The Grains Review
For the week of October 10, 2011
By Matthew Pierce

Coming back on this Columbus Day holiday the market is set up a little differently. The stocks report was obviously bearish across the board. Month end activity added to pressure as traders took corn limit lower testing the 40-cent barrier for the first time. The market then consolidated right at this level before bouncing slowly last week and into the overnight which extended gains for corn comfortably above the $6.00 level. This is the exact pattern I saw on the daily chart following the previous 4 quarter ends. If the trend holds, and I think it should, this could be in for a sizable rally this month and over the winter. The upside is limited as compared to earlier this summer but a rally back to $7.00 is easily achievable in my view. Beans collapsed following the report but unlike corn it has less incentive to rally from current levels. I talked to people far smarter than myself over the weekend and today and they all agree that the bean corn spread is in for a hell of a ride. This could rewrite the record books in favor of corn with the size of bean stocks a bearish factor heading into the WASDE report this Wednesday. Chinese demand has been happily met by South American origination with Argentina and China in bed again over the weekend. A phyto sanitary agreement for corn exports was reached with China which means more demand will shift for the expected blow up in corn interest from China. This gives the USDA a possible out on this report for corn stocks. Corn demand is coming back with a vengeance after the $1.60 price break so the USDA should add back a large chunk of the 400 million they took off just last month. If they add back any exports they have a balance sheet issue in corn while beans appear more bearish from even current levels. Rains in S. America were solid over the weekend but less than some were expecting. This is a bigger issue for the expected corn acreage expansion than beans at this point so even if it is bullish for beans today, it shouldn’t help in the long run. Wheat consolidated based on strength in Minneapolis as their MWZ-MWH spread has exploded again helped by demand from Pacific Rim meeting a lack of sellers. Producers are sitting on stocks after the recent harvest because they are smart enough to realize they are in control. Protein wheat is a high demand product and they have it all. The MWZ-WZ spread reached $3.00 late last week with the MWH-WH sitting around $1.90.

If Greece can pay its bills and Germany holds tight, the Euro will rebound against the USD into the end of the year offering a positive bias for commodities. Demand from China is another factor here so watch what they are taking as well as where they are getting it. Wheat will be under pressure as Australia enters the export market following another solid early production period adding to feed wheat woes. Ukraine eliminated their export tax over the weekend meaning more pressure on wheat versus corn so this is another spread that may rewrite the record books. I know wheat appears attractive versus corn but it is a dog.

The fundamental side will be better defined on Wednesday morning with a fresh WASDE report. Changes are expected all over the place. Corn yield, production, stocks, acreage and consumption will all adjust. Beans stocks should increase adding pressure to the fund long.  World wheat stocks should increase adding pressure to CHI wheat with the current 42K short still holding potential to add.

The macro side needs to see how the Volcker bill comes out on Tuesday, wheat the FOMC minutes say on Wednesday, how jobless claims come out on Thursday and finally what sentiment is coming out of the G20 meeting on Friday.

Overall it will be a higher start to the week as world pressure abates slightly. Oversold short term corn conditions entice buyers looking at the technical trend as a reason to buy. Wheat rallies with help from Minny with KC watching rain forecasts closely. The trend is higher today but do not get married to upside momentum ahead of WASDE.

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.

Last Edited By: pitgurufk Oct 10 11 11:11 PM. Edited 1 time.