"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Monday, October 27, 2014

USDA Reports Good Harvest Progress made Last Week

Here are the harvest progress numbers provided by USDA this afternoon.

Corn is at 46% complete while Beans are at 70% complete.

In going through the reports, excellent progress was made in the Western region of the Corn Belt. That fits with the weather conditions which showed that big front which touched off a large amount of rainfall, moved rather quickly out of the Western region before taking its time to clear the Eastern Belt.

Let me give you a sense of the numbers to illustrate this:

Iowa is now 81% complete on bean harvest compared to last week's meager 61% and the previous year's 85%. The five year average is also at 85% so Iowa has essentially caught up with the averages and looks to be in very good shape on the beans.

Minnesota is at 94% compared to last week's 85% and the previous year's 89%. The 5-year average is 87%. Minnesota is running ahead.

N. Dakota and S. Dakota are both well ahead of last year's pace and the 5 year average.

As one moves more towards the East, we can see the impact from the storm.  Illinois is at 63% complete versus 37% last week and 83% last year. It's five year average if 77%.

Indiana is at 50% complete versus 31% last week and 76% last year. Its five year average is 75%.

Ohio is at 50% complete compared to 36% last week and 80% last year. Its five year average is 73%.

As you can see from the numbers, Harvest progress has lagged as one moves West to East. This explains the extraordinarily wide basis being seen in the meal and beans from the Eastern Belt. Processors have been scrambling to get beans over there because of the lag in getting the new crop flowing into the pipeline.

The weather however looks pretty good over in the Eastern Belt from Tuesday on through the weekend at this point with some cooler but dry conditions forecasted from what I can see at this time. There looks to be a lot of sun which should allow the harvest in that portion of the belt to begin to play catch up.

Let no one be surprised to see a sharp jump in the numbers we get next Monday. The size of these combines and the speed and accuracy at which they can operate is stunning. Look at how quickly Iowa caught up in one week's time with good weather!

At some point, once these newly harvested beans begin flowing into the pipeline, any shortage in that EAStern belt is going to be eliminated. That is when the temporary spike in meal prices - and subsequently in beans - should come to an end.

We have to keep one eye on S. American weather but right now, the rains look timely and mostly sufficient.

The corn is where harvest is lagging the most and that is perhaps the reason we are seeing more impact from this sharp rally in the meal than we might otherwise see at this stage of the season. There is nothing to indicate any damage to the crop that remains unharvest but some are sticking some premium into the corn until they see a larger % of the crop in the bin.

Farmers have been focusing on bringing the beans in and leaving the corn to dry down further.

Let's start with Iowa which is 36% complete on the harvest compared to 19% last week and 52% last year. Its five year average of 65%. Obviously it is well behind.

Minnesota, ahead on the beans, is behind on the corn with 41% complete compared to 16% last week and 44% last year. Its five year average is 63%.

N. Dakota and S. Dakota are well behind as is Nebraska.

In the Eastern Belt, Illinois is 59% complete compared to 43% last week and 71% last year. The five year average for that state is 72%.

Indiana is 44% complete compared to 31% last week and 57% last year with its five year average at 60%. Lastly, Ohio is 36% complete versus 23% last week and 46% last year. Its five year average is 44%.

I can say essentially the same thing about this as said about the remaining bean harvest - the weather for the remainder of this week looks pretty doggone good to allow substantial progress to be made.

At this point, technical-based buying generated by some initial buying based on the slower pace of harvest has now unleashed a torrent of both short covering and new longs in these grain markets. Couple the strong basis for meal in the Eastern Belt and funds have been going beserk in their buy programs. At some point, and I believe we are soon reaching that point, new crop supplies are going to start flowing in considerable size and that is going to unleash the hedge pressure that has heretofore been absent. It is the absence of that strong hedging-related pressure that has produced a pocket of air ABOVE the grain markets and allowed fund buying programs to essentially move prices unimpeded to the upside.

Simply put, the funds are not selling at the moment and neither are the big commercials  ( YET) in size. Once the fund buying meets up with sufficient supply to absorb it, I believe that the grains are going to come face to face with the reality of massive supply looking for a home and competing for storage and transportation availability.

