Bullish Fundamentals; Bearish Outside Markets

By: Kevin Van Trump

Bullish Fundamentals vs Bearish Outside Markets! The markets were quick to add additional weather premium as we opened the session Sunday night, but those premiums quickly faded as more bearish news and continued evidence of a global economic slowdown were unveiled. The question has to be when will the "fundamentals" in the Ag markets prove to be too much. When will the Ags bust free from "outside" pressures and take a leadership roll. I have to believe we are getting extremely close, as several specific contracts have been able to gain ground despite the negative influence of the outside markets. Just take a look at the July corn contract. This contract has exploded higher the past few days despite the weight of the US Dollar. You have to believe July corn would be even higher if it were not for the outsides weighing on the trade. I believe the US corn market is questioning the USDA ending stock numbers right now. The trade seems very content on building more premium into the price as many inside the industry contend that the strong domestic corn basis means that corn demand is still surging higher, and that we may actually be seeing first hand confirmation that last year’s corn crop was actually overstated by the USDA. Extremely poor grazing conditions have now placed an abnormally high amount of cattle on feed also sending into question the USDA's assumption that corn being used for feed would fall substantially during the March-August time frame. With wheat feeding no longer an option, you would have to think the USDA might be forced to rework a few numbers. You also have to figure that with July corn trading within $0.25 cents of its highs and end-users willing to pay $0.50 to $0.60 over in some areas, that $8.00 corn in fact will pencil for many of them. With that being the case you would think the July contract will try its darnedest to reach those levels. A print of $8 might also prompt a little more selling by the producers and pressure the market some short-term. Obviously, I have no crystal ball, but if you take the current flat price and add the basis premium being paid in most parts, you have to believe fair value is somewhere close by. 

 

* I would imagine soybeans may become extremely volatile these next couple of weeks as traders try and figure out if producers are going to take "preventive plant" or make the switch to more bean acres. 

 

* If rain is added to the forecast for Northern Europe or Russia you may see these grain markets set back, however I highly doubt we stay their very long considering the recent demand and surge in the both the corn and bean basis. Short-term set backs from outside market pressure and weather adjustments should be anticipated, but the overall fundamental direction for corn still seems to be much higher. Look for the "outsides" to have some bearing and effect on determining overall direction, however bullish fundamentals should eventually win out. As long as the "cash" markets continue to pace the field I feel much more comfortable about longer-term price direction. Remember, it is when the cash starts to drastically diverge from the futures that you have to start wondering about a "bubble." 

 

* Many in the trade now believe that "old crop" corn is undervalued at or below the $7.25 level, and "new crop" is undervalued at or below the $6.45 level. Thoughts are that "wheat" may be undervalued or a hypothetical floor may be in place close to the $7.50 level based on current global weather conditions. If weather issues continue a wheat run closer to $10 would not surprise me. Aggressive producers may want to consider re-owning at or below these levels mentioned above with some type of limited risk strategy. I continue to preach not buying into the rallies. Only use the rallies to buy puts if needed. 

 

* Despite the recent rally, many of the big boys are still deeply concerned that most recent US macro numbers have suggested a significant deceleration in US growth, further confirming a belief that the flow of "new" capital into the commodity markets maybe start to ease in the months ahead. There is also further confirmation that this may be happening as well in the emerging economies.

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Morning markets: sowings, dollar, Goldman raise crop prices

by Agrimoney.com

Asian trading hours filtered out the bad karma in markets stemming, mainly, from the eurozone debt crisis.

The steep losses in Western share markets were not repeated in Tokyo, where stocks closed up 0.2%, while Shanghai and Hong Kong shares showed only marginal losses in late deals.

And, importantly for commodity markets, the dollar edged lower, down 0.2% against a basket of currencies as of 07:30 GMT (08:30 UK time) so improving the competitiveness of dollar-denominated assets on export markets.

Add in a report from Goldman Sachs (of which more to follow on Agrimoney.com) warming back to raw materials and the stage was set for gains in many commodity markets. New York crude added 1.1% to return well above $98 a barrel, while London copper rose 1% or so.

'Low end of expectations'

Agricultural commodities had the extra boost of a weekly US crop progress report which showed farmers a little more behind in sowings even than had been expected, with 79% of corn sown, for instance, up 16 points on the week, but behind forecasts of a figure of at least 80%.

(On average, 87% of corn has been sown by now.)

For soybeans, "planting progress came in at the low end of expectations at 41% complete compared to 51% last year and five-year average", Kim Rugel at Benson Quinn Commodities said.

"Granted soybeans still have lots of time on the calendar to get in the ground, [but] the forecast across the south central and northern states were planting is the furthest behind remains wet through this week."

