Keep Both Hands On The Steering Wheel, It’s Going To Be Coming From All Sides Soon

Its getting hot and dry him or at least that’s what some market watchers would like me to believe across the US corn belt.  I had one corn buyer here in Ontario tell me recently that he doesn’t believe any of the hot and dry talk unless it is July or August.  If it is hot and dry in July he says that is a problem for corn and ditto for soybeans if it happens in August.  So when the USDA WASDE report was released last Tuesday, I wasn’t too surprised USDA had not cut corn yield keeping it at 166 bushels per acre.

The USDA numbers pegged total corn production to be 14.79 billion bushels with the new crop domestic ending stocks finishing at 1.881 billion bushels.  The USDA also reduced the domestic soybean stocks in the United States for both old crop and new crop marketing years.  The 175 million bushel crop ending stocks in 2011/12 is a real flyer.  Fairy tale it might be, we’ll see what happens in August of this year.

In Ontario, basis levels for corn have finally changed reflecting some of the higher basis levels in the United States.  The vomitoxin levels in the 2011 crop were much more difficult than originally expected.  This had the dampening effect on corn basis all winter and spring.  The new crop bids for corn in Ontario are fluttering around $4.60 a bushel reflecting the realization that there is a big crop in the fields.  I expect 2.1 million acres of corn growing in Ontario fields.  At the present time that crop looks tremendous, almost like 2010 when yields just got bigger and bigger.  Ontario corn buyers can see this coming and they are in no hurry to build up new crop prices.

This is also reflected in the large inverse in the futures market between the July and September corn futures month.  At the present time there is approximately a 78-cent difference between the July and September futures months.  Corn is literally running out in many parts of the American Midwest. The basis levels for old crop corn today in Decatur Illinois was +79 over the July.  In Ontario we were at -10 under.  So many new crop buyers in the United States can’t wait to get to September when the 1st new crop will be coming off the fields in a large volume.

With the June 29th USDA report looming in the distance many of us are setting up for the shoe to drop.  In my mind I don’t think that is happening June 29th. Earlier, the USDA had predicted 95.5 Million acres of corn to be planted in the United States and I think that number will be higher on June 29th.  Our American friends love to plant corn and I believe they kept those planters rolling even as soybean prices went higher.  I expect soybean acreage number to be lower than expected on June 29th and then we will watch what mother-nature does to the crop.  If she is not kind, all bets are off.

We have all been there before when looking at the supply of agricultural commodities.  You just have to look at what happened last winter in South America when both the Brazilian and Argentinian soybean crops was much less than advertised.  What is much harder is understanding what the demand for these commodities might be.  For instance in last Tuesday’s WASDE report the USDA actually raised corn ethanol usage but decreased exports.  US corn exports have been anemic lately, there’s even been talk of importing cheaper Brazilian corn.  That is somewhat like importing snow to Canada in January.

Of course the even bigger factor that I think we all are waiting for is to see if our noncommercial speculative friends get back into agricultural commodities in a big way.  At the present time they are looking at the supply and demand equation just like we are, not wanting to go long until they see what might be happening.  Of course with the problems manifesting in the European economy over the last week, more and more of this noncommercial money is going into the US dollar and US treasuries.  It’s a safe bet especially at a time when the returns on capital are so fickle.

So we have reached almost the tipping point of decisive grain market action as we stare into the end of June.  Yes we want our noncommercial friends to come back in the grain market.  They have been good to us in the past and it may surely happen again.  However, it’s got to be really hot and dry for those players to get in the game and clearly as of June 14th, we are not even close to being there.  The reckoning is coming.  For most of us, we’ve been here before.  Keep both hands on the steering wheel, it’s going to be coming from all sides soon.