In looking through today's numbers, I cannot see any further justification for running the meal, and thus the beans, significantly higher especially given the forecast for harvest this week.

The corn might still try to keep some premium in it but a fair amount of that premium is already accounted for. With progress moving only one way at this point, and that is higher, maintaining much more of any sort of premium in corn related to harvest delays seems unwarranted.

My concern for the grains remains the same - when the funds are done buying, having chased prices to such lofty levels considering where the beans and the corn were at the start of the month, who is going to take their place on the buy side?

I guess we shall see soon enough, shall we not?

Soybean Meal Continues Pulling the Grain Floor Higher

Last week it was the 100 day moving average in the meal that was the talk of the town. Today, and this week, it is the 200 day moving average. Meal has now taken both of them out and has set in motion a blast of buying by hedge funds in spite of the fundamentals associated with improving harvest progress and soon to be hedge pressure.

Farmers watching the rally are sitting tight on sales of new crop ( (which is a mistake in my opinion ) as most of them now want to see how high the rally in the beans and in the corn will go before they let go of their newly harvested crop.

The problem with such thinking is that it essentially turns the farmer into a speculator. Rallies that fly in the face of fundamentals are bewildering but they can flame out faster than they began leaving a lot of people holding the bag at the highs wondering what they did wrong.

My suggestion to farmers who think higher prices are yet to come is to not hold off on selling any new crop but to sell a portion of it and replace that with call options if you think you can fetch more down the road. What you do not want to do is to end up selling at the same time all of the hedge funds do as well!

Once processors have new crop supplies of beans flowing into the pipeline, especially in the Eastern Belt, basis is going to move swiftly lower in my view. The buying frenzy that has been seen in the meal will then become a selling frenzy. Again, I have no idea when that will occur nor from what level it will take place but I am watching several key technical levels to get a sense of when the hedge funds will have awakened the big commercial hedge pressure machine.

For now, it is the funds in the driver's seat.

Meal stalled out last week at EXACTLY the 50% Fibonacci retracement level of the collapse from the May high near $412. It flew through that level this morning and is now threatening the 61.8% level near $368. Quite frankly, I am going to be stunned if it can succeed in clearing that level although with the Dollar showing some weakness today and the macro boys buying into commodities as a result, anything is possible. If it does, we could see this thing run all the way to $380 before reality sets in.

Meal had traded in a range between $360 and $340 for nearly two months ( July-Sep) before it broke down in the face of the massive bean crop expected. That it has not only returned to this former "value zone" but has exceeded it, is something that I never expected to see and I have seen a lot of weird things in the bean market over the years.

There is some chatter occurring that late rains in Brazil have turned some farmers there away from beans and towards cotton but one has to be careful with such unconfirmed rumors. More often than not, these sorts of stories arise when people are trying to come up with some sort of fundamental reason to explain inexplicable technical price action.

The technical price action has many analysts now confidently predicting a harvest bottom has been forged and that the grains are going to work higher from here. Put me in the disbeliever camp but until I see some signs that these funds are through playing "chase prices higher and move more demand to S. America" I am very careful. Those computers are unacquainted with "value" and will press in the direction that they are programmed to go until something halts them and makes them reverse.

This afternoon we'll get an update from USDA on the harvest progress.

Crude Oil Weakness Continuing

Two weeks ago during the trading session, crude oil briefly dipped below the $80/barrel level. It did not stay there long however. This morning, crude has revisited the sub $80 level. This is something that we should monitor closely.

We will want to see how this market closes today as it has not had a close below $80 since 2012.

Weak crude prices, while generally good for the consumer ( cheaper energy costs ) and some business interests ( transportation related), are a sign of sluggish economic growth generating insufficient demand to keep up with available supply.

Equity markets are lower as I type these comments as well with the Yen higher and the bonds higher. More safe haven plays are in vogue at this point. Deflationary pressures are back once more on the minds of traders it would seem.

Gold is getting tugged between being a safe haven and the general trend lower across the commodity spectrum.

Macro trades are on display once again.