Rain makes Grain

- Lee Gaus

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July 18, 2007

I anxiously went through the Sunday Chicago Tribune to find Tom Skilling's forecast for the coming week and there it was as big as you please. He was predicting temperatures in the mid to high nineties moving into the central Midwest middle to later in the week. When I checked the night session and saw prices under significant pressure I realized someone had changed their mind.

In less than a New York minute the forecast went from extremely hot to moderating temperatures with a high possibility of rain. The ultimate effect was limit down in several Corn contracts, limit down in Soybeans, and fourteen to seventeen cents lower in the Wheat. I was reminded of a story I had heard about a well known owner of a then international grain company. He supposedly said, "Over the last two years we have spent two million dollars to determine there is not a weather man around that can tell you what the weather will be the day after tomorrow."

CORN: I believe to understand the corn market, one needs to have a baseline level of knowledge as it relates to the raw numbers. Planted acres pegged at 92.9 million acres, with 85.4 million acres harvested. The national average yield has been projected at what I believe to be a conservative 150.3 bushels an acre, with a total production of 12.840 billion bushels. Based on usage projections this gives us a carry over or surplus of 1.502 billion bushels. My baseline conclusion, not bullish and that does not take a rocket scientist to figure that out.

In my view there are two truisms. First, without a weather scenario there is little reason to be bullish corn. Secondly, that is why the market took such a significant hit on Monday. Instead of hot and dry, moderating temps and rain moving into the western corn-belt took the wind out of the bullish sails. This led to aggressive selling by the funds and speculator liquidation.

Now what? The Doppler bobble heads were projecting the ridge to move east by early mid-week. Now they are projecting the ridge to hold off until the weekend if at all. Since the ridge stayed in the West, whatever moisture that leapfrogs over the top may hit southwestern Minnesota, northeastern Iowa, southwestern Wisconsin, and northeastern Illinois and move east southeast from there. Perhaps we will see scattered moisture impacting the drier areas of the west-northwest portion of the Midwest.

Weather can still have a negative impact on this crop but it is my opinion the window of opportunity is starting to narrow. Failing a negative weather impact or some unforeseen significant fundamental occurrence I think rallies in corn need to be sold. This can be difficult because major rallies in my view will probably be weather related. All my models for corn are pointing lower. In my judgment it will be at least three weeks before my short term model reverses if not longer, and at least seven weeks before my long term model reverses. Can this happen? Sure, it can happen sooner but it is my opinion that it will take a significant weather situation.

Recommendation: Without a weather story look to sell Corn on rallies.

SOYBEANS: The same weather scenario that impacted corn also impacted Soybeans. It appeared that Soybeans also got hit with spec and fund liquidation after the change on the forecast. Soybeans did achieve some pretty lofty levels with a contract highs in November Soybeans reaching $9.49 1/2. The crush and exports were supportive for Soybeans and even though the overall crop condition suffered to some extent the threat of rain and cooler temperatures took control.

Baseline numbers of Soybeans: 64.1 million acres planted with 63.3 million harvested compared to 74.6 million acres harvested a year earlier. The projected average national yield has been pegged at 41.5 bushels an acre giving us a total production of 2.625 billion bushels. Based on usage projections this gives us a carry over or surplus of 245 million bushels. My baseline conclusion, is really pretty bullish for Soybeans but let's not be stupid. A carryover of 245 million bushels is still a pretty fair amount.

My short term model is in danger of reversing to the dark side with the breaks we are experiencing as of this writing. My best guess is that it will take another three to four weeks of weaker prices to reverse my long term model.

Recommendation: I continue to look for places to buy Soybeans on breaks but I will be cautious.

WHEAT: While wheat participated in going lower on Monday but showed renewed strength for most of the early trade on Tuesday. This was attributed to a combination of intermarket spreading, a concern that Australia could once again turn hot and dry and Argentina already experiencing weather stress. Additionally Egypt bought 300,000 tones U.S. origin wheat.

How long the divergence between Wheat and Corn can continue is anybody's guess. I can't help but think that a day will come when that spread will undergo a major correction, but in the meantime it could get pretty volatile.

The weekly export number was below expectations at 11.5 million bushels, compared to guesses between 13-17 million bushels. In order to meet projected exports we need to average just less than 21 million bushels a week. Under normal conditions that is quite doable, but at over six dollars a bushel, we will wait and see.

All my models for wheat are point higher, but it will take a close above the $6.22 level on Thursday the 19th to prevent a near term reversal. My long term model looks pretty safe in my judgment for the next five or six weeks, however, given the present level of volatility that can easily be shortened.

Recommendation: I will be watching market action and possibly looking to do something later in the week.

A Word to the Wise

Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable but accuracy cannot be and is not assured. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is SIGNIFICANT RISK involved in trading futures and or options on futures and may not be suitable for all investors. Investors should consider these RISKS and evaluate their suitability based on their financial conditions. No one should ever consider trading futures or options on futures with anything other than RISK CAPITAL. This information is provided freely and is NOT in the capacity of a trading advisor. NO LIABILITY on the part of the author exists for any trading loss you may incur in the use of this information. Information provided is not to be construed as an offer to sell or solicitation to buy any commodity or security named herein.

Lee Gaus is a 54 year old industry veteran of twenty-six years. Lee began his career in the livestock feed business before becoming a grain merchandising/commodity trader with a leading international company.

In 1992, Lee established EFG Group along with his two partners who are long-time friends. Since then, Lee has traveled the U.S. conducting seminars and trading meetings for retail traders and commodity offices.

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