The Grains Pit Review

For the week of September 28th, 2009

By PitGuru Matthew Pierce

A different weekend than usual. Today I am talking about all the fundamental factors, blatantly ignoring the macro side just to expose the underbelly of what's moving the agriculture market.

Corn has the least realistic reason to rally. Ending stocks estimated on either side of 1.6 billion does not inspire bullish attitudes. It does have delayed harvest with some analysts looking for losses approaching 400 million bushels. This would concern me if the crop wasn't estimated over 13 billion. Looking at Ethanol, I see growing demand but the political question here is the battle between subsidies and mandates. I feel the mandate battle will win as the government itself starts to increase usage over the next 6 years. This should maintain Ethanol’s presence as a demand component. Concerning demand seen on front end loading by Mexico and Korea I would look for exports to continue to decline as seen over the previous weeks. Mentioning macros briefly, this is weak dollar driven. The USDA has high expectations for exports so I cannot see good sales as a bullish scenario. S. American planting and expectations are both bearish. Recent rains have recharged both top and sub soil moisture levels setting the stage for a big crop. Whether the lofty 115 MMT (using soy as a baseline) combined for Brazil and Argentina is reached has yet to be seen.  Domestic basis is undeniably bullish due to delayed harvest with the pipeline very thin. The demand for HFCS continues to support the cash market and will install a consistent bid on any drop. Overall the picture appears far rosier than I feel it really is. The short term (2 weeks) may continue the bullish attitude, but I feel a drastic (30+ cents) drop is on the horizon so don't marry bullish positions while looking to build a short delta position or while looking to bear spread Z/Z10 when harvest starts to really roll.

Beans have the more compelling story with harvest delays eating into already small carryout expectations. Hefty planting and production expectations limit the upside with China the biggest component of demand. As seen in recent weeks, China is turning to S. America for beans on the flat price run up. This is not a signal of unconditional demand but with rumors flying concerning a continuation of the stockpile program in China the chance for unlimited demand still exists. The bull stance is more acceptable for beans even with the lofty expectations for Latin America. Once we get our harvest off, as mentioned above for corn, the domestic bid will collapse. I like beans due to relative carryout levels as compared with corn or wheat for that matter. My concern here is everyone’s leaning into the bean bull. I can't find someone who is bearish from current levels making me leery of following any real rally from current price levels. Remember that the market has a habit of screwing the most people possible. The market seems very comfortable on either side of 920.

I hope this discussion sheds a bit more light on the underlying factors. Corn has a good bid but ending stocks and a massive Chinese crop will limit upside potential. Beans have limited and shrinking supplies countered by rampant demand. As mentioned here, beans are leaning too bearish which will cause nasty corrections as weak length is flushed out. These are the times for bean bulls to strike. Corn bulls needs to play short term positions looking small hits. Bears should settle into corn using this as the weak leg of spreads while also looking for volatility to come back in line with the rest of the floor.

Past performance is not necessarily indicative of future results.