Commodity Corner

Views on commodities and energy

USDA shows its optimism on corn, traders show doubts

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ohio-corn-field.JPGThe government came through with good news for world grain users, food aid buyers and food inflation watchers on Tuesday, forecasting bumper crops of wheat, corn and soybeans and easing the fears of many who thought a cold rainy spring and worst U.S. Corn Belt floods in 15 years during June would spell heavy crop losses.
    There was only one problem: the markets don’t believe it. After a day and a half, Chicago Board of Trade corn prices are up 8 percent, soybeans up 7 percent and wheat up 5 percent.
    The bounce in the markets, which has come despite a stronger dollar (bearish for export demand), has been a reflection of doubts among long-time crop watchers about USDA’s assumptions for yields and weather.
    Analysts had been forecasting a rise in corn production from USDA’s July report for weeks given the greenhouse-like conditions ideal for Midwest corn since early July.
    What they did not expect was the magnitude of the USDA’s optimism. USDA boosted its corn yield forecast to 155 bushels per acre, up a whooping 6.6 bushels from its July forecast.
    And that was after a special USDA phone re-survey of thousands of flooded out areas hit in Iowa, Illinois, Missouri, Minnesota and other corn states in June.
    The aggressiveness of USDA’s yield boost stunned even the most veteran CBOT grain traders given the immaturity of the crop and unpredictability of Mother Nature.
    Both corn and soybeans are more vulnerable to an early frost since their development is running one to three weeks behind normal after a wet spring followed by flooding in June. The biggest threat is a freeze in September, weeks before many crops mature and a normal October frost in the upper Midwest.
    And given the tendency toward cool Midwest weather this summer an early freeze of plants – and yields – is seen more likely than other recent years. 
    The National Weather Service will issue its September forecast for temperatures on Aug. 21.
    Even U.S. Secretary of Agriculture Ed Schafer told Reuters in an exclusive interview on Tuesday following the report: “We look at the crop reports today and they’re good. But you also note that they are good assumed on normal weather patterns. If we start getting some early winter, early frost — things could change.”
    But so far so good. Corn conditions have improved for the past several weeks, benefiting from the cool, moist summer.
    Soybeans have a different story as USDA cut its forecast of that crop 27 million bushels to 2.973 million — reflecting a 2.6 percent drop in expected yields to 40.5 bushels per acre.
    However, all CBOT traders and analysts know that the bean crop is “made” in August, not July, so it is premature to get too excited about that number, analysts warned.
    “There’s the potential for the crop to come up substantially from the USDA number. But that’s going to be a function of weather over the next couple months,” said Mario Balletto, Citigroup grain analyst.
    Bottom line: the world is counting on the United States to produce a bountiful crop this year. World inflation is rising, driven by historically high energy and food prices.
    The weeks ahead promise more price volatility but many economists believe we’re in a new era of higher food and energy prices. Even with the pullback in prices before USDA’s report, corn and soybean futures are well above double their historical price ranges.
    USDA’s Tuesday increases in the outlook for corn demand for ethanol and soyoil demand for biodiesel did nothing to ease concerns that biofuels will remain an unwelcome competitor for food processors and livestock feeders in the years ahead, putting a floor under prices on pullbacks.

PHOTO: Corn fields pollinating 20 miles south of Toledo, Ohio, on August 9. Taken by Peter Bohan.

Start of the Games, end of the commodities boom?

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Were the opening ceremonies for the Beijing games the beginning of the end of the commodities rally? This graphic shows that China’s economic growth took off after the International Olympic Committee gave it the nod in 2001. The commodities boom, based on the Reuters/Jefferies CRB Index, can be traced back to around that time as well.

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China went on an unprecedented seven-year construction spree to modernize its cities and infrastructure before throngs of athletes, tourists and media members arrived from around the world, stockpiling raw materials to accomplish its makeover.

