Earlier in the week, I mentioned on Twitter that “Chaos Theory” might be incubating in the grain market. In many ways, it just seemed to be one of those days, when you take risk off the table. Greece continued to be a problem and the market seemed satisfied with the crop finally being planted. It wouldn’t take much. One little butterfly fluttering around somewhere would surely cause a problem. Boom, grains went limit down that day. It was like a trap door opened under the market.
There were a myriad of factors, which put the corn market on its ear. Much of it had to do with investment money just looking for another home. Keep in mind that “frequency trading” and computer servers running “trading system software” do most of the trading. It is all interconnected with other commodity markets around the world. Somebody starts a rumor about Russia boosting grain exports and it might be the catalyst for market action. As we move ahead to June 30th, the USDA report looms as a major market mover.
In Canada, we don’t have the same impact on world grain prices like they do in the United States. Needless to say, we have had our production problems this year. Southeast Saskatchewan and Manitoba have had terrible problems with flooding. We’ve also had much difficulty in Ontario farm country getting the crop in the ground. I was interested in Statistics Canada telling us that they expected 1.875 million acres of corn to be planted in 2011. I think that figure is closer to 1.6 million acres with about 400,000 acres of that being planted in June. As one North Dakota farmer told me this past week, his crop will need antifreeze in order to make it to the finish line. Ditto for Canadian crops too.
Of course outside markets have been very jittery themselves and this always affects the grain complex. I often wonder where the $200 per barrel oil bulls are? Oil had been trading around $100 mark for several weeks but has since dropped back to approximately $91/barrel. The oil market was rocked today by the international energy agency (IEA) which said they would release 60 million barrels of oil into world markets in the coming months to balance off the lost Libyan oil production. The oil market tanked on the news and many observers were watching to see how OPEC would respond.
That will be key. OPEC is very sensitive to oil price optics for obvious reasons and they are making scads of money at $91. In fact you could make the argument that the most expensive oil in the world is from the Canadian oil sands, where depending on who you may believe might take $70 a barrel to make a profit. OPEC surely has their ideas on where they would like oil to go to sustain their cartel. In the balance lies the price of gasoline, the price of ethanol and somewhere down the list, the price of corn.
So oil is in flux and so is the US economy. For instance US Federal Reserve chairman, Ben Bernanke had his regular monthly schedule news conference this week where he tried to put lipstick on a pig. However, no matter how he tried the US economy is still in bad shape, job numbers especially are very poor. It was an indicator that we are still on the long way back in the US. Higher oil prices will only hurt that situation and maybe that is one reason why the Americans who are part of the IEA endorsed the release of the oil reserves. If the US economy cannot have positive job growth at $91 oil, it will only get worse at $100 plus.
All of this is negative for grains in a fundamental environment where we need more of everything. However, maybe the $1.60 lost in corn futures over the last two weeks is the froth induced by noncommercial traders. I dunno. The June 30th report from USDA should clarify exactly where we are with regard to supply and demand and whether that 5.2% ending stocks to use ratio in corn changes. I don’t think the crop growing in the field in the US corn belt is as good as advertised. However, I am not the USDA and you should all remember that they set the goal posts. The upcoming report needs to clarify what the crop is like and where we are going.
Sure its been a tough spring in a lot of places. Flooding continues as I write. However, the dreaded heat “dome of doom” is nowhere to be found. Its not even on the radar long term. The market over the last two weeks is saying the crop is there, despite all of our production problems. Right now, I’m a skeptic. However, July 4th weekend is on the way. Maybe this crop is made. Hate it when I’m wrong.