Views on commodities and energy
A storm hit the Chicago grain markets late in the week ended August 10. But it wasn’t the kind that grain traders usually expect to rock their markets.
This one came from Wall Street, which quaked and baked in the heat of worries about fallout from the subprime mortgage debacle. Even the Fed and other central banks got into the act, injecting billions into the banking systems in the U.S. and Europe — a move that for many just rattled more nerves.
The fallout for grain markets took the form of whipsaw moves that seemed to fly the face of agricultural fundamentals — as wheat prices, for example, fresh off an 11-year high on Thursday and after bullish data from Friday’s USDA crop reports, saw huge opening losses at Friday’s CBOT opening.
Hedge fund selling, on fear and on margin calls elsewhere, was cited. So throw out the grain fundamentals.
“Everyone had their eye on the stock market … there’s a lot of talk of funds liquidating positions,” said one floor trader on Friday morning.
Weakness in world stock markets — Dow Jones blue chips were down as much as 200 points on Friday morning before grains opened, after falling more than 300 points on Thursday — set the tone. The Dow recovered some, ending 31 points lower.
But both soybeans and wheat closed lower on Friday despite USDA’s friendly U.S. crop data issued before the CBOT markets opened. Granted, most of the “good” news was factored into prices. But stock market woes intensified the selling.
On the other hand, corn — which should have fallen after bearish, bigger than expected USDA estimates issued on Friday — closed higher. But that also seemed the effect of big commodity funds exiting their positions — this time, short positions held on ideas of a record crop this Fall.
Open interest in corn fell by roughly 50,000 contracts in the last three trading sessions of the week.
The biggest factors traders will watch next week are:
–Wall Street. Additional market woes connected with the U.S. subprime mortgage sector will likely press prices.
–Midwest weather. Crops in the southern Midwest are baking in 100+ F degree days with little rain. Any relief could trigger a selloff. On Friday there were forecasts for the central Midwest looking milder, which weighed on soy prices.
–European weather and export demand. U.S. and European wheat hit new highs this week with Chicago wheat notching an 11-year top of $6.80-1/2 on worries about a short EU crop due to harsh weather this growing season. In turn, the European feedgrain markets are rising, with traders keeping a close eye them for price direction for corn and soymeal.
Government and industry numbers to be issued the week of Aug. 13:
USDA releases weekly crop ratings on Monday. Traders expecting a 1-2 point decline in the good to excellent ratings. The National Oilseed Processors Association will release its monthly July crush data on Tuesday.
The last trading day of August soybeans, soymeal and soyoil is Aug. 14.
Wheat grabbed the spotlight in Chicago once again. Given crop problems in Europe, where rains are preventing farmers from harvesting wheat, and in Canada, where sizzling temperatures are expected to cut yields, wheat put in another stellar performance in the week ended August 3.
Traders continue to eye the all-time high of $7.50 per bushel in Chicago wheat notched in a freak “squeeze” of a big commercial firm caught short 11 years ago.
This rally looks to have stronger legs: outlooks for a 30-year low in global stocks and smaller yields due to harsh weather in key breadbasket growing areas.
That outlook for scarcer supplies of a worldwide food staple has had a very real effect on demand. One need look no further that U.S. export sales the past two weeks: nearly four million metric tons were booked by foreign buyers.
“The world flour user doesn’t have enough wheat ownership on. You sold 13 percent of your export sales in the last two weeks,” said analyst Roy Huckabay at The Linn Group.
USDA is now forecasting 2007/08 U.S. wheat export sales at 28.58 million tons, up 15 percent from the year before.
Corn and soybeans seem to be following wheat, trying to keep pace since they will be prone to lose acres next year if historic high prices for wheat attract farmers to plant a lot more wheat this fall in the southern Plains and Midwest.
Both row crops are also reacting to changing Midwest weather forecasts, especially soybeans which are in their critical yield determining phase of pod-setting and filling.
Traders will be watching to see if good rains move through over the weekend. If so, that will be bearish for Chicago grains and soy when screen trade opens Sunday night.
On the other hand, bulls were watching a high pressure ridge they expected to edge its way into the Corn Belt late next week and turn conditions hot and dry. But good rains preceding the hot weather could mitigate that heat stress.
Also seeping into the market the past week were spillover jitters linked to the credit market crunch and troubles in the subprime mortgage sector that kept some big speculators on the sidelines to conserve cash or meet margin calls elsewhere.
