Grain Futures Markets & National Cash Indices Review & Observations thru July 27, 2012 PHI Market Analysis Manager Virg Robinson

Transcription

1 Grain Futures Markets & National Cash Indices Review & Observations thru July 27, 2012 PHI Market Analysis Manager Virg Robinson S&P 500 FUTURES NEAR BULLISH BREAKOUT The S&P 500 futures monthly continuation chart, currently represented by the September contract, is at a crossroads. The upper boundary of a triangular formation, converging upper and lower directional lines, is being challenged. An end-of-month, July 31, settlement above would penetrate upper line and signal a move toward Oct 10 high of Corn: The CME Group September 12 futures contract and the National Cash Index (see attached NCI chart) are lower week / week. The spot interior cash basis was softer. This basis behavior is not uncommon as the market attempts to transition from old to new crop. The bulk of demand is being deferred to a later date. This decision is a double-edged sword. Should U.S. / North America crop conditions continue to deteriorate it will become increasingly more difficult to source product in days ahead. The strategy would fail. Manage risk accordingly. July WASDE reduced U.S. / world production, consumption and ending stocks vs. previous report. It was judged neutral / bullish. Weather remains at forefront of price discovery. A new WASDE will be released on 8/10/12. August report will be survey and field analysis driven and is expected to show continued supply restriction. Producers / farmers are willing to make incremental spot cash sales and new crop sales only on market strength (see below futures prices as reference).

2 The U.S. Dollar Index Futures Contract ended the week sharply lower. The European Central Bank vowed to assist Euro Zone countries in effort to avert additional financial stress. Debt problems remain far from resolved and will continue to be a daily story and market factor. Investors swing quickly from a risk on / risk off mentality. The threat of a market shock, oil price spike (Iran / OPEC), geopolitical event and or deeper Euro zone financial crisis is ever present. This trepidation continues to add grain price volatility. Corn s short term price behavior will be shaped by U.S. crop condition, value vs. wheat & other substitutes, August 10 WASDE, U.S. Dollar strength / weakness, global WEATHER (with continued emphasis on U.S., China, South America, South Africa and Ukrainian prospects), export sales, investor positioning, livestock and ethanol economics, and assorted other macro related developments. Demand destruction is in play. Ethanol and livestock economics have weakened appreciably. The factors are growing in number and complexity. The next several days will remain historic. Remain attentive of weekly U.S. export High prices have squelched / slowed / deferred sales. Stay informed of climatic U.S. drought conditions will attract more attention and create market gyration (risk and opportunity) as summer progresses. Long-term drought / abnormally dry conditions remain in many areas of the U.S. and primary Corn Belt, respectively. They are among worst in history. Crop prospect has nose-dived. Private estimates continue to decline. Current U.S. and world stocks to use ratios, 7 and 15 percent, respectively, remain snug by historic comparison. Corn supply concerns persist and the margin for U.S. and or global crop shortfall, with special importance on Northern Hemisphere new crop size, is small. The September 12 futures contract is likely to be contained the next few days in a trading zone from $ $8.49. The December 12 contract, new crop, is positioned to trade in a zone from $ $8.34. Making a sale / short hedge / put option purchase, should price drop to or below the aforementioned low of the two contracts respective ranges, is not currently warranted. An incremental sale / put option purchase (vertical put spread) when price is at or above upper end of price range is. Please acknowledge the possibility of extreme price volatility that can include both sharp declines and rallies, given the large degree of speculative interest, U.S. crop size debate, assorted macro events and reaction to U.S. and global weather. Funds / speculators are a major part of daily price discovery. Given the volatile price discovery environment the use of corn options, puts and calls, to manage price risks is worthy of consideration for both producer and consumer. See for longer-term futures price projections and trend.

