Settlements 10/07

A quieter day overall across the board, with corn, wheat and soybeans all closing only modestly higher. All three markets traded both sides as the recent gains were consolidated amid thin trade.

With the recent upside momentum stalling, the key question now is whether outside markets and weather forecasts can muster enough bullishness to keep things going for another leg up ahead of Friday's USDA report. The US dollar spent most of the day in positive territory to mute buy-side interest in the commodities arena generally, but there is still a consensus that the US' increasing debt burden will maintain pressure on the US currency to keep demand for dollar-priced commodities quite steady.  Meanwhile, the most recent weather forecasts continue to call for freezing temperatures only in the northern reaches of the Corn Belt this weekend, and normal rainfall patterns elsewhere that may keep harvest progress a bit slow.

The main question for our markets is whether or not the frost story and weak dollar situation have already been factored in by prices. We suspect that they have, especially in soybeans, which continue to look vulnerable to a more pronounced dip below $9 in Nov futures. Wheat also looks heavy, but corn has the potential to tread water in the $3.50-3.60 area for a while longer until we get a more solid feel for the extent of any cold weather damage early next week and general test weights across the country as harvest plods along. That data may take some time to filter through, which could prevent prices from aggressively slumping again soon.

However, it must be remembered that without a threatening frost the corn crop has the potential to finish out at a record size, which begs the question is the demand side of the equation capable of using up potentially more than 13 billion bushels of fresh supplies? We'll get some more insight into that in Friday's USDA report, but overall we expect that the feed sector and export market to remain question marks until into the first quarter of next year. That would leave ethanol as the only reliable strong point in corn right now, and while that industry certainly has the capability to stay strong can we expect aggressive expansion while we are still in the midst of a global recession? We think not, which is why we are anticipating actual corn usage to undershoot estimates for the next several months, which could lead to a steady climb in US ending stocks. We expect that scenario to limit corn's upside room from here and set the stage for a potential return to the low $3 area in Dec futures once harvest gets cranked up more fully.

Overall, we maintain that near-term rallies provide attractive selling opportunities for producers who are not already more than 25-30% sold in both corn and soybeans. Bean producers are encouraged to be even more aggressive in their sales, as once South American crops get harvested another downward leg in US prices can be expected.

We will be laying out our expectations for the USDA report tomorrow, so check back in with us then to make sure you are appropriately positioned in case of any surprises.

And, as always, call us with any questions.

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