5-14-12 9:45 AM EST
EARLY WEEK COMMODITY MARKET THOUGHTS
1) MACRO-LED SELL-OFF COULD INTENSIFY: Most Micro-Fundamental/Supply-Demand “Bulls” in grains and livestock are justifiably looking for a quick bottom in this market, especially if export demand is seen as improving on the recent price-slide, but also in the case of grains because rains for the early crop have been sparse—and goodness knows we need good, timely rains across the whole belt if we are going to raise a 166 bu/acre corn crop! I would urge caution, however, on jumping back in on the “buy side” too quickly, however, especially with Daily Chart Stochastics now becoming very “Oversold”. And I say this because we have to acknowledge that starting last week, the Macro-Markets are actually assessing and starting to price-in a Greece possibly leaving the Euro-Currency—AND IF THIS OCCURS WE HAVE TO BE PREPARED FOR THE EURO TO DROP TO PARITY TO THE US DOLLAR IN MY VIEW. Second, the ECRI Research Institute just projected a return to a Global Recession last week—matching my assessment. In their note, they wrote, “For the last 3 months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last 10 recessions. In other words, this is what personal income growth typically looks like early in a recession.”(SA,5/13/12). In the totality, I would be of the mindset that these Macro-issues will take another two weeks at least to work through the market—especially if the S&P 500 closes below its 100-day Moving Avg of 1344 today, as it looks like it could.
1. I think it’s also worth noting that the EU represents about 18% of China’s export market, so if you’re in a mindset that the Emerging Markets can help lead the global economy out of recession, like they did back in ’08-09, I would say that it’s going to be much tougher for them to do this due to less policy choices and inflationary pressures. This helps explain, I think, the fact that China eased their monetary policy over the weekend yet the Hang Seng Index fell back below 20,000 on a closing basis. The Hang Seng—to me—becomes another key leading indicator along with Gold in terms of trying to assess whether the overall market has priced-in enough negativity.
2) IN THE NEXT TWO WEEKS, SHORT-COVERING RALLIES IN COMMODITIES ALWAYS A POSSIBILITY DUE TO TECHNICALS, BUT THEY ARE PROBABLY GOING TO BE FADED IN MY VIEW. And this is where I would differentiate between corn and hogs as being “Undervalue” compared with soybeans or crude: it would be my view that both fund-length/short and fundamentals put the corn and hogs in the best spot for a medium-term low coming once we get passed the Macro-negativity. But for other commodities like beans, rallies should be used to get catch-up hedges in place. Hogs, for example, should benefit from lower fuel prices in the coming weeks, and with some major meat firms reporting handsome profits, I think that the demand-side for pork is looking-up.
1. AND THEN, BY THE END OF MAY/1ST OF JUNE, BE PREPARED TO LIFT PAPER HEDGES IN MOST OF THE AG SECTOR & POTENTIALLY GET SOME OWNERSHIP ON CASH SALES IN PLACE AS WE HEAD INTO THE JUNE REPORT.
2. FEED HEDGERS SHOULD BE VERY READY TO GET THE NEXT 6 MONTHS OF THEIR NEEDS FOR MEAL & CORN & FUEL FILLED BY THE 1ST WEEK OF JUNE AS WELL.
3) Planting Progress Should Be Much More Advanced This Week: I’m putting corn at 93% up from 71% last week, and Beans at 52% up from 24% from last week. Some producers have called-in this past weekend ad this morning and suggested that dryness on newly planted fields is starting to affect Emergence—I doubt that USDA will pick this up but I’ll be looking for it in any case.
4) A THOUGHT ON USDA’S NUMBERS LAST WEEK: I fear that USDA is becoming more inconsequential to the trade due to their assessments so far this Spring—and I say this because they are not only dropping yield data out of their statistics in corn for last year, they are more important to me going against the “Cardinal Rule” of commodities: high prices and low prices cure themselves through supply-demand reacting.
1. Take for example the new-crop bean exports; USDA projects 1.505 Bln. Bu. Exports for ‘12/13—a record even though the US Gulf Price is near the highest it’s been since mid-2008: $550/ton. When it was last above $550/ton in Jun’08, US Exports for that MY were 1.28 Bln. Bu. Similarly, the last record we had in US Exports was 2010, at 1.501 Bln. Bu—when prices were approx. $360/ton. How can we expect record prices and record exports? It is possible but a rare event in commodities, based upon my experience.
-Mike Zuzolo, Global Commodity Analytics & Consulting LLC
3548 S 9th Str, Lafayette, IN 47909 USA
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