10/14/2011

Grains Analysis

by Tim Hannagan, PFGBEST

1-800-935-6487

thannagan@pfgbest.com

Tim Hannagan is one of the nation's most prominent grain analysts. His report for Friday, October 14:

MORE USDA NUMBERS THIS WEEK

CORN
During the past trading week: Wednesday's USDA monthly crop report had no shocking surprises but saw the government ease up on its prior report stance, which was to cut usage numbers to offset production declines. That occurred in a very timely way as we note the adage, Harvest Acres Tell No Lies.

The two prior crop reports went against trader psychology that production has shrunk while demand has become increasingly robust.

USDA left corn yields unchanged at 148.1 per acre. It put production at 12.433 million bushels, down 64 million from September estimates.  This was 59 million bushels less than the average pre-report guess, and 14 million under 2010 production.

As expected, USDA cut exports 50 million bushels and left feed and ethanol usage unchanged. Production declines and usage declines were largely an offset.

Due to the increase on the Sept. 30 Quarterly Stocks Report, the beginning stocks number was up 200 million bushels. That pushed up ending stocks forecast as of August 30, 2012, to 866 million bushels versus 672 last month and over the average guess of 795.

This news left December corn futures down five cents on the day. Note: Though the ending stocks number increase was bearish on the day, it is an extremely bullish number going into 2012. We enter the new marketing year far more bullish from a supply and demand viewpoint than we did entering this year.

Also - funds only care about ending stocks. They don't care how you get to the number, whether it represents production or usage. It's the bottom line and what they trade. They see corn ending stocks as near-term price neutral and long-term bullish.

WARNING FOR PRODUCERS: Sell only what is necessary at harvest time to pay debts that are now due and operating costs through to April.  Store the remaining grain to sell at measurably higher prices late next spring, as early summer 2012 highs will exceed 2011.

SOYBEANS
Beans settled up four cents Thursday as report numbers were under estimates. Production was put at 3.060 billion bushels, down 25 million from September and 269 million less than 2010. Carryover or ending stocks were 160 million bushels, off 5 million from September, off 65 million  under September a year ago, and 21 million under the average guess.

USDA lowered exports 40 million bushels and beginning stocks dropped 10 million; harvested acres were down a little on the month and were 3 million less than the year prior. Like corn, the bean number changes were too small to send off any alarms.  These numbers certainly set up 2012 to be a much more fundamentally bullish supply demand year over 2011.

WHEAT

Wheat took the hit. In September, USDA put ending stocks at 761 million bushels.  Wednesday's report came in at 831 million, up 76 million over the average pre-report trade guess. Traders were positioned for a lower number, so the surprise pushed wheat down 34 cents on the day. The report lowered exports and domestic usage of wheat fed to animals.

Also, world stocks rose 8 million metric tons from September. I'd call the report a basic yawner.

On Thursday traders said, What report? Where is crude oil? Stocks?  The U.S. dollar?

OVERALL FUNDAMENTAL SUMMARY

Demand is now a more pronounced pricing force than supply. Traders will wait now to see the harvest wind down in November and whether further cuts will come in the actual harvested acres number that most believe should be lower.

Corn demand is picking up with China in for four consecutive weeks.  In the first of those weeks, China just nibbled, purchasing 57 to 182 total metric tons.  But this week, Chinese purchases of 900 tons may signal the beginning of more aggressive purchases.

Weekly export sales reports are showing China is buying corn for 2011-12 delivery AND 2012-13 delivery. They are probably purchasing in the 2012-13 marketing year with intent of cancelling and moving the delivery dates to the current year. This keeps things spread out enough that they hope traders don't rush in and start running up prices. We are seeing purchases of corn from unknown destinations but then later weekly export sales switch the unknown purchasers to China. The Chinese are playing a game of mirrors but it's clear they are buying.  Now.

Soybeans are seeing a very aggressive export market with China in, consistently, for eight weeks, purchasing for 2012-13 crop year. This aggressive bean buying has traders aggressively buying on any price breaks.

Talk of potentially dry el-Nina weather conditions in Brazil and their estimate that Brazilian soybean production could be down 3 million metric tons over last year may lead to China checking out U.S. beans as a hedge against South American growing problems.

With harvest underway at a record pace in beans, the last week showed a 31% jump from the week prior. Growers look to sell beans at harvest to pay debt due and leave the unusually wet corn in the field longer to dry and save drying costs.

I foresee farmers storing more corn this harvest and holding back sales until late next spring or early summer based on extremely low ending stocks.  The potential record 2012 corn exports could lead to corn prices exceeding the 2011 high. This should keep corn from revisiting the recent $5.72 low basis December.

TECHNICAL ANALYSIS

Support for December corn is $6.18. A close under and $5.98 is next. Resistance is $6.50. A close above that sets up a move to $6.68.

November bean support lies at a weak $12.60; stronger support is down at $12.24. Resistance is $12.82 a close over points to $12.95 next. December wheat support is at $6.00 then down six cents to $5.94. Resistance is $6.50 then $6.70.             

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report.