Indeed, at Phillip Futures, Kerr Chung Yang said: "Looking ahead, rainfall this week in the eastern US Midwest and in the South may continue to hamper corn and soybean plantings.

"This further raises the concerns about reduced acreage and yields for both crops."

Wheat's woes

For spring wheat, "seeding did pick-up to its fastest pace of the spring at 18 points this past week to 54%", Jerry Gidel at North America Risk Management Services said.

"But the two largest producing states [North Dakota] don't have half their acres planted yet and nationally 89% is usually done over the past five years."

Furthermore, winter wheat continued to deteriorate – and this despite some recent rains for hard red winter wheat crops which desperately need more.

While the proportion of the US crop in "good" or "excellent" condition stabilised at a low 32%, compared with 66% a year ago, the percentage deemed in "poor" or "very poor" condition edged one point higher to 46%. A year ago, the figure was 9%.

'Very poor weather'

Still, it was cotton which did the best in price terms, adding 2.0% to 157.00 cents a pound in New York for July and 2.3% to 122.50 cents a pound for the December lot.

"US cotton planting advanced from 42% to 57% complete last week, but this still remains slightly behind the normal seasonal pace," Luke Mathews at Commonwealth Bank of Australia said, highlighting that weather in US cotton-growing areas "remains very poor – drought in the west and floods in the east".

Furthermore, futures on the Zhengzhou exchange in China, the top consumer, grower and importer of the fibre, put in another firm performance, gaining 2.6% to 24,295 yuan a tonne for November delivery.

And cotton was, with corn, singled out in the Goldman report.

Scores on the doors

Among the big Chicago crops, soybeans led, on a near-term lot basis at least, managing a rise of 0.8% to $13.84 ¼ a bushel for July delivery, with the new crop November lot up 0.8% at $13.61 ¾ a bushel.

And wheat was not far behind, up 0.7% at $8.08 ½ a bushel for July and 0.6% to $8.55 ¾ a bushel for September.

Corn added 0.6% to $7.58 ¾ a bushel for July, with the new crop December lot spurting 0.9% to $6.76 ¾ a bushel.

China concerns

Better sentiment was also evident in Asia's commodity markets, where palm oil for August added 1.0% to 3,387 ringgit a tonne in Kuala Lumpur, while rubber gained 2.2% to 375.90 yen a kilogramme for the benchmark October contract.

But can rubber's rally last? Besides the seasonal recovery in production in top exporter Thailand, "there is also concern that China's demand has slowed in recent months, in part due to series of tightening measures by Beijing to curb inflation", Mr Ker said.

China's imports of natural rubber fell 18%, month on month, to 175,200 tonnes in April.

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Goldman reverses 'sell' call on commodity futures

by Agrimoney.com

Goldman Sachs has, in a report forecasting "sustained elevated crop prices" but cutting hopes for cattle futures, reversed last month's negative call on commodities which sent raw material prices tumbling.

The investment bank, which last month cut its rating on commodities to "sell", said it was "turning more bullish", after lower prices reduced the risk of consumers cutting back on raw material demand, and of inflation being stoked to uncomfortable levels.

"With prices now more in line with near-term fundamentals and price targets, we believe that the risk/reward once again favours being long commodities," the bank said, returning to an "overweight" call on raw material investments.

Goldman lifted its forecast for Brent crude as of the end of the year to $120 a barrel, from $105 a barrel, and recommended fresh long positions in oil, copper and zinc.

'Sustained elevated crop prices'

For crops, the bank said that risks to corn and cotton, especially, were "skewed to the upside", given the threat that production setbacks, such as poor weather, pose at a time of weak inventories.

"While we expect high crop prices to generate a global supply response in 2011-12, we believe that the concurrent tightness across crop balances and our expectation for continued strong demand will limit the recovery in inventories, and points to sustained elevated crop prices," the report said.

Indeed, firm data on crop use in biofuels, livestock feed and exports showed that "demand destruction has yet to occur".

For wheat, over which Goldman has been more lukewarm on price prospects, "continued poor weather is creating risks of an even larger global deficit than we currently expect and presents upside risk to our neutral price outlook".

Corn vs soybeans

However, the bank flagged a warning over soybeans which, while remaining its preferred crop in terms of price prospects, could see its supply squeeze eased by a switch to the oilseed by US farmers giving up on corn, for which sowings have been heavily delayed by rain.

"Sustained planting delays would likely increase the upside to corn prices over the next 12 months while reducing our forecast soybean upside," the briefing said.

The bank's forecast for soybean prices were cut by $1 a bushel on three, six and 12-month time horizons from those stated two weeks ago.

'Tightened supplies'

Hopes for some cattle futures were also reduced, after Friday's data showing placements of animals on US feedlots soaring 9.9%, year on year, last month, twice the pace that traders had expected.

