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Markets reacting to USDA reports

By Doug Tenney, Leist Mercantile

Typically, the February USDA reports are non-events. However, grains all closed lower that day. The corn sell off resulted in 10 successive days of lower closes.

This month’s USDA reports included the monthly supply and demand reports. Corn ending stocks increased by 20 million bushels to 632 million bushels. Declining exports were to blame. They were lowered 50 million bushels to 900 million bushels. This is the lowest number since the early 1970s. The drought last summer as well as plentiful corn supplies from Brazil and Argentina has had a dramatic effect on U.S. corn exports. Mid-February they stood at just 326 million bushels. Last year at this time they were 741 million bushels.

Corn basis levels are at record numbers for this time of year. Central Ohio has seen values of 20 to 40 over March. The high corn prices seen since last summer have certainly had a dampening effect on ethanol production. Margins have improved in recent weeks — enough for two plants in Nebraska that have been idled to consider starting production again. Current estimates have 199 ethanol plants in the U.S., with 184 to 186 plants in actual production at this time.

Soybean prices early in February were able to rally to $14.98 following the declines seen in the first half of January to $13.51. The week prior to the Feb. 8 USDA reports, March CME soybeans for five days in a row traded above $14.90, but could not crack the $15 barrier. Longs got tired as the market lacked enough punch to move higher. Overall interest in trading soybeans continues to drop. Open interest is down substantially from last fall. Traders are apparently are getting tired of the market that peaked in early September 2012 when March CME reached $17.28 and then fell to $13.51 in January. In addition, several banks in Europe are removing agricultural commodities from their basket of funds they trade. This trend started last summer as banks and other traders did not want the bad press of being tagged the “bogeyman,” who traded grains, and thus contributed to rising food prices for any country looking to blame someone for their misfortunes. The rally detailed above was due to dry weather issues in South America as well as strong demand from China.

Soybean boats continue to join the foray of others ahead of them in Brazil. Last month it was estimated the boat lineup was 5.8 million tons. Some estimate this delay could be as much as 50 days or more. Private analysts suggest they could struggle to load just three million tons in March. Brazil’s farmers are estimated to have already sold 59% of their production as of mid-February. The normal sale number for that time is near 42%. Soybean harvest was 15% done in Brazil at that time.

Traders and producers can expect to see ample volatility continue to be in the cards for months to come. Factors in the mix of grain prices include weather, China, South America, world economies, and India. The list is by no means all-inclusive. Some suggest the volatility factors are at all time highs. With so much uncertainty, traders will be very willing to assume the role of “risk off,” as they work to avoid the huge amount of unknowns. Soybean open interest has been reduced significantly since last fall. It will take both weather and demand issues to push traders to return to soybeans in huge proportions. November soybeans seem likely to trade in a range of $12 to 13.50 in coming months. December corn has come under pressure in February as it dropped over 30 cents in just two weeks. It will take weather problems to push it back over $6 for prolonged periods. The eastern Corn Belt has replenished its previous moisture deficits. Unless December trades back above $6 by early April, it seems the downside is open to further reductions. Prices below $5.50 are reasonable should planting take place without incident.

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