Outside Money Supports Prices

Soybeans are driven higher by supply fears.

Published on: May 19, 2009

The money is flowing from Wall Street toward Chicago's La Salle Street once again. The latest CFTC data shows a 145% increase in net fund ownership of corn, soybeans and Chicago & Kansas City wheat over the past 10 weeks. Fund managers point toward long-term tight supplies of the food-based commodities, but ownership of the food-based commodities also make an attractive hedge against inflation amid investor disappointment in the alternative markets available to them.

Fund managers are focusing on those commodities that show the greatest promise of long-term gains as investors slowly come out of hiding. A stable stock market gives them the confidence they need to venture into the investment world once again as signs of a turning economy emerge. Ongoing uncertainty will likely create periods of wild price swings as emotions wax and wane, but the trend toward a weaker dollar and renewed inflationary concerns argue for both higher grain prices and higher input costs in the months ahead. The dollar tested 2009 lows once again today, while crude oil traded above $60 per barrel for the first time since early November.

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Commodity Weather Group reports that dry weather has now been in place for most northwestern areas of the Midwest Corn Belt for the past week, while Ohio and far eastern Indiana have been dry for five days and other areas in the southern belt for three days. A relatively quiet pattern will continue for the balance of this week in all but northwestern areas, with the best chance for any rain elsewhere occurring on Friday along a weak front.

These rains may reach a few spots in Missouri, Illinois, Indiana and Ohio, but activity should remain very isolated. Northwestern areas will only see another three days of drier weather, but the rest of the belt should largely see another five to six dry days.

This will result in a total window of eight to 10 days for most areas, allowing for some improvement in areas of the south and east that are running very slow with planting (particularly in Illinois and Indiana). However, this will be the main opportunity for any major advances in the Ohio Valley, as wetter weather returns next week. The 6 to 10 day outlook has turned decisively wetter for southern and eastern areas of the Midwest. North Dakota is also running well behind the normal pace due to cool soil temperatures, but this should improve during the next 10 days.

USDA's weekly crop progress and condition report showed a continuation of the sharp contrast in planting progress. Iowa and Minnesota remain on target with 90% of the crop planted, with Nebraska at 93%. However, just 20 and 24% of Illinois and Indiana were planted as of Sunday respectively, while just 39% of Ohio and 23% of North Dakota was in the ground. Overall, 32.3 million acres remained unplanted as of Sunday, with nearly one-third of that total in Illinois and 50% of it in the three states of Illinois, Indiana and Ohio. Every year since 1986 that produced an above-trend yield had at least 76% of the corn crop in the ground by May 17.

Corn

Corn prices were a reluctant follower of soybeans early on today, but then gained upward momentum by late morning. Sales increased to pressure prices into the noon hour, but late buying in the final couple of minutes pulled prices higher once again. Planting delays continue to threaten both acreage and yield, even with this week's more favorable pattern. A wetter forecast for next week added support, with some eastern areas expected to remain soggy through much of this week due to saturated soils.

July corn is establishing itself above the 200-day moving average this week. The next objective for chart watchers is to close the gap on the daily continuation charts to $4.53, followed by $4.83. However, the latter target probably needs additional demand support, or greater threats to the size of this year's crop to make it happen at this point. Traders will be monitoring Thursday morning's USDA weekly export sales report for signs that prices are slowing demand, but end users continue to buy the breaks, providing good support.

Soybeans

USDA reports that 25% of the soybean crop is in the ground as of Sunday, meaning that 19 million acres have been planted to date. That's far short of the 44% or 33 million acres that would normally be planted by this point. Roughly 18 million of the unplanted acres are in Illinois, Indiana and Ohio, where farmers are trying to get corn planted first. In fact, just 1% of Illinois soybeans have been planted, when the normal pace is 50%.

While supportive, the real strength of this market continues to be in the old-crop contracts, which soared to nearly eight-month highs today. Farm Futures models suggest that soybean stocks are on pace to reach just a 9-day supply; something that the market cannot allow to occur. Prices must reach high enough levels to ration demand to keep the supply pipeline functioning. They have not yet done that.

July soybeans gapped higher this morning, pushing past gap resistance from last September on the daily continuation charts in the process. Both end user and speculative fund buying provided the support, with a potential supply squeeze looking increasingly likely as the July and/or August contracts approach expiration. The next primary chart objective at this point continues to be a move to $12.14, which would complete a 50% retracement of last fall's collapse. First significant support is at $11.

November soybeans traded within a tick of $10 in open outcry trading today. Consecutive closes above $10 would make the contract attractive to speculative buyers, while also sending a warning to end users about potentially higher prices down the road. However, key support is still near $9.50, so a set back is possible if the outside markets turn lower.

Wheat

Commodity Weather Group indicates that while recent showers have brought slight relief to drier sections of the western Canadian Prairies, more rains are needed to improve early growth prospects. Some slight improvement is possible over the spring wheat belt over the next two weeks, although cool temperatures this week will continue to slow emergence rates. Meanwhile, some gradual improvement should continue in the planting pace for Montana, Minnesota and North Dakota, as showers will be limited.

USDA reports that 56% of the winter wheat crop is heading, down 10 points from the five-year average pace. Delayed heading results in a shorter grain-fill phase unless temperatures remain abnormally cool. A short grain-fill phase tends to result in lower yields. Agronomists also report seeing evidence of reduced fertilizer usage due to high costs that is leading to fears of lower yields in portions of the belt.

Yet, this week's crop rates a condition index score (500=perfect crop & 100=total failure) of 319, up 5 points from the previous week, but down 7 points from the 10-year average. USDA reports that 26% of the nation's crop is rated Poor to Very Poor, but that's down 1 point from the previous week.

The spring wheat crop is 50% planted and 21% emerged as of Sunday, down 40 and 38 points respectively from the five-year average pace. North Dakota is 31% planted and 5% emerged, down from the normal pace of 87 and 54% respectively. North Dakota farmers are worried because yields tend to fall each day that planting delays beyond May 15. Cool soils aggravate the problem by delaying the start of the crop's development. Yet, Minneapolis traders took profits on recent gains today, with much of the current crop delays already factored into the market.

Chicago July wheat tried to follow corn higher today, but failed again in its attempt to push through chart resistance at the 200-day moving average on the daily continuation charts. Kansas City July wheat failed in a similar repeat attempt to move above $6.50. Meanwhile, Minneapolis wheat consolidated lower, but shows signs of forming a bull flag on the charts with fundamental support from planting and emergence delays in the Northern Plains.

Wheat has a fundamental story, but probably not enough of one yet at this point to sustain this drive should the other markets fall back. Fortunately, they continue to push forward, providing ongoing support for wheat. Harvest has begun in Texas, with low yields providing support until combines reach Kansas. As such, wheat should be able to maintain price support as long as buying continues in corn. However, we'll need to see reports of disappointing yields to sustain that strength into the summer. 
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