Global equity traders were cautious overnight ahead of this morning's highly-anticipated release of US second quarter growth data, or gross domestic product (GDP). US equity and economically sensitive commodity markets took a nose dive early today when the Department of Commerce reported that second quarter GDP rose just 2.4%, down from analyst pre-report expectations of 2.5% and below the revised first quarter estimate of 3.7%.
Fortunately, the outside markets stabilized ahead of the opening bell in the Chicago grain pits, allowing grain and oilseed prices to continue its rally of the past couple of days. Trading was a bit more erratic as traders prepared to square their books for the end of the month and due to pre-weekend positioning, but bullish sentiment in the grain pits is beginning to feed on itself, almost more than on the fundamentals themselves.
That kind of momentum is very unpredictable, but we saw its potential in 2008. US projected grain stocks are larger now than they were at that point, but the emotions of a market that's feeding on itself are very strong. Furthermore, there is evidence to suggest that this week's strength in the grains is actually receiving a boost from quantitative easing comments made by Federal Reserve officials this week.
Those comments suggested that more liquidity needs to be pumped into the economy, which translates into a weaker dollar and revived inflationary concerns. Investors are disenchanted by the more economically sensitive asset classes, but headlines of adverse weather in Europe and the Former Soviet Union have captured their attention.
Once again, I see four major phases to a bull market. The first is when money managers begin buying a grain based on shifting long-term fundamentals. Traditional analysts and traders tend to shake their head questioning this move. The second phase is when end users begin to panic about rising prices and join in the buying spree on fears that prices will be even higher in the future.
The third phase is when money managers begin taking profits, but end users are in a final panic buying spree. Finally, end users realize that panic exceeds reality and they step out of the market, causing it to implode on itself.
The markets can go from phase to phase over an extended period of time, or rather quickly, with emotions high in the second and third phases. The grain and oilseed markets are currently in phase two, with both fund managers and end users chasing the market higher. It's very possible that we will transition to phase 3 by the August 12 crop report, unless sufficient bullish news continues to emerge to justify ongoing fund buying.
Commodity Weather Group notes that thundershowers were quite heavy in far northwestern parts of the Corn Belt yesterday, particularly near the Iowa/South Dakota border. Some localized flooding is occurring and some additional flooding is possible in northern Iowa in the next 5 days. However, the expected showers will otherwise be beneficial for corn and soybean development and should even hit some of the drier spots in northern Illinois and eastern Indiana tonight into Saturday.
There will still be close to 15% of the belt with moisture deficits when hotter weather arrives early next week (mainly Monday/Tuesday), with some minor yield losses expected. Highs will likely near 100 in Missouri and Kansas, with upper 90s for southern Illinois, southwestern Indiana and southern Nebraska. CWG's current forecast keeps central Illinois and southern Iowa in the low 90s, but these areas could reasonably expect to rise into the mid 90s.
Rains arrive with good coverage in the 6 to 10 day period to suppress heat and recharge soil moisture in most of the remaining dry spots. The European model suggests a warmer latter half of the 6 to 10 day period as well, but the expected showers should make the milder outcome more likely for late in the week. Another brief round of warmer weather is anticipated early in the 11 to 15 day period, but moisture shortages should be quite limited by then.
All in all, corn and soybean yields will be shaved slightly by the expected pattern, but serious losses should be averted due to the lack of broader moisture deficits or more sustained heat. The main risk for stronger heat is late in August, but much of the soybean crop will push through much of its pod development before this threat arrives.
Showers were spotty yesterday in the Delta and are not very impressive in the next 2 weeks. The best chance is in the 6 to 10 day period, but the risk to the forecast is also to the drier side. There is at least a third of the belt that still has moisture deficits. These areas will regularly top out in the mid to upper 90s or better and this will cause stress to dryland soybeans (which encompass half or more of the affected areas on average).
Looking to China, CWG notes that showers were confined to the southern crop areas again yesterday. Highs pushed well up into the 90s in the North China Plain (NCP) and will remain at those levels but should ease next week. Showers should gradually increase across the NCP by early next week. The showers will be scattered so some dry spots could pop up in areas that miss the rains. That will need to be watched next week as it could still impact the soybean pod fill.
Manchuria will see heavy rains in the south but much of the northern third of the soybean belt will still struggle to pick up much rain and could begin to see moisture stress on the pod development by the end of next week for the areas that continue to miss out. The corn in Manchuria should not be hurt as temperatures there are not as warm. About 10% of the corn is in northern Manchuria and could see minor yield impacts if dryness lingered into mid August.
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The debate in the coming weeks will be the impact of this year's growing season on corn yields. Weekly crop condition ratings suggest the possibility of a national average yield above last year's record of 164.7 bushels per acre. We have argued that this summer's heat would make that difficult, despite good moisture across 80% of the belt.
Iowa State's Elwynn Taylor provides more information on the impact of August temperatures in an embedded video near the end of a more detailed story on FarmFutures.com. Today's genetics probably allow the crop to handle the warmth better than some in the past, but it does suggest that yields will likely fall short of expectations.
Yet, surging wheat prices on rising supply concerns pulled corn higher once again today, with prices triggering preset and chart-related buy stops along the way that accelerated gains. Panic buying pushed prices higher, but there is some fundamental support beneath this market as well.
