Monday Night Grain Outlook, 1-21-08

Sunday (Monday) Night Grain Outlook
By Duane Lowry
Monday, January 21, 2008

OPENING CALL:
Corn= 4-6 lower,     Wheat= 5-8 lower,     Soybeans= 10-15 lower.

Weather will receive a bearish spin tonight. Argentina received 40% coverage of ¼-3/4, locally 1 inch rains during the weekend. The next 5 days will see rains produce 45% coverage of ¼-1, locally 2 inch rains, favoring the southwest early, but becoming more widespread by Saturday. Some forecasters will undoubtedly be viewing the maps with an even wetter slant. Their 6-10 day window calls for below precip in the east and south, normal elsewhere. Brazil received very impressive rains in Rio Grande, producing at least 75% coverage of the state. Overall, Brazil remains very favorable.

News> A weekend New York Times article, “Costly Fuel Means Costly Calories”, discussed the negative implications of costly global food, blaming it largely on the push to use food sources for energy production. They pointed to a UN food price index that saw food prices jump 14% in 2006, 37% in 2007 and an accelerating trend this winter. The major focus of the article was the impact on the global poor—not just the cost but the effect on social order. Riots and protests have erupted in several countries. In China when a store announced a limited-time cooking oil promotion, a stampeded of would-be buyers left 3 people dead and 31 injured. In the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families. Another unintended consequence of the food vs fuel fight has been a push for hundreds of thousands of acres of Asian tropical forest to be cleared to plant palm oil plantations. The article pointed to Western subsidies for biofuel production as a driving force behind the push for biofuels. According to Oil World, biofuels accounted for nearly half of the worldwide demand increase for vegetable oils last year, and represented 7% of total edible oil consumption. If you remember the discussion in my January 15th morning grain comments, it summarized the leaked EU internal memo that placed much doubt on the overall merit of mandated biofuel production. The EU memo also discussed the establishment of biofuel standards that would ban the import of biodiesel that had been grown in areas that damaged rain forests, as well as other criteria. This has incensed the Malaysian palm oil industry, which had plunged into biofuel production in part to satisfy European demand. The London Observer reported Sunday that the UK biofuel future has been put into question, as politicians will this week question whether they do more harm than good. The UK government’s Environmental Audit Committee is set to call on Monday for plans to get 2.5% of gasoline and diesel sourced from biofuels to be delayed due to environmental and economic concerns. High commodity prices continue to gain more attention, which causes greater scrutiny and discussions of the entire biofuel merit, its speed of expansion, government mandates and how its future will unfold. **On Monday, the UK government’s Environmental Audit Committee said the production of the most commonly used biofuels should cease until the environmental impact of alternative fuels improves. In a report, the committee said: “Biofuels standards should be changed to ensure that support is given only to those that deliver environmental improvements over fossil fuels in terms of not only greenhouse gas emission reductions but also wider impacts such as fertilizer and pesticide pollution.” The report went on to say that biofuels are an expensive and unsuccessful use of resources to reduce greenhouse gas emissions. The report criticized governments for stimulating the biofuels industry too hastily and called for a moratorium on current targets until alternative fuel technologies are further developed. “Only when technology improves and an appropriate regulatory framework is in place should biofuels be utilized,” said the committee. The EU Energy Commission agrees with the committee that biofuels must be sustainable; it disagrees with the committee’s conclusions. China will offer 500 tmt corn from state reserves Tuesday. India reports its Bird Flu problems are spreading. Pakistan expects to harvest 24 mmt wheat in 07-08, up from 22.25 mmt last year. The first new-crop wheat is expected to arrive in late February. The IMF Chief says world economic situation is “serious”. Yesterday’s global stock markets slides were some of the largest percentage 1-day falls since September 11, 2007. The UK market fell 5.5%, Germany down 7.2%, and France down 6.8%. Monday, the Brazilian Real lost 2.5% to the US Dollar. 

Wheat will find support from news that Pakistan purchased 510 tmt wheat. However, this was expected and some actually may have thought the final quantity could have been even larger. Some support will come from Friday’s impressive performance and the “look” created to the charts. Yet, financial meltdowns around the globe amid intensifying recession fears will weigh on overall market psychology tonight. Iraq is tendering for wheat, but here too that was rumored last week. Argentina’s wheat harvest is largely complete, with some inching up final production estimates. European traders say they may have more exportable supplies than once expected, leading to a more aggressive European wheat export pricing stance. While Friday’s performance was certainly impressive and it could spur more technical buying activity, I question whether we have enough new fundamental support to fuel independent wheat strength when the rest of the commodity world appears poised to find increasing selling pressures from weak crude, gold, stock indexes and a solidly rebounding US $.  

Corn will start lower on economic woes and sharply lower outside market trends. The negative biofuel comments are rising in the press, especially from Europe, which when combined with crude oil prices that have declined 12% in a short period of time, creates some unease among longs established on biofuel foundations. Price action faltered last week in relationship to expectations, amid extremely one-side bullish post-report market psychology. Friday’s close was the lowest close of the week and 14 cents off the highest post-report settlement. Many post-report longs will be challenged by tonight’s expected weakness. If price action doesn’t immediately improve, we can expect long liquidation pressures to build.

Soybeans may suffer the most tonight from outside market issues. South American weather will also help to fuel some new selling. Soybean values have largely lost all of their post-report gains, settling Friday just 3 cents above the January 10th settlement, and nearly 80 cents off the post-report highs. Tonight’s expected notable weakness will create problems for the many post-report buyers. We seem poised for increased liquidation pressures.

In summary, outside market action will generate the majority of tonight’s market sentiment. Sharp losses in crude, gold and stock indexes, as well as impressive US $ strength will weigh on bullish commodity sentiment. The grain trade seems especially vulnerable because of the weak post-report price action that managed to quietly catch post-report buyers off-guard. The overall trade sentiment has become extremely one-sided, with producers no longer willing to consider sales, cash grain buyers seeking to limit exposure to new purchases, and spec traders only looking at one side of the market. If it weren’t for the longer-term acreage battle discussion, many would be very uncomfortable with the market’s overall profile. When you look at the above “News” section, you can’t help but wonder what the future holds for the biofuel usage, which is largely the fundamental backbone of the bullish agricultural market stance. I sense we have a lot of nervous longs this afternoon that are hoping for stability to immediately surface in the grain trade and to be able to shrug off the negative outside market influences.

This newsletter is prepared from information believed to be reliable. Early Market News, Inc. does not guarantee that such information is accurate or complete and it should not be relied upon as such. Opinions expressed are subject to change without notice.