Commentary
USDA surprised the marketplace with an unexpectedly large 2.7% cut in its forecast for U.S. corn production, indicating that persistent dryness in parts of the Midwest has taken a bigger toll on the crop than previously thought and tightening the global supply outlook. The 2.7 percent cut represented a national average Bushels per acre estimate of 174.6. This was 4.9 bushels per acre less than their projection last month and the number bested even the most bullish pre report guesstimates. Yet the market finished the day 20 cents below the daily high. I surmise that yesterday’s price action reflected a bit of skepticism, or lack of confidence sufficient to break out of this summer’s trading pattern. Traders will be looking to next week’s Pro Farmer tour to provide confirmation, or proof otherwise, of USDA’s numbers. Weather is a mixed bag moving forward in the areas that need rain the most. The 1 to 5 day into next Wednesday is bone dry for areas of need. However a wetter pattern emerges in the 6 to 10 day that brings a wall of storms from Nebraska up to the Canadian prairies that moves East and hits areas of need in the Dakotas, Minnesota,,Iowa, and with extended coverage east of the Mississippi. The trade will be paying attention to this system next week as well as results from the Pro Farmer crop tour.
My written piece on Wednesday suggested selling the October 450/500 call spread at 46 cents with 4 cents of maximum risk plus trade costs and fees. In my opinion the USDA had a reputation of being conservative with production changes, not wanting to have to retrace steps that it’s already taken to reverse a trend. However, it was more aggressive in its U.S. corn yield reduction on Thursday, while taking its Russian wheat production estimate notably below even the lowest private estimate from the Black Sea region, dropping it 11.5 million metric tons in this report to 72 million metric tons. Net global wheat production fell 15.5 mmt, with ending stocks falling 12.6 mmt. Wheat feed use dropped 3.2 mmt due to tighter supplies. The majority of the tighter supplies are in major exporting countries, which is why in my view the wheat market is trending higher. In short my trade recommendation has been wrong. There maybe a seismic shift within USDA on how they create these state by state yield and production estimates in my opinion. Technical levels for next week come in as follows. Support for December corn comes in at 564.2 next week. A close under and its 556. A close under here could push the market down to 540, then 5.32. Under 5.32, watch out below in my opinion. Resistance is 577.6 then 580. Over 5.80 and the market can push to the 6.03/6.07 area. A close over 6.07 and its 6.22.
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