Crunch Time for U.S. Corn — So Far, So Good

July 20, 2008

  There is nothing like nice weather during July to take some risk premium out of Chicago Board of Trade grain markets. The weather in July for corn pollination, the critical yield-determining period for U.S. corn, has been just what the doctor ordered. Corn likes hot days and cool nights, and the Midwest crop has had both this month. With some timely rains mixed in to reduce plant stress, the late-planted Corn Belt crop is coming back nicely — making good pollination now look like a “cinch” this summer, as one CBOT grain trader said this week. 
     As a result, corn prices have deflated nearly 20 percent since making their record top above $8 a bushel in June amid flood worries. 
    Soybeans have followed along with corn’s slide, with growth also benefiting from the prime conditions in the Midwest. But soy prices have retained more of a risk premium, down 12 percent after notching all-time highs above $16 a bushel two weeks ago. 
    Traders remain more concerned about soybeans, which may have been harder hit by the June flooding — soybeans don’t like their feet wet and are always later-planted than corn anyway, causing their root development to lag corn. The critical flowering and pod-filling stages for beans also trails corn, so continuation of July’s excellent crop weather through August will be key for this year’s yields.
    The very tight end-stocks outlook for both corn and soybeans also provide a daily reminder to traders of the razor’s edge that grain supply-demand will be on in the coming year. Even before the June floods, U.S. corn stocks a year from now were already projected at 13-year lows. Soybean stocks are even tighter. Grain traders and analysts were stunned by the July supply-demand report from the U.S. Agriculture Department which showed a revision to the 2007-08 soybean balance sheet putting “residuals” at a -35 million bushel deficit.
    “That’s never happened before,” said Mike Woolverton, agricultural economist at Kansas State University. “We simply have to have a good harvest this year or we’ll be in trouble.”
    News that Argentina repealed its controversial soy export tax hike on Thursday was really the big pressure point for beans, soymeal  and soyoil as well. Argentine farm protests about the tax over the past four months in effect paralyzed  exports from the world’s third largest soy exporter and  its top meal and oil supplier. 
    U.S. farmers benefited from the situation as world buyers extended their buying out of the United States. There was talk on the CBOT grain trading floor by Friday that Argentina was  back open for business and buyers were booking supplies. 
    Besides the weather  and export factors, traders are also eyeing another wild card for futures — rising concerns that U.S. politicians, due to consumer pain over soaring food and fuel prices, will impose greater oversight of domestic commodity markets. The brokerage industry argues such moves will send business offshore. The talk seemed to be shaking some longs out of many commodities  last week. 
    “There is this sentiment that Big Brother is watching. It just feels like funds are paring back on positions,” one veteran trader said.
    The most heavily traded grain contract, corn, has seen open interest fall nearly 10,000 contracts in the past two weeks. 
    There was a big sell-off in crude oil as well. Crude saw its biggest one day drop since 1991, falling below $130 a barrel this week, the lowest level in five weeks. 
     The threat that Big Brother could be watching may also help grain traders get more traction from CBOT and CFTC on the thorny issue of convergence  — or lack thereof — between cash grain prices and CBOT prices.  
     The Commodity Futures Trading Commission has called a second public hearing on the issue for July 29 (the first was April 22), when the grain industry will air their arguments that CBOT’s hedging process is broken. Record weakness in the cash basis for soft red wheat after this summer’s harvest is driving the latest protests to regulators. Fears that corn and soybeans will face another such debacle with this Fall’s harvest, especially if weather turns damaging and futures spike higher, are also red flags grain users are waving.
     The grain industry blames Wall Street hot money inflating futures prices above real supply-demand and CBOT recalcitrance is reining in such hot money, especially “long-only” index funds. The  July 29 meeting is open to the public and could provide more fireworks. 
    For next week the same factors will influence CBOT markets: weather, politicians bantering about oversight of commodities, value of the dollar,  and the direction of crude oil. 
    USDA will issue its weekly crop progress report on Monday. The weather has been ideal so look for conditions to be steady or possibly improve a little, especially soybeans.

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