Few Surprises In Latest US Department Of Agriculture Crop Report

Analysts were on the mark with their pre-report estimates for the USDA June Crop Production and Supply/Demand report released Wednesday morning. One of the most anticipated parts of the report was the 2009-10 Corn ending stocks estimates, which the USDA pegged at 1.090 billion bushels, down from the 1.145 billion bushel estimate in the May report and just above average analysts estimates of 1.071 billion bushels. Less than ideal weather conditions had delayed Corn plantings east of the Mississippi River, which forced the USDA to lower average yield estimates by 2 bushels per acre to 153.4 bushels. The decline in the upcoming season’s carryover figures was muted by a decrease in feed and residual demand of 100 million bushels.

Ironically, the USDA did not lower its Corn acreage estimates, but that should change in the highly anticipated June 30th Grain stocks and planted acreage report. Another highlight was the carryover figures for old crop Soybeans, which will remain extremely tight this summer. The USDA lowered the 2008-09 Soybean carryout to 110 million bushels, down 20 million bushels from its May estimate and right in line with analysts’ estimates. Higher U.S. bean exports combined with higher Soybean crush estimates accounted for the carryover decline. U.S Soybean exports have been strong due to strong Chinese buying, as well as less competition from Argentina, which has suffered from poor growing conditions this year. Soybean Meal demand has also been strong, which contributes to the higher crush prediction.

Yesterday’s figures should do little to alter the prevailing trends in the Corn and Soybean markets, with bull spreads continuing to widen in Soybeans and Soybean Meal. New crop Corn futures are hovering near yearly highs, aided by a weak U.S. Dollar driving investors into commodities as a hedge against inflation and signs of an economic recovery coming sooner rather than later. Long-time grain traders will know that USDA report days are notorious for producing “reversal” days, especially when speculative interest is heavy. There have been many days where it was not uncommon for the market to open limit-up after a bullish report, and then finish the day limit-down after speculators rushed to book their profits when protective stops were hit. Though it is still early in the growing season for this to happen, traders should be cautious later in the summer as USDA report days draw near.

Trading Ideas

Since March, the July/November Soybean spread has widened by over $1.40 per bushel, as extremely tight old crop stocks and possibly record Soybean plantings have forced old crop beans to move to a large premium to new crop beans to help ration demand ahead of this year’s harvest. Given no current signs that the near-term tightness will abate soon, some traders may wish to consider buying old crop Soybeans (July or August )and selling new crop soybeans (November) on any price correction in the spread, which is currently around $1.77 July over November premium. There appears to be major chart support around a $1.20 July premium over November, with more minor support in the $1.45 July premium over November. Traders should remember that these old crop/ new crop spreads can be quite volatile and may not be less risky than an outright long or short position. It is quite possible for one side of the spread to be trading higher and the other side lower in the same trading session.

Technicals

Looking at the daily chart for July Soybeans, we notice the market has moved nearly straight up since the recent lows were made in mid-March amidst the steep sell-off in the equities market. Since that time, July Soybeans have climbed about $3.00 per bushel, as the market tries to ration supplies of old crop beans. It’s no surprise that prices are well above both the 20 and 200-day moving averages. The 14-day RSI is in overbought territory with a current reading of 72.42. Given the recent correlation between the weak US Dollar and higher equity and commodity prices, any major rally in the greenback or equities sell-off could spill over into the Soybean market, which could spark a major sell-off as speculators get stopped out of existing long positions. The next resistance point for July Soybeans appears at the 1300.00 area, with near-term support seen near the 1177.00 area.

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