A Wobbly Europe & Nervous Speculators, But In 2012, A Much Bigger US Crop

Bigger Crop 2012We are getting very close to Christmas and the end the 2011.  In Ontario you will still find a few cornfields around, as the rain keeps falling on the wettest year ever to hit southwestern Ontario.  Next year I’m sure we will get the crops planted in April and harvested by Halloween.  Agriculture is like that.  You never know what you’re going to get.

Part of the puzzle of holiday markets has to do with low market volume.  Strange things can happen at a time when traders are taking time off.  Of course so much trading is done now strictly through computer algorithms maybe that no longer holds any resonance.  Needless to say, the Bears have held the day since the end of August.

In many ways, it’s almost like the bears are feeling like bulls.  I say that because sometimes I think the fundamentals of grain have died.  Corn prices continue to show weakness even at a time when the stocks to use ratio is at 6.7%.  I suppose we still have handsome prices compared to history but the combination of noncommercial speculative demand leaving the market along with the slowest moving train wreck in history called Europe have certainly usurped the fundamentals.  It just goes to show how important outside markets are to grain prices.

It is true that corn, wheat and soybeans had their entire ending stocks rise in last week’s December USDA report.  Despite that, shortages of corn are fairly widespread in parts of American farm country.  The US corn stocks to use ratio remained unchanged at 6.7%, soybeans was higher at 7.6% but wheat now is at 41.7%.  Looking into 2012 we need big crops but not as big as what we expected in 2011 based on demand going down.

Much of that slack will be taken up with South American production.  It is been interesting the last few days, soybeans have seen a bit of a bounce based on dryness in Brazil.  However, what do we really know about dryness in Brazil?  It’s hard enough to predict which way the wind will be blowing in southwestern Ontario tomorrow.  In fact in Brazil it might be raining cats and dogs or be even drier than advertised.  Getting that information back from Brazil in a truthful way may surely be a casualty of the process.

As many of you know I am very active on Twitter.  I find it a very useful research tool and when it comes to commodity information, it is almost 2nd to none in picking up the market noise.  I have had several of my South American followers chime in telling me that Brazil is getting dry.  So if Brazil gets dry, that will cut soybean yield, which invariably will reduce world-ending stocks and get soybeans the bounce they seemingly want.  Of course it starts to rain, that makes grain and the whole thing goes all to heck.

Of course underlying the whole-grain fundamental situation is our macro economic forecast.  The slowest moving train wreck in history called Europe continues.  I won’t dwell on that as they inch ever closer inch by inch over the abyss.  The big benefactor of that have been US securities and the rising US dollar, which is like putting brakes on higher Ag commodity prices.  The US dollar is higher now than it’s been over the last 9 months.  Our American friends are taking advantage of their default currency.   All that printed money is gaining in value against the world’s commodities.  However, common sense tells me that can’t last forever.

The difficult part is sometimes getting to forever.  It takes a long time.  As we head into 2012 that process seems to be growing more complex as market bulls have been pushed aside from almost everything else in creation.  Economic doom is predicted everywhere.   Of course, nobody knows, but in some ways it’s a self-fulfilling prophecy.  Something needs to happen to turn the macro situation around.

As we move into the last weeks of 2011, quiet holiday markets should be the norm.  In the distance is the January 9th USDA report which always produces fireworks.  The US corn crop if you believe past reports should come in at 145 bushel/acre.  However, what if, they find some corn and it comes in at 150 bu/acre?

Yes, it would be price chaos, and the gnashing of teeth over USDA would ramp up.  It may or may not happen that way.  As we move ahead it’ll be just another hurdle to jump over.  We got here with a sub par US crop in 2011 combined with a wobbly Euro and nervous speculators.  In my mind, that’s unlikely to happen again in 2012.  The change is likely to be a much bigger US crop.  I’m not so sure about the other.