The presence of index funds in the agricultural markets is like having a bully on the playground. They throw enough weight around that everyone is constantly keeping an eye on what they’re up to. What they’ve been up to lately is aggressively buying corn and wheat futures, which was enough to push those two markets up through technical resistance last week. Soybean came to the party late and did not attract nearly as much fund buying.
No one knows how long the index funds, which are designed to be a hedge against inflation and therefore trade only the long side of commodity markets, will continue to be active in the farm markets. As long as they are, they bring enough buying power to overwhelm what are still largely bearish fundamentals—especially for the corn and soybean markets.
Corn is not totally devoid of positive news, however. The past two weekly export sales totals have been very impressive. The cumulative export commitment total is now back on pace to reach USDA’s projection for the 2005/06 marketing year. Domestic usage has been record-setting all year and that will continue to be the case. However, even though demand has perked up this winter, it does not change that fact well over 2 billion bushels of corn will be left over at the end of the current marketing year.
The only way to put a significant dent in the huge corn stockpile is with major and widespread production problems during the upcoming growing season AND if planted acreage is cut rather significantly. A warning by the NOAA last week that a La Nina is in the early stages of development sent a ripple through the corn market. Dry conditions in the western Corn Belt and the South are often associated with a La Nina event.
So why haven’t soybean futures stay in step with recent gains in corn? Because export business continues to lag far behind expectations and if anything the already huge carryover will get even larger. The U.S. has found it difficult to compete with South America in the global soy market this year and China has not been nearly as aggressive a buyer as expected. The Brazilian government has predicted more than 58 million metric tons of soybeans will be harvested this year, which will be a new record by a comfortable margin. Furthermore, weather concerns in Argentina have diminished. The 2006 acreage outlook for soybeans is the opposite of corn. The soybean market is expecting more planted acreage this year, although we continue to think many traders and farmers are badly overestimating the magnitude of the acreage shift from corn to beans.
Technically, soybean futures are in never-never land. There are gaps everywhere you look Friday’s rally stopped right at near-term downtrend lines, but from a somewhat longer-term perspective the trend in soybeans can best be described as sideways and very choppy. Fundamentally, new-crop soybean futures are badly overvalued unless the crop is severely cut by bad weather, Asian soybean rust or both.
The index funds have been in love with Kansas City wheat futures and the other two wheat exchanges have come along for the ride. There is also fundamentals justification for strength in hard red winter wheat. Not only are old-crop supplies more manageable than what the soft red winter wheat market is looking at, the crop in the southern Plains has been badly hurt by the ongoing drought in that part of the country. By some estimates, Texas will harvest half as many bushels as last year and yield potential is also down sharply in Oklahoma.
So far, 2006 has not been much fun for hog producers. Cash prices have dropped below the cost of production for many operations for two basic reasons: Market-ready hogs continue to be readily available and the wholesale pork market has been under pressure. Packer buyers are having little trouble putting together daily kill of 400,000 and average weight remain record high. Pork cutout values have dropped to the lowest level since the fall of 2003 and are currently about $20/cwt less than a year ago.
The daily charts for cattle futures also look extremely toppy going into the new week. Liquidation of long positions by the funds in part of the problem, but recent weakness in the wholesale beef market certainly hasn’t helped nay. There is also growing concern about a hefty increase in beef production during the 1st half of 2006. Feedlots have been insistent upon keeping bids in the $90s, but with packing companies losing an estimated $69/cwt, look for cash fed cattle prices to dip below that benchmark soon.