“Normally you get a flow of capital into the markets for the new month and that doesn’t seem to be happening today,” said Charlie Sernatinger, analyst for Fortis Clearing Americas, said on Thursday Aug 1 as corn and soybeans closed lower.
“It feels on the floor like hedge funds are taking risk off the table, not putting any new money into it,” he said.
Bottom line: the same fundamental variables that drove prices in late July will continue into early August — European, Canadian and Midwest weather; export demand for U.S. crops; and general market jitters about subprime fallout.
Next week the big numbers everyone will be watching will be the U.S. Agriculture Department’s corn and soybean yield estimates due on August 10.
The August estimate is the first for the new crops based on actual field surveys, rather than historic yield trends.
So yield predictions especially for corn are taken more seriously by veteran grain traders than the trend-line yield projections USDA has been using up until now.
So far, there seems to be a general feeling that the heat and dryness this summer is shrinking the corn and soy crops from current projections. But a record U.S. corn crop is still in the cards given the 63-year high in spring plantings.
For the weekly crop conditions due on August 6, traders expect USDA to cut its rating of the U.S. corn crop by 3-5 percentage points in the good to excellent categories and soybeans by 2-3 points due to heat and dryness the past week.
All eyes were on the wheat market this week with prices soaring to an 11-year high above $6.70 per bushel — and eyeing the all-time of $7.50.
On Thursday weekly U.S. wheat export sales of 2.1 million metric tons – another 11-year high — was one catalyst for the rally. But just as bullish were worries about both heavy rains and scorching European weather shrinking the crop there.
U.S. traders will stay focused on Europe’s weather next week. Rains in France and Germany have been threatening harvest quality and quantity, driving flour miller to book U.S. wheat.
But in North America, especially Canada, there are also fears that summer heat is now shrinking spring wheat yields.
The corn market also got a boost from worry about a smaller feed-grain crop in eastern Europe due to the extreme heat.
“We’re seeing interest in U.S. sorghum from the Europeans. They feed a lot of wheat over there, so if we don’t have feed demand for wheat, they look for non-GMO crops like U.S. sorghum or Brazilian corn. Both those markets are seeing good interest, with basis levels improving,” said Dan Basse, president of AgResource Co. in Chicago.
But U.S. weather overall was bearish for corn and soybean prices this week. Heavy rains moved through the Midwest, which was seen especially beneficial for soybeans now in the midst of pod setting and filling. Chicago soy prices fell to levels not seen since before the bullish June 29 USDA planting report that showed U.S. soy acreage the lowest in 12 years.
Extended forecasts looked a little warmer for next week across the Corn Belt, which might lend some support. As usual during the summer, any change in the Midwest forecast can spur volatility.
Despite Corn Belt rains this week, Chicago traders expected USDA to lower corn ratings in its weekly crop progress report on Monday afternoon. Soybean ratings could be steady or possibly lower, they said.
The week of July 16 began with a bang — as in a bubble popping. Chicago corn and soybeans dove down the daily trading limits on Monday — 50 cents a bushel in beans and 20 cents in corn. They stayed there all week. A change in the forecast for the week to cool and wet from hot and dry fed the collapse.
“Rain makes grain” and “Don’t stand in front of a freight train” — those old market sayings explain the sell-off.
Weather is sure to keep the markets volatile in the week starting July 23, but with the focus shifting to soybeans from corn. July is the key growth period in the Midwest for corn yields, as mild weather during pollination assures a good “fill” for the kernel. For later-planted soybeans, though, the same mild temperatures and timely rains are needed in August to assure that flowering and pod-filling go well.
“Corn seems to have gotten the rain it needs for now, but the beans need the rain in next week or two,” said analyst Gavin Maguire at Iowa Grain.
On Friday, traders were hesitant to go home with a long position in corn or soybeans given what happen last weekend — even though on Friday next week’s forecast was hotter and drier than it was earlier in the week. No doubt weather forecasts will continue to drive the Chicago soybean and corn markets.
But options trading on Friday featured traders actively selling $3.40 Dec 08 corn calls, indicating many in the market felt the corn crop is “made,” one options floor trader said.
Roughly eighty percent of the Midwest Corn Belt saw 0.75 inch to 2.5 inches of rain in the week ended July 20.
Traders are expecting the USDA to report on Monday that corn and soybean conditions improved a couple of percentage points in the good to excellent category after the rains.
