The Grains Review
For the week of September 12, 2011
By Matthew Pierce

Coming back from the weekend the trade ground lower overnight in anticipation of a bearish report. The trade on Friday was anticipatory in many ways with positions taken off locking in profits or losses eliminating risk on both sides. In corn traders saw heavy front end option activity (CV) with this bought to cover flat price positions or to speculate with established risk. The market was eagerly awaiting the USDA numbers with many eyes on Europe over the weekend with a rumored Greek default in the works. This did not occur but Asian and EU equities are on the defensive adding to the bearish world undertone starting the week. Energies are on the defensive due to consumptive worries and confirmation that Shell found a major reserve of crude oil they expect to tap within the next 6 months.

Heading into the day session traders have WASDE to digest with corn yield estimated at 148.1 versus the average guess just larger than 149 bpa. Bean yield is estimated at 41.8 versus the average guess of just larger than 41 bpa. Remember that these guesses are gatherings of actual yield expectations, not what they think the USDA will put out on this report. The actual trade guess is much closer to a 146 at this point but no one felt the USDA would be this aggressive. The initial reaction is bullish for corn with the OTC market trading 745 basis Dec but fading as I write. I cannot see that in the numbers especially if you look at the world stocks numbers. New crop world stocks came in at 117.39 MMT which is 5 MMT larger than the average guess and 2.3 million above the largest prereport estimate. Corn ending stocks were lower but were 40 million above the average guess so I cannot see the real bullish impact for the trade at current levels. If it were trading at $6.50, yes, this would be bullish but trading at $7.35 I cannot see a bullish lean on this report. If the USDA had lowered harvested acreage in either beans or corn I could agree with bulls but this will have to wait until October at the earliest. If the USDA had lowered world ending stocks for any commodity I would agree with bulls. The corn yield drop is not enough for bulls with the drop in consumption easily offsetting the reduction. The reduction of 100 million in exports and feed for corn was expected by the trade with heavily bullish proponents exclaiming that the USDA reduced demand too much. Talking to my customers, the placements of chickens are falling and cattle are being sold early and often. This does not jive. Wheat saw no impact outside of new crop ending stocks rising due to a drop in exports. Feed stayed the same and corn collapsed by 200 million offering evidence that cattle on feed and chicken placements are dropping as feed costs rise. This is the demand destruction I have discussed recently and I look for more in the coming months if we do not see a drop in both basis and flat price corn. The overall impact of the report is mixed to bearish. Beans are bearish, wheat is neutral to bearish while some want to talk corn bullish. I do not see it from the report but help from the USD and cotton may be enough to help corn stay positive.
Outside of the report this morning traders have many macro factors to deal with. The Euro was 1% lower overnight only to rally 1.5% now trading around 100 higher versus the USD. This is a bullish impact for all commodities today with energies not using the momentum. Crude is lower which is dragging cotton lower after early bull spread momentum fades. There is a genuine squeeze going on in cotton right now with the production in Parana falling dramatically short of expectations catching many over hedged. Just think of what is happening during the MUW delivery period and apply it to this scenario.

The overall feeling now…many minutes after I started this wire is more bearish. Outsides may help stem the bleeding but the Euro debt situation, weakening softs, neutral to bearish USDA numbers, overbought technicals and way too much weak length all point to a weaker trade today and through this week as the US harvest rolls along. I feel this is simply a breather in the agricultural markets, especially row crops. Markets still have plenty of upside potential after things correct. I would look to use this opportunity on the drop to expand coverage in corn before volatility jumps making it unattractive. Bean volatility is way too cheap in my eyes with early talk of La Nina in Brazil and Argentina offering chaotic opportunity for the next many months. Look lower right now but do not take the bull horns off, just sit around and wait for the next leg higher.

Disclaimer: Past performance is not indicative of future results. Trading futures and options involves substantial risk of loss and is not suitable for all investors. Fundamental factors, seasonal and weather trends, daily news, and other current events may have already been factored into the markets. The use of stop loss or contingent orders may not protect profits and may not limit losses to the amount intended. Certain market conditions make it difficult or impossible to execute such orders.