It’s the holiday season in the United States, and crop prices have gone on vacation.
But don’t expect the present weakening to signal the arrival of an early Grinch, says Allendale Inc. analyst Joe Victor.
“Going into the (November U.S. Department of Agriculture supply and demand report) corn futures in particular were extremely overbought and it was essentially a case of buying on the rumour and selling on the news,” said Victor.
“If we hadn’t been so overbought going into the report, there would have been lots of room left (for prices to rise).”
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The USDA did not substantially change its view of world supply and demand of the major traded crops in its Nov. 9 report, but grain prices fell following the report and trended slightly lower in the following two days. Victor said this is not a case of a beginning bear market but a small pullback of a market that was ahead of itself.
“Based on what we’ve seen … this is a market that is prepared to consolidate,” said Victor.
USDA raised world wheat production estimates by 60 million bushels because of better results than expected in Ukraine and Russia, but lowered the Australian crop by 18 million bu.
A bigger corn crop in China more than offset a decline in U.S. corn production.
But Victor said the key to understanding the sell off that followed the USDA is to realize that it was a technical response to prices that had recently risen too high and that the minor increases in the wheat and corn numbers played little role.
This kind of temporary weakness is typical in U.S. markets in the American Thanksgiving to Christmas period. It’s hard to tell whether it will be as weak this holiday season as in the years before commodity hedge funds became such big players.
“The market tends to be a little bit more light in trade volume (in the holiday season), but with the advent of the commercials coming in here driving futures higher, we could have a different kind of a trade mentality going through the holidays,” said
Victor.
His belief in the underlying strength of the corn and wheat markets is based on the fact that no new substantial supplies will come to market before spring when India harvests its wheat crop and Argentina its corn crop.
“There’s not much we can do to change (tight) world supply until next March,” said Victor.
Crops now in production around the world will help determine spring and summer prices, but they have a long way to go. The trend-setting U.S. winter wheat crop is in a mixed situation, needing rain badly in Oklahoma but looking excellent in parts of Texas and Kansas, reports Oklahoma State University analyst Kim Anderson.
But some Kansas wheat crops may fall victim in the spring to corn prices, which could lead some farmers to plow up their winter wheat and plant corn instead.
Victor said tight wheat and corn stocks will be the fundamental basis of a strong cereals market through the winter, but high corn prices are beginning to affect demand.
For instance, Japanese buyers were recently in Brazil trying to lock up some of that crop as a way to diversify away from the U.S. corn market, which is heavily influenced by booming ethanol demand.
“Japan is not all that thrilled to be held hostage to the U.S. ethanol market,” said Victor.
Some analysts have speculated that stronger corn prices will cut U.S. livestock production, as happened in 1996 when corn prices rose over $5 per bu.