3 Soybean Complex: The CME Group August 12 futures contract and the National Cash Soybean Index (see attached NSI chart) are lower week / week. The spot interior cash basis was weaker. The old crop / new crop spread (carrying charge) remains inverted. A price inversion indicates demand is in excess of supply. Producers are willing to make sales on price strength only (see high of futures price ranges below as reference). The futures market August 12 GPM spread (gross processing margin / crush spread) rebounded thru the period and is about unchanged from one year ago. Net soybean export sales for the period July 13- July 19 were modestly improved from the previous week and the 4-week average. China was the buyer of note. U.S. WEATHER worries / production concerns and tight stocks are the dominant price discovery factors. This will be the case for the next few weeks. The current projected U.S. 2012/13 stocks to use ratio is 4.2%. An update will be issued on 8/10/12. Crop size will be derived by survey and field analysis. Supplies are expected to be more restricted. There s no margin for major soybean / oilseed crop shortfall in U.S. / North America and China this season. U.S. crop prospect is in serious jeopardy without additional rains. Weather related markets are traditionally choppy / volatile. Stay abreast of weekly net U.S. export soybean and product sales, deferments and Export sales and shipments have weakened the last few reportable weeks (seasonal) but, in lieu of much higher price; remain on track to meet revised USDA yearly projection. U.S. weather and Chinese purchases remain major wild cards. During the next several days the August 12 (SQ 12 / old crop) CME futures contract is positioned to trade in a range from $ $18.49 (wide range reflective of volatility). Be advised abrupt

4 swings in value are likely. The November 12 (SX 12 / new crop futures contract) is positioned to trade in a range from $ $ This contract experienced an outside week. To a bar chartist this behavior is bearish and warns of a trend change. Acknowledge and manage accordingly. Making a new sale at / below the low end of aforementioned old and new crop price ranges is not currently warranted while making an incremental sale / short hedge / put option purchase at the upper end is. Prudent price risk management could include owning out-of-the money puts or vertical put spreads to create price floor. Price risk remains high and is reflected in option premiums. The August 12 soybean meal futures contract is projected to trade in a range from $457 - $559. The August 12 soybean oil contract is projected to trade in a range from $ $ It s currently not advisable to establish a new long position at / or above the highs of aforementioned soy product price ranges but rather at / near the lows of the ranges, respectively. Expect soybean complex PRICE VOLATILITY TO REMAIN HIGH as export demand (China), Western Hemisphere WEATHER, exchange rates, assorted macro events, speculative / investor positioning, U.S. processing margins, South American competition for export sales and uncertainty of 2012/13 total Western Hemisphere oilseed production drives current price discovery. See for longer term futures price projections & trend. Wheat (all classes): Soft Red, Hard Winter and Hard Spring futures and cash prices are lower, respectively. The spot interior basis was firmer for SRW but softer for both HRW and HRS. SRW is more difficult to source while cash demand is being met for both HRW & HRS. The HRS spot basis was noticeably softer. Recently concluded U.S. Wheat Quality Council spring tour forecast indicated a high quality and large HRS crop. Rallies / short covering remain opportunities to make incremental sales (see top of price ranges below for reference).

5 U.S. supplies are deemed adequate while world supply, with emphasis on Russia & India, is more concerning. A new U.S. spring condition report will be issued the afternoon of 7/30/12. A new WASDE will be released on 8/10/12. Industry participants will continue monitoring crop conditions, U.S. and global, for weeks to come. Weather influenced markets are traditionally choppy / volatile as has been the case. SRW & HRW prices will not lose sight of corn / coarse grain values in price discovery process. SRW & HRW prices are currently well above corn. The September 2012 Chicago wheat futures contract (SRW) is positioned to trade in a range from $ $9.49. A move toward the high-side of range will attract new incremental cash sale. The September 2012 Kansas City wheat futures contract (HRW) is positioned to trade in a range of $ $9.37. The September 2012 Minneapolis wheat futures contract (HRS) is positioned to trade in a range of $ $ Price volatility has increased. Prepare accordingly. See for longer term SRW futures price projections and trend. Virg Robinson

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