advertisement The index funds flexed their buying power in the grain/soy complex last week and it looks like they are going to be fairly aggressive at the start of this week, too. While there is a little fundamental justification for recent strength, the news isn’t nearly positive enough to overcome the overwhelmingly bearish underlying fundamentals the corn and soybean markets have been saddled with after two straight monster crops. But thanks to increase investor interest, the index funds clearly carry enough weight to move the agricultural markets for at least a short period of time regardless of the fundamentals. Index funds are designed to be a hedge against inflation and therefore trade only the long side of commodity markets.
Corn futures were the darlings of fund managers early last week, but soybeans have apparently moved to the top of their shopping list. The best fundamental explanation being offered for this strength is a return of hot, dry weather in Argentina. Drought-like conditions were a worried earlier this month, but farmers in that part of the world recently enjoyed a week or so of more frequent rains and moderation in temperatures. But it looks like a weather pattern that will be more stressful for crops is setting up again. It’s the equivalent of early August in Argentina, so this is an especially critical time for the soybean crop there. On the other hand, growing conditions in southern Brazil have improved and the yield reports coming out of west-center and northern Brazil are impressive.
The demand side of the price equation for soybeans does not indicate a need for higher prices. Exports have been lagging far behind year-ago comparisons all year and cheap new-crop Brazilian beans will be available in about a month. In other words, time has pretty much run out for a strong recovery in export business. It’s also troubling that the domestic crush estimate for December came in smaller than a year ago. Odds are fairly high that the whopping U.S. carryover projection of 505 million bushels will get even larger.
Technical buying helped fuel last week’s rally in corn futures, but frankly it’s hard to make a case for the rally continuing—not with a projected carryover of more than 2.4 million bushels. Tight farmer holding of the large 2005 crop provides near-term support, but that’s actually a long-term bearish factor because it bunches sales into fewer months. Long-term optimism seems to be stemming from anticipation of a large drop in corn acreage and concerns last year’s drought in the central Corn Belt is spreading westward. While a drop is corn plantings is likely due to high input costs, it will take a combination of reduced acreage and poor growing conditions to knock a major hole in stocks. And there has never been a crop killed by a mid-winter drought yet.
Probably the most encouraging news for the corn market last week was a huge weekly export sales total. USDA said 85 million bushels were sold to foreign buyers the week ending Jan. 12. That’s the largest weekly total in memory and it pushed the cumulative sales total above the year-earlier comparison. However, it will take a few more weeks of brisk export business before USDA will even start thinking about an upward revision in their export projection for 2005/06.
Fund buying also gave wheat futures a boost last week and that market is also approaching the point where it is overvalued based on the underlying fundamentals. However, the fundamentals for at least hard red winter wheat are becoming more bullish by the week. The ongoing drought in the southern Plains has put 85% of the Texas crop in poor or very poor condition. The crop in Oklahoma is also under stress and there is concern the drought could spread into at least southern Kansas. As a result of this crop threat and the fact HRW ending stocks are expect to be tighter than the other classes, Kansas City futures start the week at new contract highs. Providing underlying support for wheat prices are concerns about winterkill in Eastern Europe and the possibility Iraq might be ready to make another large purchase of wheat.
