The presents have been unwrapped, the champagne consumed, confetti dropped, and whistles blown, marking the end of the holiday season and the beginning of the long, cold march through winter. But before you hunker down under the quilts and await the start of baseball spring training (the unofficial end of winter) in late February, there is one more end-of-year ritual we need to get through: USDA’s January Numbers Cornucopia.
Fundamental analysts, global economists, and international investors (just to name a few groups) are all waiting for next Wednesday like young children wait for Christmas morning. The possibilities hidden from their anxious eyes by the fancy wrappings and bows only heighten the anticipation. If history is any indication, once the parent — in this case USDA — gives the okay at 7:30 a.m., chaos ensues and the real fireworks begin.
Think back to last year’s USDA reports where the combination of the “final” crop production numbers for corn and soybeans (both domestic and global), ending stocks for all grains (both domestic and global), quarterly stocks, and winter wheat acreage set off a pyrotechnic display in the Chicago grain markets the likes of which has seldom been equaled. By the end of trade Tuesday, Jan. 12, corn contracts were down the limit 30 cents, soybeans were off “only” 32 1/2 cents, and the front-month wheat contract had tumbled 36 3/4 cents. Why? Well, as we all recall, most of the numbers came in just a tad larger than what had been anticipated.
The fundamental surprise that hit the market that morning shook commercial traders, but they weren’t alone, for the other side — the noncommercial side — reacted with equal exuberance to the bursting shells of USDA numbers. As of that same Tuesday, Jan. 12, this group reportedly held a net-long futures position of about 273,000 contracts of corn, the week before had held a net-long futures position of almost 88,000 contracts of soybeans (down from the winter high of about 119,500 contracts), and a net-short futures position of about 23,500 contracts in Chicago wheat. In four weeks time, the corn position would be trimmed to only 87,500 contracts, soybeans to about 5,000 contracts, and wheat would see its net-short grow to about 60,500 contracts.
So what does all this mean for 2011? I think it is safe to say that 2010-2011 corn production numbers remain highly questionable, despite the sharp cuts seen by USDA in recent months. If production numbers are still thought to be off, then how should domestic ending stocks and quarterly stocks numbers be viewed? In soybeans, the questions are more geared toward global demand with many thinking the demand number could continue to increase, lowering global ending stocks and stocks to use.
And then there is wheat, once again living up to its Job-like reputation as global 2010 production problems carryover into 2011 with the flooding in Australia. Given the situation down under, how much further will global stocks be trimmed? Will the greater supply of global feed wheat (lower-quality wheat) lead to lower demand for corn, something hinted at in the December round of numbers?
One can’t forget about winter wheat acreage either. Though still expected to come in larger than 2010 numbers, the reality of the situation is that acres could ultimately be lost in parts of the Southern Plains due to poor growing conditions as the crop moved into dormancy late last fall. With farmers in the area reporting no significant precipitation since last September, talk is growing louder that at least some wheat acres being worked up and replanted to corn and soybeans.
Last, but certainly not least, is again the noncommercial side of the market. As of the latest CFTC Commitments of Traders report this group held a record large net-long futures position in corn of about 480,000 contracts, a record net-long position of about 228,000 contracts in soybeans, and built the net-long Chicago wheat futures position to almost 28,000 contracts. Given that the three Chicago markets are trading in the upper percentages of five-year price distribution ranges, what is it going to take to convince investment traders these markets remains good buying opportunities?
Those of you who read this column regularly know my opinion regarding government reports of any kind. Do I think next Wednesday’s reports will answer any of the questions listed above? No, not necessarily. But I will concede that after the fuse is lit the fireworks will begin to explode, met by a chorus of superficial “oohs” and “aahs” that always seem to accompany such exhibitions. And then, when the din and smoke has evaporated into the air, the markets will go about the process of returning to their normal, highly volatile selves as they face the rest of the new year.
Darin Newsom can be reached at darin.newsom@telventdtn.com
(CZSK)
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Posted with DTN Permission by Haylie Shipp.
