'Time to go golfing?'

'Time to go golfing?'

By: Jeff Caldwell 06/30/2011 @ 10:11am

It's going to be a rough couple of days for the grain trade in Chicago. That part's clear. Rough enough that traders say "it's time to go golfing."

What isn't quite as clear is, once the immediate reaction from Thursday's USDA acreage and grain stocks reports has dissipated, how the trade will proceed through the remainder of the summer. It depends on a lot of different factors, analysts and traders say.

Thursday morning found USDA pegging both grain stocks and acreage numbers higher than the trade expected. That sent the grains nosediving Thursday morning at the open, and analysts agree that slide will take a day or 2 to even out.

"We will come in with acres much lower than what we saw this morning, but the trade was prepared for a 600 million-bushel ending stock for old-crop [corn] and the possibility of needing a 158 (bushel/acre) yield to avoid catastrophe," says Terry Roggensack, market analyst with the Chicago-based Hightower Report. "Now, we're looking at a more comfortable situation. Traders were also net-long coming into this report. We're going to see some pretty serious liquidation."


So, it's a foregone conclusion that the bears will rule the CME Group grain pits for at least a couple of days. Then what? Longer-term, the higher-than-expected stocks and acreage numbers will "give the trade a lot of breathing room," but questions surrounding "found acres" in Thursday's report make the August crop estimates, which will take into account both acres and yield projections, much more important to the overall crop picture this year, says Linn Group grain market analyst Jerrod Kitt.

"We basically found 300 million bushels of corn. A lot of people were trying to price in a rationing scenario with the July contract. This gives the trade a lot of breathing room," Kitt says. "The acreage numbers are kind of a fade trade. The numbers in August are going to be much more significant."

But, for now, Thursday's numbers aren't all doom and gloom for everyone with a dog in the hunt. Ethanol refiners and livestock producers should see a boost from the bearish swing kicked off by Thursday's reports. When it comes to the ethanol sector, Kitt says previous market posturing in that area of the industry already had already been going on. There were already signs of rationing in the sector that had a positive month in June. But now, projected down moves in the grains, led by corn, should snap ethanol margins wider for at least the near term."We saw a tremendous increase in ethanol margins in June, from around breakeven to 40 to 50 cents a gallon," Kitt says. "We were pricing in a moderate rationing situation for ethanol."Adds Roggensack: "After the smoke clears from this liquidation break -- and ethanol margins are stong now -- and if we break 40 or 50 cents in the long run, ethanol margins are outstanding."

The livestock sector -- which itself is bound by tight margins right now -- could get a big boost out of a lower-trending grain market, Roggensack says. Lower corn prices could loosen up cattle and hog feeders to increase herd numbers that they've kept low to buffer the blow of high feed prices.

"We're already looking at a very tight situation for the first quarter of next year for beef supply, around a 4% to 5% reduction, one of the biggest drops from the fourth quarter to the first quarter in history. If we do get lower corn prices in the fall, it will allow more cattle on feed to take away that tightness for next year." Roggensack says. "With pork cutout values at record highs and with [producers] able to hang in there with corn at $7 or $8 without losing too much money, this will allow some expansion in the pork industry, and we could see increased feed usage down the road for 2012 and 2013."

But, don't think of Thursday's numbers as final in any way. Because of this spring and summer's crazy crop weather, a lot of acres will need to be resurveyed to get a clearer picture of how things could shape up this fall. That will come in the August report, in which USDA will revise its acre figures.

"There are a lot of adjustments that need to be made," Roggensack says. "There are areas that have lost acres since June 1 that need to be resurveyed."