"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, June 30, 2014

Trader Dan Grain Index at 5 Month Low

Today's USDA reports really did a number on this index that I have created for my own analysis purposes. The unexpected data showed supply outrunning current expected levels of demand and forced the market to adjust to the new set of fundamentals.

If you note the index, it is at a 5 month low!

A couple of things to note here that I was unable to get to this morning amidst the hustle and bustle of trading activity. First, corn demand has fallen off because feed demand is falling off. The reason is because we now know that there are less piggy mouths around to feed than previously expected. Also, cattle numbers are well off last year's levels as well. Less animals to feed means less corn demand.

Secondly, even though planted acreage estimates for corn are lower than last year, traders are expected the harvested crop to actually come in larger than last year. The reason is because we have thus far had nearly ideal growing conditions. The crop looks terrific at this point as it enters the key pollination stage and for now, forecasts look benign.

Wheat prices are low but global supplies are ample and US prices have had to respond to increased competition from other nation suppliers.

I do want to add another note here - today is both the end of the month and the end of the quarter. End of the month positioning is bad enough but throw in a good dose of end of the quarter book squaring, and all manner of strange price moves can be seen.

Dr. Copper Threatening an Upside Breakout

One look at the chart says it all - Copper is knocking on the door of overhead chart resistance and is threatening an upside breakout.

The catalyst has been continued improvement in recent Chinese manufacturing economic data. Traders are also optimistic that this evening's upcoming overnight release of China's monthly purchasing managers' index is going to be positive.

Also, today's US pending home sales data was a big mover of the market. Sales rose 6.1% in May compared to the previous month. The estimates were for a very modest 1.1% increase. The red metal leapt higher when the data hit the wires as it was much better than expected. Bears were caught off guard by the surprisingly strong number and wasted no time covering.

Copper bulls are banking on improved numbers coming from the two largest consumers of the red metal ( China and the US).

Also, there is behind the scenes talks occurring among banks and traders caught up in the double and triple counting metal schemes to split losses. That seems to have lessened the impact from any expected forced sales of copper in the event that the Chinese authorities force the loans to be called.

It's funny isn't it how one day the market is terrified of losses and then the next day it could care less. Such are the fleeting vagaries of sentiment. One never knows when it will change or what it will decide to focus on from day to day. Let's just say that for now, looking at the chart, Copper is convinced that economic data is going to be improving as we move forward into the summer months.

Let's keep a very close eye on this chart. It is one of the most accurate indicators of global economic activity that I know of.

USDA Report Unleashes Massacre in the Grain markets

Today was the big day we grain traders were all waiting for as it was USDA report day. The June Acreage numbers were going to be released along with the Quarterly Grain Stocks numbers. All I can say is "Great Googly Moogly! Look at what USDA hath wrought!".

To say that the report was bearish would be an understatement, especially when it came to the beans. The sheer size of the acreage number ( a stunning 84.8 million acres ) caused traders to gasp in astonishment. This is a record. We were expecting a big number but this was well above the pre-report average estimates. To put it into a bit of perspective - last year 76.53 million acres went to beans. Previous USDA estimates were at 81.49 million acres. No matter how one looks at this report, it is a shocker.

The combination of sky high soybean prices and unseasonably cool, wet weather in certain key corn growing areas, meant that the move to soybeans was strongly underway. Also, the weather in other key soybean growing areas was very good and led to the crop getting in early in some cases.

This report confirms that old but wonderfully time-proven adage; " The best cure for high prices is high prices". Simply put, the market sent the signal that more soybeans were needed and farmers responded accordingly.

If that was not bad enough for the bulls, USDA also came in with an ending stocks estimate that was above the pre-report guesses as well. Analysts were looking for 387 million bushels for carryover but got 405 million instead.

They also gave corn a swift kick in the rear by raising ending stocks estimates to 3.854 billion bushels, well above the 3.724 billion estimates. This is spite of the fact that the big move towards beans among farmers meant less acreage going to corn this year. The agency anticipates 91.64 million acres of corn compared to previous estimates of 91.69 million. To provide some comparison perspective - last year 95.37 million acres went to corn.

While the acreage number for corn, on the surface, seems friendly, ideal growing weather, a huge bean crop and reduced corn demand as evidenced by the 39% increase in ending stocks, gave the signal to the market to take the price lower yet.

This is excellent news for the livestock and poultry industries.

Expected wheat acreage also rose but out of the three categories, the wheat number looks the least negative. KC wheat is actually holding up fairly well given the weakness in SRW and the sharp downdraft in corn.

Farmers can still make money at these prices and hopefully some of them had secured some strategic option positions ahead of the report to give them some downside protection. This particular USDA report is notorious for producing very big and very wild swings in prices. It lived up to its reputation once more.

One side note - in speaking with a reporter over at Dow Jones today on the livestock markets and the reaction of the hogs to the Quarterly Hogs and Pigs report out last Friday, I commented that this USDA report is going to produce a very big shift in Farrowing Intentions for the rest of this year. Hog producer profits look to be outstanding due to these sharply lower feed costs. While most of the hog contracts are locked limit up today having opened that way in some months and remained there for the session at this point, next year should be considered optimistically by hog producers.

To the shell-shocked consumer who is watching gasoline prices moving higher, beef and pork prices soaring and seeing the number of grocery bags that they can bring home for the same price shrinking, at last we have a glimmer of good news on the food cost front. As I have said before, we are going to have to deal with high red meat prices for the entirety of this summer but some relief is still in sight later this year and certainly by next year. (* at least for now! Who knows if the weather will stay this cooperative for the remainder of the growing season!).

Here is a quick look at the November Soybeans Chart about 45 minutes after the USDA report release. Notice that the Head and Shoulders Pattern that was forming on the chart was violently confirmed by the breach of the neckline. Without getting too bogged down in details at the moment, given the time constraint and busy markets I am dealing with right now, the pattern target is down near $11.20 - $11.25. This of course assumes the weather remains friendly.

More later.....