Let's get a running start by backing up to last Friday's USDA Crop Report. Most felt the report was a yawner as the awaited production numbers came in line with pre report trade expectations. They pegged production at 12.995 b.b. up a modest 234 m.b. from the August Report and 894 m.b. over last year- and of course prices moved from an August high basis December Futures of 3.78 to a 3.02 low. Now, the October Report will equally interesting to production as the growing season will not end until month's end. It is then that production estimates will be largely known and we move from a supply driven market to a demand driven market. This is where it gets interesting as demand is where the government struggles to get a grasp of as pertained to ethanol consumption of corn, feed use and foreign demand. In Friday's Report, it almost appeared as though they are getting smart or deciding to go on the higher side of estimates as the last three years of conservative usage estimates left them terribly off. They put our ending stocks come next September 1, 2010 the beginning of the new marketing year at 1.635 b.b. or 60 m.b. under this past year. Essentially they said we will produce more but end up with less. This sent a strong signal to commercial end users of corn like the export companies, feed lots and ethanol producers that a third consecutive demand driven market into next spring is on the way. Getting inventory of cheap corn at harvest time may decide whether or not you make profits in 2010. Harvest low bids the last several years have paled by comparison to the planting season spring summer highs. I look for Asia to be a big harvest time buyer of corn as big neighbor supplier China continues to experience drought with talk of corn production cuts by 20% or more at a time when their building strategic reserves. This all says they will have less to sell leaving the U.S. to fill the hole. Drought in Argentina and now Mexico opens the door further for inventory insurance to surface at U.S. Ports as the crop comes in. Mexico was in for 410 t.m.t. of corn this past Monday. The big question long term is in- prices will trend higher long term into next spring but near term the next 30 days is wide open. This week brought talk of a potential frost to the Midwest Grain Belt next week- September 23rd, 24th and 25th. On Tuesday the weather gurus suggested 90% of the grain belt could get hit by frost. Wednesday it was cut to 40%. By Saturday, it could be taken out of the forecast completely and put back in by Sunday. The point here is the weather threat is always there and always changing. So let's get an idea of what to expect if a frost hits or does not. The corn crop needs until October 1st to fully mature and end the threat of potentially losing production. If weather stays generally mild through October 1st and void of a frost. December corn could have one more leg down before harvest begins and then a demand buying opportunity for us enters.
NOTE: Harvest low prices will hold as a low through late next spring.
The low looks to be between 2.84 and 2.90. Some chart patterns suggest a low potential of 2.60 but for now work with 2.84. Now frost. That is the magic word as it could cut 150 to 400 m.b. off production and that means the USDA takes it from ending stocks already heading down on a Bullish demand outlook. There is no real history of frost damage other than the 1974 frost. We saw the December contract rally over a dollar quickly and that was before large billion dollar trading funds. However, we have to assume that fear and money combined makes for a severely overbought potential frost rally. A test of our summer 4.60 area would not be out of line if severe enough. As of the writing of this report today (Thursday), many of the weather sites are taking the frost threat out for next week. Near term a close under 3.25 basis December Futures for the week sets up a test of 3.02 then 2.84. A turn to a Bullish forecast and we will take out our 3.47 resistance. Sell a close under 3.25 or put buy stops at 3.48 to catch a break out.
The USDA Crop Report last Friday came in at 3.245 b.b. up 46 m.b. from the month prior report and 286 m.b. over the year prior. They put ending stocks at 220 m.b. come September 1, 2010 up 10 m.b. from the month prior and over this past year of 110 m.b. Well, on the surface you see a crop getting bigger and inventory too. The problem here is last year's 2.959 b.b. production was thought to bring ending stocks over 300 m.b. but world demand for high protein beans left us with only 110 m.b. Now the 220 m.b. starting point looks awfully low suggesting to some we will end up less than 100 m.b. by next September. Though the report suggests amply production, demand may again outstrip production. Argentina begins to plant beans late September into October. Conditions remain very dry. We know that last year's dry conditions in Argentina had China turn to the U.S. and overlook beans. With China in the grips of very dry conditions themselves and cutting bean production estimates and selling beans from their strategic reserves to insure that the mandate of more protein into their diet is met. It is probable they gain will over buy at U.S. Ports this October harvest season until they see how South American growing season goes into February. Our current export sales in the new marketing year beginning September 1st are at record levels due to Chinese purchases. Like corn, beans too look to see a rally from harvest low cash bids into next spring as demand will drive the market. The question remains are the lows in or will we see one more dip. Weather is the primary decider. A frost prior October 1st and a test of the 11.00 June high could be eclipsed and lows are in and will hold through next June. No frost and talk of higher production numbers on the October Crop Report and a test of 8.85 is possible. Worse case scenario of 8.40 dreams buy. Near term a close on the week under 9.25 basis November Futures should be sold as at test of 8.85 is next. A change in forecast and frost buy stops should be at 9.80.
Wheat remains the tail of the dog to corn and beans. Last Friday's Crop Report showed ending stocks come June 1st, 2010 will be 743 m.b. up from 667 in our last marketing year and record levels to match record wold ending stocks. This will keep end users buying hand to mouth as needed rather than buying inventory only to pay storage and insurance cost. This soft economy says let someone else pay the costs as long as a mountain of product sits out there. A wheat rally can come only on three fronts. One- crop problems with our now going to seed U.S. winter wheat crop and or problems with other major producers. Two- corn and bean fall rally with wheat in tow. Three- short covering rally. By that I mean trend following funds decide they do not want to be short and start covering or buying short positions back. We are getting close to the corn and bean rally and funds are fat with short profit positions holding a massive 69 thousand short contracts. Surely we can see some short covering before month's end as they pulled wheat up 25 cents off the August low going into the last 8 days of August. Month's end book balancing is a fund staple. However, if corn and beans bottom and funds tire of selling old supply side and weak demand news, we could see funds go from short to neutral and that would see tens of thousand of short contract bought pulling December corn back over 5.00 with no Bulllish news.
For the near term into next week.
Resistance is 5.00. A close over 5.00 buy long. A close under 4.52 on the week sell short for another leg down.