Conditions had been a downtrend the prior two weeks due the dryness, especially in the western Midwest. But as of July 15, two-thirds of U.S. corn was already rated good-to-excellent.
The weather is still a factor for the U.S. spring wheat crop, which will be harvested in a couple of months. But demand, as much as this year’s reduced world wheat supplies, was the story that drove Chicago wheat to fresh 11-year highs.
The export market is red hot for U.S. wheat, the traditional top shipper of wheat to world markets. Egypt, Morocco, Tunisia, and Bangladesh all booked more U.S. wheat this week.
A rarity: the strength in wheat pushed the price gap between wheat and corn, basis December Chicago futures, to more than $3 per bushel on Thursday — a premium for wheat not seen in at least 30 years.
Analysts on Friday refused to guess whether the spread has topped out, given current fundamentals: a 30-year low in global wheat stocks at a time when U.S. corn farmers are likely to harvest a record crop off the largest planted acreage in half a century.
What remains certain is more volatility in the spread.
Chicago corn, wheat and soybean markets finished higher on the week. While aberrations in the U.S. Midwest forecast sparked price hikes or dips — long-term outlooks for grain supplies and soybeans to shrink added to the buying sentiment.
Soybeans made contract highs every day this week. The market is on a roll after the USDA June 29 acreage report estimated that U.S. farmers planted the smallest number of soy acres since 1995. Corn also trended higher this week, tracking the moves in soybeans.
Signs of demand for wheat from customers around the world helped wheat also end the week higher. Wheat is near 11-year highs on supply problems and world demand. USDA reported that U.S. exporters sold 1.2 million metric tons of wheat in the last week with fresh interest from Brazil, Iraq and Egypt.
The same inputs especially weather will drive prices next week. Trading could get volatile on any signs of a high pressure ridge hanging out in the western Midwest as that would turn up the heat and keep things dry as corn pollinates and soybean approach pod formation, the two key growth stages.
Traders already expect USDA to cut the condition rating of the U.S. soybean crop by 1-3 points in Monday’s update.
The National Oilseed Processors Association will issue its June crushing demand data next week at around 137 million bushels, down from 143 million crushed in May. It’s common to see a drop during the summer as crushers close plants for maintenance ahead of the fall harvest.
As expected, weekly trade data released by the Commodity Futures Trading Commission on Friday afternoon showed large speculators expanded their net long positions in all CBOT ag markets as July 10. The biggest jump was in soybeans — up 13,200 lots to 119,000.
But the most momentous day for CBOT traders in Chicago this week came on Monday. Chicago Board of Trade and Chicago Mercantile Exchange members/traders voted to merge, with the Merc buying the CBOT for $12 billion. It was finalized on Thursday which marked the end — in name at least — of the 159-year-old Chicago Board of Trade.
The CME Group, representing the marriage, opened for business on Friday with the ringing of the opening bell for the Chicago grains markets. There wasn’t a dry eye in the house.
Chicago grain and soy futures continued to react to the shockingly big U.S. corn acreage figure and the cut in soybean plantings estimate that the government released on June 29. Corn rebounded during the week, getting a lift from worries that a hot weekend in the Midwest could stress the corn crop as it enters pollination.
Up until this weekend the summer growing season has been pretty mild. Even though there hasn’t been much rain the last few weeks, temperatures have been cool — limiting crop stress. Ohio and Minnesota are the driest spots.
Traders and analysts expect few, if any, changes to corn and soybean ratings in USDA’s weekly crop report that will be issued Monday afternoon. However, there are concerns that spring wheat ratings could fall after a hot spell in northern Plains.
Weather will be the key price driver this week, with corn the most vulnerable to hot, dry conditions. If corn gets a boost this week on weather jitters, soybeans will likely follow as the market is trying to encourage South American farmers to plant lots of beans.
The other market factor will be the July 12 USDA monthly crop report. The general consensus among analysts and traders is the agency will boost its 2007 U.S. corn production figure and cut its soybean crop estimate to reflect the June 29 acreage report.
USDA will also issue a U.S. wheat production figure. A closely watched analytical firm Informa Economics came out with its winter wheat production estimate on Friday which was lower than the USDA June forecast. The hard red winter wheat crop is seen shrinking as Oklahoma and Texas wheat keeps getting hit with rain. Wheat has been hovering at an 11-year high for over a week, supported by supply worries. But the market broke down technically last Friday and appears to be range-bound for now, analysts said.
