. In my opinion, the only way I will be surprised on Monday is if prices do nothing.

Let’s break it down fundamentally and technically in each market. Remember, there are 2 factors moving prices this time around — amount on hand and planted acres (future supply):

Corn

In corn, the last 3 march reports have moved the front month prices drastically over the following days. In 2011, we saw the market spike 51 cents, followed by a 70 cent price spike in 2012. In 2013, the market got a bearish surprise and broke almost 1.00. That’s an average of 73 cents of price action in the last 3 years. Over the past 20 days, the average price movement of corn has been 9 cents. Now, I would not look to price action to be as drastic in the past, as the fundamental setup and price point was very different. A 40 cent move in this market will feel the same as a 70 cent move last year.

Fundamentally Speaking

• What is going to drive a lower stocks number? The US livestock herds are at historical lows, ethanol grind reports have not shown a dramatic increase, and the exports are moving but not at a rate where I would imagine losing millions of bushels without the market being aware. Because of this, I do not expect the stocks number to come too far from 7 million bushels. This would keep the carryout near 1.5 billion and should bring prices lower — especially old crop.
• On the planted acres side, I believe the trade estimates will be accurate and we will see 92.5 million acres planted next year. Do the math at trend yields and you should come out with a production number over 14 billion. This should also send new crop prices lower. I do not expect a complete wash on Dec corn (below 450) as the risks of late plantings should keep sales slow and premiums in play. The damage may come in a reversal of the curve, from a CN-Z inverse to a carry.

Technically Speaking

• Short term, the technicals are solid. Both May corn and Dec corn are both sitting on 2 month retracement trend lines, while forming a bull pennant. The indications of this would be continued bullish action if prices would close on highs, Monday afternoon.
• When I pull the charts back, the technicals do not look that good. While we have seen a nice technical rally over recent months, it pales in comparison to where prices came from. If you look at a daily chart pulled back to a two year time frame, this recent spike looks like a normal correction.
• From an OI perspective, the funds are long. Who is going to buy the next leg? The farmer? I think it’s going to take some major fear of crop loss for that to happen.

DEC BEANS

MY VERDICT: Neutral to bearish report expected.

Soybeans

The stocks report for soybeans will be the more closely watched report. If stocks are tighter than expected, planted acres shouldn’t matter much. If the USDA would pull 100 million bushels over expectations out of its hat, the planted acres report shouldn’t matter much.

Fundamentally Speaking

• The saltiest traders I know will tell you that markets that do not break on bearish news are bullish. The recent news flow in soybeans has been incredibly bearish. Between South American harvest progress, poor crush margins worldwide and China basically backing out of purchases and selling them elsewhere, I am baffled about why prices are trading near highs.
• If the stocks are tight, the pressure on what we will plant here will be high. If they are bigger than expected, then they do not really matter as much. 83 million is a high guess for acreage, but I’ll play along with the other dart throwers and put my guess somewhere in the 82 million range. Is the USDA really going to increase acres by over 5% at historical highs? If they do and the stocks are bigger than we thought, I think the market has a 3.00 in old crop and 1.00 in new crop that will come out of it before the mid-summer fears get prices in.

Technically Speaking

• The inverted market is certainly a strong indicator. That said, it was this inverted in corn last year at this time.
• The May contract has set up a bearish flag, while sitting right on a 3 month trend line. The double top at 14.60 offers very nice risk reward for short sellers. Even a bullish report may end up with a lower market. If this market was a ski slope, it would be a double black diamond, trade at your own risk.
• I was at a bar last weekend and there were some college kids there playing the game Jenga. You know this game, the one where you remove blocks from the bottom and put them on the top. Eventually, the bottom gets so weak the top collapses. The challenge is to not be around when it falls. This is how I see the open interest affect in the bean market. If the funds are tapped out and cannot buy (and China is selling), who is going to take this market higher? I would not mess around on the long side up here; it screams “toppy” to me.

MAY BEANS – CONT.

MY VERDICT: Bullish/neutral stocks report- Bearish planted acres. In the end, the bears win out as supply outlooks hit the tape and the market retreats crushing weak longs. The break may not come right away, but it should come sometime in early Q2.

Wheat

The wheat will be the forgotten market on Monday, but it may have the most price action. I am not going to venture a guess on wheat, as I don’t really think it matters. The market is trading on weather and, the USDA reports have been somewhat bearish over recent months, yet the market continues to rally. No matter what happens on Monday, I think the market bounces and puts in yield loss risk as we enter the harvest months.

Technically Speaking

• As Andy Daniels said yesterday, the corn wheat skew has jumped to some levels that have been hard to hold in the past. If the corn report is bearish, we may see it bleed into the wheat markets.
• The recent down stroke in the market has taken away the inverse in KC K-N. I believe producers are emptying the bins from last year’s harvest. This is good, as there may be some buying there after this break as end users want to make sure they are covered over the next 3 months before new supply comes online. The 760 level in KC and the 690 level in Chicago are prices to watch. If those get broken on a close, the top may be in until the yield fears begin to come back.

MY VERDICT: Neutral to bullish, but it probably comes down to what corn does. I don’t see the CN-KN spread widening out too further at this point. If we have ample corn stocks on hand, July wheat may see some demand going there and need to go lower.

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