RAY GRABANSKI COLUMN: Grains trade limit on outside influence
Wheat Wheat was sharply lower on concerns about the stability of the U.S. economy after news of the Bear Sterns buyout. This caused financial and equity markets to fall, causing broadbased commoditywide selling. This trend held for most of the we...
Wheat was sharply lower on concerns about the stability of the U.S. economy after news of the Bear Sterns buyout. This caused financial and equity markets to fall, causing broadbased commoditywide selling. This trend held for most of the week with traders liquidating positions and trying to take money off of the table. Adding to this pressure, was spillover from sharply lower outside market and a stronger U.S. dollar. March 18 was a slight exception, with wheat closing slightly higher. This came from bounce in the stock market which carried over to commodities allowing the market to gain a little back. Also, the May contract month on the Minneapolis Grain Exchange has been able to avoid some limit lower closes, showing the need for spring wheat is still a factor in the market. Wheat still has the fundamentals to hold some higher prices, there is still a demand for spring wheat and the acres battle isn't over until the planting intentions report March 31. However, these supportive factors are unlikely to make much of a difference until the economic situation stabilizes.
U.S. Department of Agriculture export inspections were neutral at 15.7 million bushels. This is with preliminary expectations of 14 million to 18 million bushels. Cumulatively, this puts us at 145 percent of exports at this time last year. Primary destinations were Mexico and Egypt. USDA export sales were on the lower part of expectations at 6.2 million bushels. This is with preliminary expectations of 5.5 million to 22 million bushels. This is the lowest export sales number since mid-February but is enough to stay on pace for the year. Cumulatively, we are at 1.185 billion bushels out of the projected 1.225 billion for the marketing year.
The huge liquidation of long commodity positions is pressuring all commodities. This is an interesting response to a stimulatory monetary policy move by the Fed earlier in the week. Generally, one would expect a lower dollar and higher commodities from an inflationary type Fed response, but instead, the commodities are dropping from it and the dollar is higher. But the real reason for the big selloff in commodities is the liquidation of futures positions to generate cash by funds. This is an odd response, as funds typically pay in entirety for futures they buy as they do not trade on margin or leverage. Why do they need to generate cash now when monetary policy is going their way? If something very strong comes along to break the negative perception of the soybean market (like planting or reproduction problems), perhaps soybeans can still run to new highs yet this year. But it will take a dynamic change in perceptions (if not reality) to break the negative outlook established by lower highs and lower lows (in other words, a downtrend). In wheat, it might take a real act of God for prices to go to new highs. Perhaps the best we can hope for is a bounce back near old highs with some type of production problem. But even with a bullish development, ProAg is doubtful that new highs can be achieved in the wheat market.
Corn markets fell lower, rounding out a tough week throughout commodity markets. Grains were not the only markets to see these losses, and in fact, seemed to be following pressures in metals and energies. As we have said repeatedly, financials and speculators are heavily involved in commodities as an inflation hedge. Ironically, the week probably saw some of the strongest inflationary signals, but overall economic concerns proved too much. Worries about liquidity and a huge need to take profits by funds pushed markets limit down on at least two sessions. Markets tend to overexaggerate both the good and the bad, and we are seeing the bad side now. This does not mean the market has topped, but it could take time to recover strength. March 31 will see the release of planting intention data, and that may be what we need to entice buyers once again. Additionally, wet weather in the southern Corn Belt could delay plantings, further reducing prospective acres.
USDA export reports were released March 17 and 20, and both were positives for the market (like beans, however, they were largely ignored). Inspection numbers March 17 were 48.8 million bushels, above trade expectations for 39 million to 47 million bushels and well above the previous week. Sales numbers were positive as well, coming in at 30.7 million bushels. That is near the high end of expectations although down from the previous week.
Markets have found a weak spot recently, with soybeans dropping $3 from recent highs in just a few weeks, and wheat dropping nearly $3 winter and $5 spring on futures months. This debacle comes after a scare in the banking industry (Bear Stearns collapse) and a little manipulation of the grain market rules (new price limits and speculative trading rule consideration) that combined to scare out many traders. There just aren't many traders who can tolerate this type of volatility -- even the grain industry is moving away from trading.