Weekly trader data issued by the Commodity Futures Trading Commission, usually released on Friday afternoon, was delayed until Monday due to the Fourth of July holiday. The most obvious change is an expected jump in the net long speculative positions within the soy complex after last week’s buying spree sparked by USDA’s low soy acre estimate.
While veteran Chicago Board of Trade traders have been in the midst of a summer weather market, they’ve also been consumed with a bidding war between the Chicago Mercantile Exchange and IntercontinentalExchange for their exchange.
Up until Friday they were torn between the two bids. But the CME on Friday sweetened its bid to $11 billion for the world’s oldest futures exchange, swaying many trader/shareholders to vote for the CME deal on Monday. If the deal passes — combining the two largest U.S. futures exchanges — the CME would become the world’s top futures/options mart.
Photo: A soft red winter wheat field in Naperville, Illinois, 30 miles west of Chicago, where farmers chose to grow wheat — a hot cash crop — ringed by “McMansions.” Picture taken by Peter Bohan in Chicago on June 24, about a week away from harvest.
Chicago Board of Trade grain and soy markets stayed all about the weather this week. When forecasters called for dry weather in the eastern U.S. Midwest, corn and soybean prices rallied. But by week’s end, parts of the eastern Corn Belt — notably Illinois, the top U.S. soy producing state and the No. 2 corn state, was benefiting from good rains.
Summer is always the most volatile time of the year for Chicago grain prices. But this summer is exceptionally volatile, which reflects large number of long positions held by big speculators and growing volume spread across two trading platforms: electronic screens and arm-waving pits.
There were many times, even a few years ago, when it was common for corn to spend an entire trading session in 1-cent range. On Tuesday, corn fell the 20-cent limit. The next day wheat jumped the 30-cent limit. Veteran floor traders, astute at making markets, struggled to keep heads above water.
Wheat prices also reacted to the weather. With global wheat supply projected at a 30-year low, more jitters about the U.S. winter harvest continued to jostle the market. The U.S. is not the largest wheat producer but is the largest exporter.
Mature winter wheat in the southern Plains was damaged by rains as harvesters tried to get the crop off the field. But weather late in the week was turning drier which should help improve harvest efforts in Texas, Oklahoma and Kansas.
Dry Midwest crop conditions were seen also stabilizing late this week, with corn and soybeans benefiting from scattered rains. The government will release updated condition ratings for the week next Monday. But all eyes will be on the USDA’s updated acreage report that will be released next Friday, June 29.
Talks was circulating this week on the trading floor that corn acreage will definitely be revised up. Ditto for soybeans, as a lot of drought-damaged soft red winter wheat grown in “double-crop” areas of the Ohio River and Delta states may have been plowed up and sown to more soybeans than usual.
Photo of Art Bunting in his corn field in Dwight, Illinois about 100 miles south of Chicago. Thte photo was taken by Mark Weinraub this week.
Wow, what a week. The feature was wheat, soaring to an 11-year high on worries that the size of the U.S. hard red winter wheat crop was shrinking due to relentless rains in the southern Plains, and a government forecast for global wheat stocks to reach a 30-year low by the end of the 2007/08 marketing year. It was so crazy that the premium for wheat relative to corn stretched above $2 per bushel — a rare phenomenon.
“It’s just gone absolutely bananas. It went to $2 and there’s only been five times in history it’s been there,” said analyst Roy Huckabay with The Linn Group in Chicago.
Next week will surely bring more volatility. If it stops raining in the southern Plains and farmers are able to resume the harvest, wheat could see a downward correction.
If it stays wet, anything is possible, with some analysts thinking the price of Chicago wheat could take a run at $7.50 — the all-time high.
“There’s not any reason for the market not to make a run at the all-time high at $7.50,” said Terry Roggensack with The Hightower Report. “The market is trying to price in the damage done to this soon-to-be harvested winter wheat crop.”
Soybeans and soybean oil seemed to joined at the hip with Malaysian palm oil, rallying and collapsing with equal fervor. Track the moves in palm oil and it should be an indicator of soybean and soybean oil direction.
By far, Midwest weather will be the driving force next week as the eastern Corn Belt is drying out and traders are building in weather premium into corn prices. The eastern Midwest is expected to be dry this weekend with light rains moving in early next week.
“It will help but not turn the drier-than-normal conditions around,” Mike Palmerino, a forecaster with DTN Meteorlogix.
