On Monday, the USDA released its December Supply and Demand Update for 2006/07. These numbers support the bullish story for the grain complex I have made over the past few months and the breakout in the DJ AIG index (along with the moves individually in corn, beans and wheat). Here is a quick rundown of the numbers of this report.
* Corn and Bean Price estimates were raised (which makes sense given the run in these products over the past few months). They lower the price range for wheat which I find interesting given what I believe are supportive for higher wheat prices. For corn, the average price range was raised to a range of $2.90/$3.30. For soybeans, it was raised to $5.70/$6.50 and for Wheat it was lowered, $4.15/$4.45.
* Corn and bean usage estimates remain unchanged while the wheat usage number was lowered by 20mm bushels.
While the hikes in the price estimates are predictable for corn and for beans, I disagree with the lowered expectation for wheat prices. Some wheat farmers have migrated to corn crops and this lowers overall production of wheat. Further, the export of wheat from this country should be helped by the falling dollar. In the past, when the dollar was weakening, our grain markets have found international demand. Why would that be different now?
Interestingly, on the corn side, where all the enthusiasm sits, we are now seeing many global regions moving to plant more corn. This could be part of the reason that the USDA is not raising its corn usage estimates as the expectation of more corn on the world market will keep usages steady domestically. Also in terms of global plantings, it appears that soybean farmers may be looking to plant more beans though if I remember correctly, there have been rumors of such in the past that have not come to fruition.
As I argued last week, my enthusiasm for the complex has been tempered due to a very bearish chart formation in the DJ AIG index. While I have not moved to a bearish stance on the complex (and become a short in the grain futures) it is my simple belief that the index is holding support before it makes another move higher.
Monday's data was basically a confirmation of what is occurring in the markets. Now I am looking forward and wondering if the chart is telling us that either the story is almost over or it is just pausing before the next run begins. I cautiously believe we are getting ready for the latter. This week, I am long wheat and flat in the corn and bean markets (working buy stops on the flat positions, sell stop on wheat).