The Bulls Will Just Have to Refocus

Bulls RefocusThe air is growing chilled over southwestern Ontario.  On my farm what was one the most challenging wet springs in history has been rescued from benign weather with adequate moisture all summer.  My late crops look strong going into the home stretch and only now are my soybeans starting to turn that beautiful yellow color.  As I battled the demons of this past wet spring, I couldn’t have written a better script for the rest of the way.  Harvest time is almost here.  I hope they keep that frost in Western Canada.

Of course our markets have responded over the past couple of weeks to better-than-average early harvest results.  A strengthening in deferred futures months has substantiated this, as commercial traders and end-users don’t seem to be too worried about supply.  Maybe, that might all be folly, but that’s what markets are for.  This past week we got the latest flavor of the month from the USDA on crop size and ending stocks.

The September 10th USDA crop report pegged the corn yield at 148.1 bushels per acre down from the August estimate of 153 bushels per acre.  This reduction from USDA was slightly greater than the general trade estimates.  Production is now set to come in at 12.497 billion bushels with corn usage being pegged at 12.760 billion bushels.  This was a reduction in corn usage by approximately 400 million bushels from the August report.  It reduced ending stocks down to 672 million bushels with the stocks to use ratio slightly decreased to 5.3%, the tightest since 1995 and 96.

What was completely obvious from the USDA numbers was not only the yield reduction but the rationing of corn demand.  400 million bushels is nothing to sneeze at.  Yes, there are people within the industry who scoff at that but deferred future spreads were giving clues that commercials were growing weary of buying corn close to $8 a bushel.  The October USDA report will surely be incredibly interesting to see if this trend continues even after our recent price break.  In fact, the December corn futures contract has decreased approximately $.80 over the last 2 weeks.  This happen, despite worsened corn conditions.

The USDA raised soybean yield to 41.8 bushels per acre from 41.4 bushels per acre last month.  The crop size rose to 3.085 billion bushels with the harvested acreage figure of 73.8 million acres.  The resulting ending stocks were pegged at 165 million bushels up 10 million from the August report.  The ending stocks to use ratio has been pegged at 5.2% which is much more comfortable than the corn side of the ledger.

All wheat ending stocks rose to 761 million bushels from the August 671 million bushels or 33% of expected total use.  We may have been the most bearish of all but still, unless they get rain in the southern plains for next year, world wheat stocks will feel the pressure.

Despite the bullish tone in the corn numbers reports from early harvest in the US Corn Belt are better than expectations.  That line seems to be key.  Is pretty clear that yields are less than last year and even less than average.  However, expectations had grown so dim throughout a very dry summer that actual yields are tending to be significantly better than expectations.  Yes, this crop is variable and yes futures spreads are strengthening but maybe at the end of the day, all this new crop technology is paying off.

Of course we don’t know what prices will do next.  The high is always in the few days or weeks after you’ve realized it.  It’s completely obvious to me that there is a demand brick wall at about $7.50 to $7.75 a bushel for corn.  At that point it seems that demand drops off and noncommercial traders get less interested in grain.  That’s not to say we could see a lot higher prices because anything is possible.  Just today, I read a past article of mine where the inflation adjusted price of soybeans from the all-time high in 1973 of $12.90 in 2011 would have a present value of $32 bu.  So we have a long way to go in real terms.

All of this has been happening in a macro economic environment, which couldn’t be more negative.  We have large European banks in big trouble as well as small European countries.  In fact central banks are trying to support each other.  At the same time the Bank of America laid off 30,000 people last week.  The Bank of Canada governor as well as the US Federal Reserve chairman has said they are not going to raise interest rates until at least 2013.  The Bank of Canada chairman even said he might cut them.  Despite that, the grains have been in a bullish tone for quite some time.  That’s almost the most impressive thing about agricultural prices over the last 12 months.

As we move ahead into the fall there will surely be harvest pressure on prices, even with the short crop.  Around the world in places like Argentina, Brazil, South Africa and the Ukraine people are trying to grow corn.  When you can smell a profit in agriculture, it doesn’t take long.  In 2012, I see more of the same, but clearly the bears are moving in.  The bulls will just have to refocus.