Chicago traders expect the government to drop its ratings of the corn and soybean crops by 2 to 4 percentage points in the good-to-excellent category in Monday’s weekly crop update because of the dryness in the east.
(Photo: Corn field in central Iowa near Ames. Photo taken by Chris Stebbins the week of June 11.)
The summer growing season is always volatile for Chicago grain markets but this one is keeping veteran grain traders on their toes. With the rising tide of speculative capital pushing into farm commodities, price swings have been more pronounced — even given a fairly benign weather outlook and strong crop condition ratings so far this season.
Once again, soybean oil grabbed the spotlight this week. Prices rose to a 23-year high early in the week, then fell nearly 3 percent on Friday alone as traders cashed profits.
Any time soyoil sees a sharp move, soybeans follow, with both tracking a volatile Malaysian palm oil market.
Palm oil has been red hot on demand for edible oils led by Asia. But palm also saw its sharpest single day drop Friday on prospects that Indonesia would delay raising its veg oil export tax. The tax hike sent prices flying earlier this month on the outlook for tighter supplies.
So the decks are clear for Monday’s monthly USDA reports. The government’s monthly world supply and demand estimates are due at 0730 Chicago time (1230 GMT) on Monday morning. USDA will also be updating U.S. winter wheat production.
“The big things that people are going to be watching for are the wheat production numbers, for the intermarket spreads, and whether or not they raise the yield on new-crop corn,” said Charlie Sernatinger, analyst with Fortis Clearing America.
Typically, USDA doesn’t touch its corn production guess in June. Yield estimates are based on historical trends and acreage until the first field surveys used in USDA’s August report. But traders say given the excellent crop ratings USDA has been reporting each week, the agency could lift its corn yield forecast.
Most expected bearish corn numbers on Monday. But floor talk late on Friday was also that July corn prices could keep range-bound until July options expire June 22.
“Based on what’s happening in options, it looks like corn will stay in the $3.60-$3.90 range until July options go off the board,” one options trader. Firms have been liquidating their July call and put options positions all week.
On the wheat front, the consensus among analysts was for USDA to raise its U.S. winter wheat forecast by 25 million bushels after the crop saw plenty of rain this season. The USDA’s forecast will be based on June 1 wheat conditions.
On the other hand, some traders said they had heard of disappointing early harvest yields out of Oklahoma. Winter wheat harvest is under way and will move north on the Plains and into the Midwest this month.
Additionally, wheat bulls noted, global wheat stocks on Monday were expected to remain tight — at a 26-year low.
Soybean data should be ho-hum. Stocks may be a little smaller but no big change is expected.
Once traders digest the USDA data early in Monday’s opening session, the focus should return to the weather. Soils are getting dry in eastern Illinois, Indiana and Ohio with traders watching for the possibility of a high pressure ridge to move in the Midwest that could produce more dryness. That kept markets jumpy this week and will continue next week.
It was another week of volatility with several surprises for veteran Chicago grain traders, including the strength in July corn most of the week and Friday’s rally in soymeal, when commodity funds flushed more money into Chicago grains and oilseeds.
But weather jitters were the biggest market drivers this week — everything from worries about dryness in the southeastern United States, some long-term forecasts calling for a high pressure ridge to move into the Midwest, dryness in eastern Europe’s wheat country and too much rain in the U.S. hard red winter wheat belt.
“It’s all weather — world weather, especially in the U.S.,” said analyst Dan Cekander with Fimat USA in Chicago, referring to what will move the markets next week.
Cekander is most concerned about all the rain in the southern Plains bread basket, where farmers are trying to harvest hard red winter wheat. It keeps raining, stalling harvest in Texas and Oklahoma and raising fears about crop loss and disease pressure.
The concerns helped wheat futures buck a seasonal downward trend that occurs as the harvest expands.
That said, traders will be focused on the latest weather maps and forecasts.
“If it rains in the Southeast over the weekend it could stimulate some selling,” one trader said. But he quickly added that the soybean market is technically strong.
Top soils are drying out in the eastern Midwest for the developing corn and soybean crops. According to the Midwestern Climate Center, top soils are especially dry in Ohio, Indiana and southern Illinois. But there’s plenty of moisture west of the Mississippi River — maybe too much, Chicago traders said.
They are looking for USDA to drop its corn condition ratings by 1-3 points in Monday’s crop progress report from the current 78 percent good-to-excellent mark.
Soybean ratings could be as high as 70 percent good to excellent.