"This larger feedlot count points to strong supplies of live cattle through the summer and in turn lower live cattle prices," Goldman said.

Nonetheless, the bank kept a forecast that Chicago's near-term live cattle contract would stand at 120.00 cents a pound in a year's time, citing the limited supplies of further feeder cattle ready for fattening in feedlots, a factor highlighted to Agrimoney.com readers on Monday by leading analyst Steve Meyer.

"These sustained strong placements since last fall have tightened feeder [cattle] supplies significantly, pointing to lower placements in months ahead and lower fed cattle supplies by year end," Goldman said.

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Il vulcano Grímsvötn

Scene da un altro mondo sono arrivate nelle ultime ore dall’Islanda. Il vulcano Grimsvötn ha iniziato ad eruttare lo scorso fine settimana scagliando colonne di cenere, vapore e fumo fino ad una quota di 12.000 metri. Esplora altre foto nei nostri risultati di ricerca.

Foto di Sverrir Thor, Agust Gudbjornsson, NASA Goddard Photo and Video, sigurlauglinnet93 e orvaratli.

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Corn Market Continues to Focus on Production Prospects

Source: University of Illinois

Two weeks ago, corn prices were declining rapidly, and experts pondered the likelihood of a recovery similar to those of September 2010, November 2010 and March 2011. The answer came quickly, says University of Illinois Agricultural Economist Darrel Good.

"By May 23, July 2011 futures traded within 14¢ of the contract high, and December 2011 futures traded within 7¢ of the contract high on May 19," Good notes.

From the low on May 12 to the recent highs, July futures increased by $1, and December futures increased by 58¢. Although the larger increase was in old-crop prices, the recovery was driven by concerns about the new crop. The price behavior was an attempt to slow consumption of old-crop corn in the face of concern about new-crop supplies, he says.

"Domestic consumption of old-crop corn is likely proceeding at or above the rate projected by the USDA. 

Ethanol production during the first half of May occurred at a rate 4.1% above the pace in May 2010. To reach the USDA's projection of 5 billion bushels of corn used for ethanol and byproduct production during the current marketing year, ethanol production from now through August needs to exceed that of a year ago by 2.4%," he says.

The pace of domestic corn feeding is not known, but the USDA's May 20 Cattle on Feed report supported ideas that feed use continues to be large. The number of cattle in feedlots on May 1 with capacity of 1,000 or more was 7% larger than a year earlier. Placements into feedlots during April were 10% larger than placements of a year earlier and were the second largest for the month since reporting began in 1996, he says.

"The number of milk cows on farms during April was 1.2% larger than a year ago. The number of broiler-type chicks placed for meat production continues to run near the level of a year ago," he adds.

Exports of U.S. corn continue at a rate below that needed to reach the USDA projection of 1.9 billion bushels by the end of August. For the four weeks ended May 19, export inspections averaged 35.2 million bushels/week, he says.

"To reach the USDA projection, exports during the final 15 weeks of the year need to average 41.1 million bushels/week. The pace of new export sales suggest that exports can reach 1.9 billion bushels by the end of August, but the pace of shipments will need to accelerate," Good says.

In many markets, the recovery in cash prices since May 12 has been larger than the recovery in futures prices as basis levels continue to strengthen, he adds.

The average spot cash price of corn in central Illinois on May 20, for example, was 11¢ under July futures, compared to 24¢ under on the same date last year. Cash prices reached new highs in some markets, says Good, adding that basis also remains strong in export markets where demand appears to be the weakest. The average bid at Illinois River points north of Peoria on May 20 was 9¢ under July futures, equal to that of a year earlier, he says.

"The strong basis levels being experienced in many areas may reflect relatively small inventories remaining in the hands of producers. The March 1 USDA Grain Stocks report revealed that producers held a much smaller portion of the crop than in 2010. Monthly USDA estimates of average farm price received also suggest that farmers forward contracted a large portion of the 2010 crop," Good says.

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Breadth Divergence Between Large and Small Caps Continues to Widen

by Bespoke Investment Group

Whenever the major market indices have a big move in either direction, it often helps to look at the breadth of their underlying components in order to gauge the health of the rally or the decline. In early May when the small cap Russell 2000 hit a new high, we noted that cumulative breadth in the index had yet to hit a new high, thus not confirming the rally to new highs. Unlike the Russell 2000, breadth in the S&P 500 did hit new highs as the index itself also rallied to new highs.

In the chart below, we have updated the cumulative breadth for both the S&P 500 and Russell 2000. As shown, breadth for both indices is off of its peak levels. However, the downtrend in breadth that is forming for the Russell 2000 is considerably more well-defined than the S&P 500. Whether or not the S&P 500 follows the lead of small caps is unknown, but until the pattern for small caps changes, investors would be best served staying away.

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