Outside Markets as of 5:55am: Dollar Index up 0.0340 at 80.2210; Euro down 0.00130 at 1.36090; S&P’s down 2.50 at 1968.50; Dow futures are down 8.00 at 16,970.00; 10-yr futures are up 0.09%; The Nikkei closed up 0.64% at 15,395.16; The DAX is down 0.52% at 9,732.39; The IBEX-35 is down 1.28% at 10,471.00; Gold is up $5.70 at $1312.40; Copper is down $0.70 at $324.20; Crude Oil is down $0.65 at $100.25; Heating Oil is down $0.0107 at $2.8622; Paris Milling Wheat is up €0.25 at €179.00/MT.
Market focus today will be on Fed Chain Janet Yellen’s semi-annual testimony before the Senate Banking Committee as she delivers the Fed’s semiannual monetary policy report to Congress. Investors doubt she will offer much more today than the official Fed meetings from June 17-18, and she is undoubtedly going to keep her dovish tone. Economic data out today includes June retail sales which are expected to show an increase of +0.6% and +0.5% ex-autos, improving from May. Today will also see the July Empire Manufacturing Index (-2.28 to 17.00), and May business inventories (+0.6%). Investors will also be looking forward to Q2-GDP data from China out Wednesday as skepticism remains a cloud over the globe’s second largest economy.
Relatively open Midwest this morning in terms of moisture, and should remain so the next 3-days. The southern plains will see rains fire up through Friday with heavy totals expected in OK/NE-TX/AR/LA, but again the Midwest should remain dry for almost the entire week aside from intermittent shower activity. The feature this week will obviously be the cooler than average temperatures as some of the Midwest corn crop begins to shoot tassels. The 6-10 and 8-14 day outlook from NOAA does see things begin to warm back up with above normal temps for the Northern Plains, while moisture will be split along the Mississippi with below normal west and above normal east. The warm dry weather should be good for finishing the spring wheat crop in portions of the Dakotas. Still no major weather threats to stall market declines.
Turnaround Tuesday in the wrong direction for grain bulls following yesterday’s relief rally which felt like the first gains in months. Friday’s USDA reports confirmed what the market had been anticipating since the June 30th reports: without threatening weather, supply is going to rise more than demand can support during the 14/15 marketing year. Analysts continue to raise corn yield estimates, despite the USDA standing pat at 165.3bpa. It would seem the majority of the trade is between 167-170bpa based on current forecasts, and with that type of yield carryout is going to have a difficult time remaining below 2.0bbu on September 1st, 2015. Demand will expand, but there are limitations outside of feed/residual. Unfortunately for the corn bulls, there also remains two big longs in the market which continue to weigh on price: farmers and funds. The average US farmer has ample old crop stocks remaining in the bin, and he is woefully undersold on new crop. COT data confirmed funds adding to longs. Both will make forming a major bottom difficult. The yield and demand components will remain wildcards a bit longer on soybeans as the key developmental weather is still several weeks out.
Crop progress reports out last night confirmed an improving corn crop as conditions increased 1pt to 76% G/E vs 66% last year, and remain the highest since 1999. MO is leading the pack with 84% of its crop rated G/E, followed by SD at 82% and IL at 81%. 34% of the crop is silking vs 15% last year and 33% average, so the sluggish start to planting looks to have been overcome in some of the Midwest. Soybean conditions held steady despite expectations for an increase at 72% G/E vs 65% last year, and remain the highest since 1999. 41% of the crop is blooming vs 37% average. Spring wheat conditions were unchanged at 70% with SD still 20pts above last year and ND 8pts above last year. MN and MT are 12 and 11pts below a year ago. Winter wheat harvest was pegged at 69% vs 68% average with KS now 90% complete with harvest efforts. OK and TX are essentially done.
The University of Illinois published an interesting article yesterday talking about corn supply and demand, but the real interesting tidbit was their take on whether prices have discounted a 165.3bpa corn yield, or possibly even larger? The U of IL is projecting the stocks/use ratio at 15.4%, which would be the largest since 2005-06 when stocks pushed to 17.5% stocks/use. The average corn price during 2005-06 was roughly $2.00/bu, but the average from 1973-74 to 2005-06 was $2.40, making the $2.00 about 83% of the average. Yet the University argues that since corn prices have entered the “new era” price echelon in 2006-07, the average price of corn from 06/07-09/10 is actually $4.60/bu. If we take 83% of the new era average, we come up with $3.81/bu. Their thinking therefore is the market is already pricing in a yield higher than the USDA’s current 165.3bpa, and ending stocks above the USDA’s current 1.801bbu and 13.5% stocks/use. I will admit their methodology is more art than science, but there is logic there and $3.50-3.80/corn lines up very well with old technical support on long-term monthly charts. Will be interesting to see how close this analysis comes to pegging a low.
Along the same lines, I thought it would also be worthwhile to take a look at the seasonality of other record yielding years to see when price tended to find its major low. The chart at the bottom shows 2014 December corn in black, with 2009 in blue and 2004 in red. As one can see from the chart, 2009 didn’t hit its major seasonal low until September 4th, while 2004 proceeded to move lower right up to delivery and bottom on December 1st. One will also notice that once 2009 hit its low it tacked on over $1.00/bu rally as we entered harvest. This was obviously due to delayed harvest and wet conditions which went on to haunt the market well into the summer of 2010 via poor quality. Still, the point here is to say in other record yielding years, the market continued to press price lower until the maximum supply was realized, which didn’t come until at least a month and half after the current date.
As mentioned above, the most recent COT data showed funds adding 10,319 contracts to their net long position in corn last week to bump their net long back up to 36,418 contracts. This is by no means an egregious position, but it doesn’t imply bottoming action either. The Gross Commercial Long (end user) finally bought corn for the first time in 4-weeks, adding roughly 19,000 contracts which is a positive sign. There isn’t anything to extreme from either a commercial or fund perspective which makes the public opinion data showing corn at extreme pessimistic levels more difficult to trust. Sentiment doesn’t seem to be arguing for a major bottom yet. Soybeans on the other hand do have some extremes developing as the commercial net short position now sits at just -11,234 contracts, the smallest net short on record going back to 1/2/2007. In addition, funds are now net short -43,142 contracts, the largest net short on record. These two groups moving to extreme positions are major warning signals, and obviously it is usually preferred to be on the side of the commercials who look like they are about to go net long the soybean market. It makes one wonder whether the funds piling into the short side of the market ahead of pod-setting isn’t going to end with some capitulation. End users continue to buy soybeans on the way down, toting the largest gross commercial long (242,363 contracts) since October 22nd, 2013. Keep watchful eyes on this market.
A few quickies to close: Russian wheat prices have begun to drop again as harvest expands; Indian’s monsoon season is looking for better rains beginning July 22nd which will be imperative after the poor June and bad start to July. The USDA made mention many times in Friday’s WASDE report of the sub-par monsoon season to date; Brazil soybean basis strength continues unabated and will keep US demand firm; Rail freight costs continue to climb without hesitation making for poor basis levels in the Northern Plains and causing anxiety ahead of small grains harvest; Chicago wheat is sitting on 9-yr trendline support; Wheat O/I is up 30,395 contracts since the June 30th report as funds sell and harvest expands.
Bottom Line: Crops aren’t done getting smaller today, and weather the next week looks beneficial. Traders seem more willing to press corn than soybeans given the crop calendar, but corn is nearing some long-term support candidates. Farmers remain undersold on old and new crop which will remain an albatross around the neck of the market. No reason for funds to switch to buyers today. Better living through lower prices.
Good Luck Today.
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