September 15, 2008


Corn, soy find it tough to decouple from outside markets



Bearish macroeconomic factors affecting inflationary markets and commodities in general are making it tough for corn and soy to decouple from outside markets despite lingering supply woes.


Commodity and inflationary markets have become extremely intertwined in recent years. And the slowing of the US and global economies over the past several months have brought negative effects on prices that have been felt across commodities markets.


Outside commodities markets have to some degree become more of a focus than weather of trader attention, with traders watching what is happening in crude oil and the US dollar before checking the weather, said Dan Basse, president of AgResource Co.


Weather is a key factor in the development of crops and is usually the primary influence during the summer growing season.


Corn and soy have a correlation with crude oil because of the alternative fuels ethanol and biodiesel, and that relationship makes energy an influence for corn and soy on a daily basis, traders said. In the US, ethanol is made primarily from corn while biodiesel is typically made from soyoil, which is produced when soy are crushed.


The slowing US and world economies have raised concerns about future export demand, as high prices spark fears of global curbed food demand, Basse said.


The grain market continues to look for a strong fundamental clue that will allow corn and soy to stand on their own feet, with a reduction in yield and production forecasts the latest feature to try to rescue the market from a recent downturn.


The US Department of Agriculture's cut to yields and lowering of production on Friday should give grain and oilseed markets a lift, especially after recent losses, which have been seen across commodities markets. A rallying US dollar and the exodus of index and hedge funds recently have pushed prices down sharply from all-time highs scored in 2008.


Futures did settle higher Friday, in part due to the report. Chicago Board of Trade December corn futures settled up the 30-cent, exchange-imposed trading limit at US$5.63 1/4 a bushel. November soy settled 26 cents higher at US$12.02 a bushel.


David Hightower, principal and founder of Hightower Report, said the sharp break in grain prices is directly related to the influence of outside markets, rather than prices falling because yields were expected to rise.


"Because of the macroeconomic influences, this data won't be as powerfully bullish as it could be," Hightower said. "But if the stock market stabilizes and crude oil bottoms, we could see inflation concerns coming back."


The market is in a corrective phase from overbought conditions experienced during corn and soy' historic run to all-time highs. Simple rationing of supplies have emerged, as once prices got too high, end-users adjusted their buying habits, and the world seemingly is using fewer commodities and producing nations are searching for demand, analysts said.


The market is readjusting downward, making it difficult for buyers to fight against a general bearish trend.


"Commodities are cyclical, and we are in a bearish cyclical phase in the market, making it easy to sell-off on bearish news, particularly from outside-market factors," said Anne Frick, senior oilseed analyst with Prudential Bache Commodities in New York.


The US has a very tight domestic supply situation, but the "US is a bullish island in a bearish sea," as global inventories are not scarce, Frick said.


The world oilseed market has intrinsic bearish factors, with increased world rapeseed and sunseed production, larger Chinese soy crop prospects and India's soy crop seen up this year, Frick said.


The fall of the US dollar over the past few years fuelled the commodity boom. And amid the global economic woes, the soy market seemingly overshot on the high side. That and a recently stronger dollar have opened the door for the current downside correction, analysts said.


However, an extremely tight soy stock situation, with very few supplies in the hands of end-users, will continue to lend support, particularly with uncertainty surrounding 2008 yields.


Further yield reductions from USDA will force fundamentals back into the mainstream of market focus, said Dan Cekander, analyst with Newedge.


"If you get US soy yields down to 39 or 38 bushels an acre, supply would be so tight and fundamentals so bullish, severe supply rationing would be needed and futures could decouple from bearish outside economic factors," Cekander added.


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