OVERARCHING 2012 THEMES FOR GRAINS
- New highs are possible for corn and soybeans due to weather conditions (hot and dry)
- Soybean (meal) feeders and bio-fuels producers vie for limited cash supplies
- Livestock producers need corn and vie with ethanol producers for limited cash supplies
- Funds continue to dominate trade
At the start of 2012, we anticipated and reported on a number of events and continued to summarize them in routine commentaries at
For old-crop July futures, we felt the ongoing drought in the major [soybean] growing countries of Brazil and Argentina during January and February would create a grain rally into late February followed by a break in prices in March, leading to another good buying opportunity. The basis of this thought was, no matter how bullish the weather was, large trading funds always clean out their books before the planting season begins. What actually occurred?
Corn rallied 60 cents from the January low to the February high, then it broke into late March with a drop of 70 cents.
Soybeans rallied 80 cents and lost 40 cents on the break.
Wheat rallied 70 cents and then followed up with a 70-cent drop. Right on schedule. Normally this correction would occur in late January.
Next, we foresaw a second buying opportunity on this break, based on a projection that there would be a rally into the beginning of the planting season, in May. We wrote that tight ending stocks for corn and beans would result in higher prices in each of those markets to ensure farmers plant enough acres of each to keep ending stocks from declining further. The March low to May high rally was 45 cents for corn, 90 for wheat, and $3.05 beans! Yes, beans led the rally.
The third highlight we projected at the start of 2012 concerned new crop futures. We suggested there would be aggressive buying of new crop November beans and aggressive selling of December corn. Fundamentals suggested farmers would plant more corn rather than beans for the sake of increased profitability. On January 2, December new crop corn was trading at $5.98, but in May the price had dropped to $5.00. That same time, November beans were trading at $12.25 and then rallied $1.75 to the $14 level in May! The spread between December corn and November beans widened by $2.73. The March 30 planting intention report validated the spread trade by coming out with a increase on the year for corn of 3.7 million acres and decrease on beans of 1 million acres.
And the final summation of what we'd brought to your attention in January was that a late spring wheat rally would occur. Our basis was, that even with large U.S. and world ending stocks of wheat, we should expect a late spring rally to the season's high, as funds holding large short positions on expectation of large inventories would buy back those shorts as the winter wheat growing season uncertainty entered. On May 7, as harvest began, July wheat sat at its seasonal low of $5.90. Before month's end, it traded up to $7.22 - the high of the year - a solid rally as spring came to an end.
Now that we have celebrated the success of trading major events in the first half of 2012, how about the last half of the year? We are entering the key growing period for corn and beans when yields are made or lost - between July 1 and August 20 - as corn and beans go through the pollination and pod-setting stages. Weather will be the only determining factor as to the final yields and production.
The first six months of 2012 in the U.S. were the warmest since records kept, and the period was also among the top 10 driest on record. Since the first acres went to seed in late April, there have been only two weeks of rain prior to June 15. If this pattern of generally warmer and drier conditions persists until August 20, expect new contract high prices to occur within that time frame, and expect below-average yields.
And, if that weather rally materializes, we would still expect a harvest break off the contract highs. Producers will see the lowest harvest price on the first 25% of harvest, but as harvest progresses, I think there will be a price rally.
Here are the reasons why demand will be strong to buy and own cash grain. Soybean ending stocks for the 2012-13 marketing year are projected as of the June USDA monthly crop report at 140 million bushels versus 175 million for the marketing year prior and compared with 215 million the year before that! An ending stocks inventory of 140 million bushels would be a 4.3% stocks-to-use ratio, the lowest since 1965. Feeders in need of soy meal for the winter feed ration, bio-fuel producers in need of soy oil, and exporters of beans will scramble for ownership of this disappearing crop.
Corn faces a similar situation. This year's corn ending stocks are pegged at 851 million bushels versus 1.128 billion last year. The 851 million bushel figure represents about a 45-day supply. There was some early thinking that the increased acres planted this year would have ending stocks climbing back to 1.7 billion bushels if weather was good. However, that's only a remote possibility because hot, dry conditions this growing season has the trade thinking that ending stocks between 1.1 and 1.4 billion bushels would be the maximum.
Since corn acres climbed this year at the expense of bean acres to ensure we wouldn't run out of corn, traders know next year beans will take from corn and growers will plant many more acres to beans on fear of running out. Corn traders will see harvest low prices as potentially the lowest corn prices through 2013 and until the 2014 crop year reverses the planting trend again. Feedlots, ethanol producers in need of corn, and exporters will aggressively by cash corn to garnish ownership on fear of having to pay one or two dollars more next year.
FRIDAY CHECK THIS: The wildcard is if the June 29 final planted acreage report shows a surprising change in how many acres of each grain was plant.