Prices are rising too far too fast, but we should eventually see an increase in demand for corn as a result of the dynamics driving wheat prices. The world will likely lose at least 0.5 billion bushels of feed wheat production this year. That should eventually increase demand for corn, with much of it originating from US shores.
Near-term, I expect USDA to raise its production estimate on August 12. That increase should be partially offset by an increase in exports, but I think the report will be modestly bearish nonetheless. I then see the fundamentals strengthening again into the fall and winter. However, this market can continue to feed on itself beyond what's justified by the fundamentals, with periodic sharp corrections that create a panic of their own.
December corn pushed through resistance at $4 today, followed by a rise above the 200-day moving average of $4.02. It's important for prices to hold those levels next week to maintain upward momentum that's attractive to investors. September corn continues to target a test of $4, which should clear out much of the remaining old-crop cash corn left in the country. The next upside objectives would be $4.15 and $4.25.
August soybeans surged on tight supply concerns as both export and crush demand continues to exceed USDA projections. The contract triggered fresh buy stops as it pushed through modest areas of chart support, surging late to move above $10.50 per bushel. It's the first time that a lead contract has traded above $10.50 since August 28 of last year.
The September contract will now try to follow as it takes over on the long-term continuation charts. It pushed higher late in the session to close above $10 for only the second time since January. Increasing chatter about potential weather problems in August provided the fundamental excuse for today's rally, even though little has changed from forecasts seen on Monday when prices were plummeting.
Updated weather models for the first half of August will set the tone on Sunday night. However, money flow into the wheat pit will also have a significant impact in shaping market sentiment for the first week of August.
Commodity Weather Group reports that showers are occurring in both US and Canadian wheat areas currently and they will continue to scatter across these areas over the next several days. However, drier trends are showing up in the 6 to 15 day period that would aid maturing spring wheat in the Northern Plains and wet soils in the northern Canadian Prairies. Crop conditions should generally be stable or improve slightly. The only concern area is in northwestern Alberta (Peace River region), where 5% of the Canadian crop area as a whole has moisture deficits. However, there have even been a few scattered showers in that area this week.
There is very little change in the forecast today for Argentina, with no rain in the past 3 days and very little activity through the next 2 weeks. This will allow moisture supplies to continue to dwindle for much of Argentina, with the best chance for rain along the eastern edge of the belt in the 1 to 5 day period. However, moisture needs are very limited for emerged wheat at the moment and the current dryness will simply elevate the importance of timely spring rainfall in order to sup-port jointing and heading in late August and September.
Temperatures remain cold, but this also is not really a threat to wheat right now. The area of concern remains in the southwestern corner of the belt, including parts of western Buenos Aires, eastern La Pampa, and southwestern Cordoba. These areas have largely never seen rains improve this growing season to allow for much seeding, and this unplanted acreage is likely the reason for the lack of returns that show up on the vegetative health imagery for the region. This area encompasses about 15% of the wheat belt and time is running out for planting.
Wheat prices soared on Thursday on word that the Ukrainian government had increased quality inspection requirements, which were interpreted by trade sources as export curbs. A trade source within Ukraine provided greater clarity today, stating that World Trade Organization requirements do not allow Ukraine to curb exports. However, he said that the government would probably be more aggressive in buying local supplies to guarantee sufficient stocks to curb food inflation pressures. That in essence would reduce exports from the Black Sea region.
The Canadian Wheat Board expects this year's crop to fall 17% from year ago levels due to adverse weather. Trade sources today suggested that production problems in Canada, Europe and the Former Soviet Union should increase demand for US wheat by more than 350 million bushels. That would push US exports to their highest level in nearly two decades, but it would still leave US ending stocks abundant at more than 700 million bushels.
As such, wheat fundamentals don't truly become bullish until/unless additional global shortfalls occur beyond those currently known, such as due to adverse weather in Argentina, Australia and/or the US 2011 crop. Dryness is already a problem in Argentina and Western Australia and La Nina increases planting time risks for the US winter wheat belt, but it's still too early to assume losses in these regions.
Back home, the annual Wheat Quality Council Tour of the Northern Plains found excellent yield potential across the region. Conditions overall through the week suggest that this year's crop may top last year's for yield, leaving concerns about protein levels.
Look for USDA to boost both its hard red winter and hard red spring wheat production estimates on August 12, while bumping it export target a bit more as well. However, the net affect could still initially be bearish, depending on how aggressive USDA wants to get with its export target at this point. In the past, it's tended to lean toward the conservative side in making drastic changes in demand estimates.
All currently known supportive fundamentals were dialed into this market some time ago. Yet, this market continues to feed on itself. Can it go higher? Yes, prices can go much higher as long as sellers remain on the sideline, afraid to be short (sold).
Chicago September wheat is now targeting the June 2009 high of $6.77, while that same high is at $7.27-1/4 and $7.97-1/4 in Kansas City and Minneapolis respectively. Do the fundamentals justify it? No, but the market "can" do it anyway when it simply starts feeding on itself, similar to what we saw in 2007 and early 2008. The downside risk is substantial if and when this market does tip over, but shifting emotions will largely be responsible for the timing and price level for that direction change.
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