FIRST LOOK, by Duane Lowry
Friday, August 12, 2016
At 11:26 am> Grain/Soy Snapshots: Corn= 7 lower, Wheat= 7 lower, Soybeans= 13 3/4 lower.
*At 11:00 this morning USDA released the following:
Corn= 15.153, vs estimates of 14.784 bil avg, range= 14.590-15.146, July USDA= 14.540, Last Year= 13.601
Yield= 175.1, vs 170.8 avg, range= 168.6-175.0, July USDA= 168.0, Last Year= 168.4
Soybeans= 4.060, vs 3.949 avg, range= 3.865-4.054, July USDA= 3.880, Last Year= 3.929
Yield= 48.9, vs 47.6 avg, range= 46.7-48.8, July USDA= 46.7, Last Year= 48.0
Corn= 2.409, vs estimates of 2.287 bil avg, range= 2.091-2.653, July USDA= 2.081
Soybeans= 330, vs 23 mil avg, range= 260-403, July USDA= 290
Wheat= 1.100, vs 1.115 bil avg, range= 1.080-1.213, July USDA= 1.105
Wheat received information from USDA this morning that was in line with estimates and fully known fundamental foundations. As I have discussed before, wheat has little incentive to follow any row-crop weakness or harvest related negativity. Wheat has found price levels that are very capable of producing a major long-term bottom. Current levels offer ownership opportunities.
Corn production will top 15 bil bushels, according to USDA. Wow, did we ever think we would read those words! Favorable and/or non-threatening weather for such a vast majority of US acres set the stage for this to occur and while there is a certain “shock" element to seeing the specific number in print from the official USDA, we really should not be surprised at USDA’s general finding. We may or may not achieve my long-held target of a probe below $3.20 today, but it seems likely that we will chew through that level at some point during the next few weeks. Downside risk can easily be towards $3.00, but once we get below $3.20, basis Dec, I will have no interest in any bearish stance. Demand will be robust through the harvest window, as buyers from every sector of demand will be searching to establish ownership, include export demand. For producers, today’s number may be discouraging when thinking about its weight on market sentiment, but when they choose to focus on what is most important…THEIR OWN PRODUCTION figures, hopefully there will be much to celebrate. I am sure today’s USDA figure will produce some very bearish downside targets, but I encourage you to largely reject that thinking. Bracket Dec corn from $3.00-3.20 and you should largely have defined most, if not all, of the downside risk between now and December. Price ranges may continue to shrink during this process of absorbing the reality of a 15.0 bil bushel crop, but that process doesn’t have to require steeply trending lower values. Erosion, in my opinion, will be a better explanation of what price action may look like during the next several weeks.
Soybeans also received a shocking headline number from USDA, with US production pegged over 4.0 bil bushels. However, from a longer-term perspective, the right number to focus on is US carryout at 330 mil bushels. This is only marginally higher than last year and well below what we have seen for expectations at multiple times in the past. Considering we will produce the milestone of a 4 bil bushel crop, having the not so uncommon carryout projection of 330 mil bushels actually seems quite bullish to me. Add to this the historical norm that USDA and market sentiment seems to always overestimate US soybean carryout at this time of year and again, I come to a rather bullish undertone to my thoughts towards future price potential. Remember, this market has already achieved the downside target zone for a major bottom. Now, who knows how long we might stay churning down here and we certainly have the potential to experience price erosion below the recent lows at some point in the future, but fully reject any super bearish attitudes that you might here in the hours/days ahead. I believe this market needs to reach a more advanced stage of maturity before the Bear market gives way to a trending higher Bull market, but it is very possible and probably very likely that the time spent “down here" will be much shorter than what today’s popular opinions might suggest! Search price action during the next several days for longer-term bullish strategies and ownership opportunities.
In summary, the US farmer and seed companies have again showed their remarkable ability to produce if weather deals them a favorable/non-threatening hand. Try to avoid the discouragement that will be surely heard today. Better prices are ahead and downside risks will prove to be not much different than what I have been talking about for quite some time. It is time to be bullish wheat. It is warranted to believe time and minimal price erosion below $3.20 will contain the market’s reactions to bearish supply projections. Soybeans may need more time and price structure unfolding to believe that the Bear market has reached maturity, but expect that process to occur much more quickly than today’s popular rhetoric may suggest.
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© 2016 Duane Lowry. All Rights Reserved.