This is truly a gut check for bulls, who are having a hard time imagining a market top on no change in fundamentals whatsoever. Of course, there really hasn't been any change in fundamentals from last fall, either. Prices have swooned up, and now swooned down. Corn could still be an interesting story yet to unfold. If acreage falls below 86 million the end of this month, we could be into new high territory in corn in April -- with the whole season yet ahead of us. However, with the huge selloff of speculative longs and the negative technical picture today, a whole lot of bullish enthusiasm has been wiped out of grain markets this past week. Yes, it's gut check time for bulls.
Soybean futures finished limit to near limit lower in at least two sessions during the week as grains were hit full force by a widespread selloff throughout financials and commodities. The pressure does not appear to be linked to one factor in particular but does reflect the huge nervousness and instability throughout the economy. Much of the attention in commodities (as well as everything else) seemed to center around the Federal Reserve and its rate announcement March 18. That decision resolved in a 0.75 percent drop in addition to the emergency 0.25 percent rate drop March 16, leaving interest rates at the lowest level in years. This should have resulted in a more confidence as well as more inflation, but it seemed to end in additional concern. There is a tremendous amount of information being processes right now and as much as markets tend to overdo to the top side, they do the same to the downside. Fundamentally, we are little different if not slightly better off, but it could be some time before the market realizes that.
USDA export sales and inspection data was positive, although it had little to no effect on the market. Inspection data March 17 reported 23.97 million bushels of soybeans, near the middle of trade expectations but slightly below the previous week. Sales reports came in at 18.5 million bushels and topped both expectations and what was needed to meet USDA export projections.
The huge liquidation of long commodity positions is pressuring all commodities. This is an interesting response to a stimulatory monetary policy move by the Fed earlier in the week. Generally, one would expect a lower dollar and higher commodities from an inflationary type Fed response, but instead, the commodities are dropping from it and the dollar is higher.
But the real reason for the big selloff in commodities is the liquidation of futures positions to generate cash by funds. This is an odd response, as funds typically pay in entirety for futures they buy as they do not trade on margin or leverage. Why do they need to generate cash now when monetary policy is going their way? How long this liquidation will persist, no one really knows. But this certainly is not based on fundamental analysis, or even on a logical response to world economic situations. This is simply a money response. But since commodity trading has become so much a money game recently, perhaps it makes sense that the liquidation of these long positions is a money proposition, too.
The recent support backing high prices on small grain contracts has definitely faded this week with all commodities from grain to energy to metals taking a tumble. Prices on specialty crop generally lag a week or two, but this should put producers on guard that a drop in price could be approaching. Prices in Minneapolis were left unchanged for barley at $7.25 for malt and $5.35 for feed grade. Durum prices were still no quote. This latest drop in price may or may not be temporary on a large scale, but our suspicion is that it is very close to planting of small grains and there may not be enough time or incentive to raise prices over the next few months. Old crop supplies should continue to tighten until late spring or so leaving at least moderate upside on those bushels.
Dry bean producers continued to see higher dry bean prices as buyers make last-minute efforts to secure acres for next year. Navy and kidney bean prices have moved to very attractive levels, with pinto lagging slightly. One important thing to keep in mind is the loss in value of openly traded commodities this past week, which could result in a loss of contract offering prices in the next two. As we mentioned in small grains, specialty prices often lag price changes in the main grains, giving producers the opportunity of "limited hindsight." This is not a hard and fast rule, but has been very useful in the past.
Oilseed markets struggled this past week on pressure from outside forces. Financial and speculative concerns surrounding both the U.S. and World economies forced many funds and others to examine where they had profits and take that cash out. Unfortunately for canola, sunflowers and other minor oils, a good share of those profits had been the vegetable oil markets that support their prices. ProAg expects that prices will bounce longer term, but there is no doubt that the last loss has taken away a lot of the previous momentum. We still look for very tight oilseed supplies this summer, which will help old crop. As for new crop, a weather market may be the next best chance to price.