August 6, 2008

US grain prices seen volatile over weather, erratic market forces

Grain prices have fallen sharply since July, and values are expected to remain volatile going into an important government crop report next week.

 

Benign Midwest weather and broad-based commodity-fund liquidation weighed on grain prices in recent weeks, and that was a factor in Monday's plunge.

The fickleness of these variables and numerable others could lead to acute price volatility before the release of the August 12 crop production report from the US Department of Agriculture, analysts said Tuesday (August 5). Not only is this the first survey-based yield outlook for corn, but this year it will include a revised acreage figure after the USDA revisited areas hit by extreme flooding this spring.

 

"You have to put it in the big perspective," said Don Roose, president of US Commodities in Des Moines. "With a big market, you put in big ranges."

 

According to a number of analysts, the Chicago Board of Trade December corn contract is seen trading within a range of $5 to $6 per bushel before the Aug. 12 report. November soy is seen trading within an $11.65-$14 per bushel range. December wheat is seen trading within a range of $7.25 to $8.50 per bushel.

 

The volatility of corn prices will be largely driven by fluctuations in commodity fund liquidation, weather, demand, crude-oil prices, and a brewing fight over acreage, analysts said.

"It almost all depends on the index funds," said Sid Love, analyst with Kropf & Love Consulting. "Are they no longer worried about inflation or the prices of commodities or not?"

Prices could continue to fall if "funds liquidate and blow out," said Love. Nevertheless, a break in prices is going to make exports and ethanol demand pick up, he added. Weather is also an uncertain factor and difficult to price.
 

"I think we could see it range between $5.25 and $6.00," said Love.

A battle shaping up over future global and US acreage could also provide some support, analysts said.

"I think the thing that stops you is that in the macro sense we still have to buy acres next year, and our demand continues to be very strong," said Roose.

 

Although the corn crop has greatly improved since early spring, it is also necessary to keep some risk premium because the crop is far behind and subject to a potential early frost, Roose said.

December corn will likely trade within the $5-$6 range before the Aug. 12 report, Roose said. A potential stabilization of crude-oil prices, which have recently fallen, must also be considered, he added.

 

Soy is subject to similar volatility, analysts said.

Weather remains a predominant factor because August is the make-or-break time for soy yields. The extent of future commodity-fund liquidation also will determine prices before the Aug. 12 report, analysts said.

 

"Weather looks pretty good, but that could change," said Love.

Brian Hoops, president of Midwest Market Solutions, sees soy prices declining before the Aug. 12 report if weather remains unthreatening and funds continue to liquidate. Hoops said a range of $11.65 to $11.90 is probable for November soy before the report.

"As long as the weather looks benign, you could push that [$11.65] low," he said.

Others, however, see a much wider range because of the wide-swinging nature of the market. Roose, citing this volatility, said November soy prices will trade within the $12-$14 range.

"There is still a lot of the growing season left," said Joel Karlin, sales manager and commodity sales coordinator at Western Milling.
 

Karlin said soy prices have fallen too far and too fast, which implies an impending bounce. He said November soy will trade in a range of $12.37 to $13.50. A developing acreage battle could also provide support, Karlin added.

 

The future of wheat prices before the Aug. 12 report will depend on variations in demand, commodity-fund liquidation and the price of corn and soy, analysts said. The underlying acreage battle could also provide support.

 

"Wheat is the one that is going to lead any rallies," said Hoops, noting an uptick in demand. Just Tuesday, Egypt bought 175,000 metric tonnes of US soft red winter wheat as part of a larger tender that included wheat from the Black Sea region.

Hoops said December wheat will likely trade within the $7.70-$8.50 range before the report.

 

Wheat will be the "upside leader if it could divorce itself from corn and soy," he said.

"[Wheat] is also going to be in the mix fighting for acres," said Roose, who sees an upside of $8.50 and a downside of $7.25 before the Aug. 12 report.