All Eyes on USDA’s Tuesday Blockbuster

    The biggest crop report of the summer will be released on Tuesday morning at 7:30 a.m. (1230 GMT). Undoubtedly it will be the main driver of Chicago Board of Trade grain and soybean prices that day and for the remainder of the week. 
    USDA’s August crop report is always a biggie. It’s the government’s first U.S. corn and soybean crop forecasts of the year based on actual field surveys, rather than historical average yield estimates. But this year offers some special twists. 
    Crop development for both is running one to three weeks behind normal in the heart of the Corn Belt. (Iowa and Illinois alone usually produce a third of both corn and soybeans.) Planting was delayed across the Midwest this year due to a wet, cold spring, followed in June by the worst flooding the region has seen in 15 years. So analysts are wondering if the government’s yield estimates will be a true reflection of the crop size.
    In a normal year, corn yield projections are more accurate than soybeans as corn goes through pollination during July. But as of last week almost a third of the U.S. corn crop had not yet pollinated. Still, crop scouts have an easier time predicting corn yields compared to soybeans, a crop which usually sees its key growth stage — flowering and pod-setting — in August, not July. So yield estimates for beans are always tough this early in the summer. 
    Then you have the issues tied to the great Midwest flood. 
    Since the deluge and weeks of levee breaks in June, grain analysts, traders and crop specialists have been second-guessing the USDA on how many acres of corn and soybeans were planted and how many were lost. The flooding occurred so late in the season that replanting corn or even beans looked like a losing proposition. Usually, corn planted after May 15 in the central Midwest loses about a bushel a day of yield due to fewer growing days.
    USDA promised that during July it would resurvey some 9,000 farmers in the heart of the Corn Belt that were hardest hit by the Midwest floods. In June, corn prices soared to a record above $8 a bushel on talk that as much as 5 million acres of corn were lost or would need replanting. Traders did back-of-the-envelope calculations using average yields of, say, 145 bu an acre and, presto, came up with a potential loss of 700 million bushels. That would have wiped out the projected end-stocks in September, 2009, already seen at 13-year lows before the flood.
    “We are so delayed on development that I don’t know if anybody is really going to be that confident on what USDA gives on yield. There’s just not enough to measure,” said Randy Mittelstaedt, analyst with Chicago-trade house R.J. O’Brien.  
    “What I’m hoping is we get a better soybean and corn acreage reflection. At least that will give us a starting point as we move forward the next three or four weeks and determine crop size and have a better handle on yield.” 
    Another detail traders will be looking at more closely will be the USDA’s assessment of this season’s carry-over soybean supplies. 
    Last month, USDA revealed a stunner buried away in its monthly domestic supply-demand report. USDA reported a ”-35 million bushel” supply of soybeans in its residual category for the 2007/08 crop year ending August 31. The first supply deficit for USDA’s catch-all category that most analysts could recall. USDA said the negative residual was based on demand through end-May and on USDA’s June 1 soybean stocks report.
    While it pointed to tighter supplies this season than even bulls expected, it could be an indication that the 2007 crop was understated — an adjustment that will not be made until September 30 when USDA issues its quarterly stocks report.
    Bottom line: stay close to news reports on Tuesday. No change in acreage, or an increase or decrease – all will have market implications for price. 
    Two well respected analysts, Rich Feltes of MF Global Research and Dan Basse of AgResource, will be commenting on the report from the CBOT floor after the USDA data on Tuesday and ahead of the 9:30 a.m. (1430 GMT) futures market opening. 
    Rest assured that after the opening, while the debate over USDA’s estimates will continue, the market will also focus closely on weather as pollination and pod-setting continue.  

A U.S. energy plan from Paris (but not France)

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paris.jpgCan’t decide who has the better energy plan, Barack Obama or John McCain? Now there’s a third choice — party girl Paris Hilton. The Hilton video riposte to McCain’s television attack ad comparing Obama to Hilton and Britney Spears is hilarious, not to mention kinda coherent and smart. (Read Reuters’ story about the video here)

Hilton’s tongue-in-cheek proposals actually sound as reasonable as the policy ideas of either of the actual candidates for President.

from Global Investing:

What next for OMV, and for MOL?

omv-ceo.jpgFollowing an acrimonious and drawn-out takeover battle for Hungary's MOL, Austrian oil and gas group OMV finally did as expected: it threw in the towel.

Yet according to OMV Chief Executive Wolfgang Ruttenstorfer, the consolidation pressures in central Europe -- the strategic rationale which prompted him to launch the unsolicited offer in the first place -- remain in place.

from Global Investing:

Mick Davis takes late-cycle punt with Lonmin bid

xstrata.jpgMining stocks have lost a third of their value over the past three months on fears the commodity super-cycle is coming to end -- but Xstrata's Mick Davis reckons it's still a good time to buy.

The acquisitive miner's $10 billion cash bid for Lonmin, the world's third-biggest platinum producer, is opportunistic and far from friendly.

CFTC takes a mulligan on oil speculator numbers

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frustrated tiger woodsThe Commodity Futures Trading Commission has quietly bumped up the proportion of oil futures it thinks are held by speculators after going over its data. The agency now thinks speculators held 48 percent of oil futures and options -not 38 percent as it previously thought.

The CFTC is not providing much information about the revision, saying only it followed consultations with the futures industry.

Grain Markets Cool Off in Summer Heat as Some Hot Money Leaves

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cornroad.jpg Commodity prices in general deflated during July as investors ran to the sidelines, taking profits. The Reuters-Jefferies CRB <.CRB> index of 19 commodity futures lost 10 percent — its steepest monthly drop in 28 years.

While declining crude oil prices led the drop in CRB and other commodity indexes, Chicago Board of Trade grain prices were not immune.  Weather worries usually keep corn and soybean prices on the boil in the hot days of July, as traders worry about heat stress and adequate moisture during pollination for corn plants, the key period determining yields. But not this year: corn weather in the Midwest has been ideal.

from Global Investing:

EDF fails to push Britain’s nuclear button

british-energys-heysham-nuclear-power-station.jpgA dramatic last-minute hitch to plans for France's EDF to buy British Energy leaves managements, shareholders and especially the British government in a quandary.

It was a 12 billion pounds ($24 billion) deal that was supposed to relaunch Britain's nuclear energy programme. Everyone had been told to expect it. In fact, the collapse of talks came too late for French newspapers, several of which had been briefed on the deal and splashed it prominently on their front pages on Friday.

American drivers hitting the brakes?

Americans are notorious for their love of the open road, but it seems like high gasoline prices and a souring economy are cooling the affair.

A U.S. government report on Monday showed U.S. drivers cut the number of miles they traveled by 3.7 percent — the biggest drop for the normally travel-heavy month on record.