There were two key reports the first two days of this week.  Monday’s crop condition report and Tuesday’s U.S. Grain Stocks quarterly report. 

The News

Let’s cover the September stocks and small grains summary first. The report was viewed as mixed, but in the grand scheme of things not all that eventful. Sep 1 corn stocks were pegged at 1,236 million bushels, 55 million above expectations. September 1st bean stocks were pegged at 92 million bushels, 38 million below expectations. Wheat stocks were pegged 1,914 million, right at expectations.

Soybeans have found modest support, while corn and wheat are slightly lower just after the reports release however the market returned its focus to prevailing trends by the close, which remain structurally bearish.

Supply side fundamentals came on Monday’s crop condition report.  Corn’s condition was put at 74% good to excellent condition.  The ten year average is 57% and the highest ever was 84%.  Harvest was put at 12%, while the ten year average is at 21%.  The spread between current harvest and 10 year average looks to widen on a slow harvest due to recently wet conditions and cool evening temperatures slowing progress.

What’s Next?

Looking ahead, we are closing in on a seasonal low period for corn and beans.  The rules of thumb are when the crop is 35% harvested your low is in.   Then the market becomes once again a demand driven market.  Commercial interests begin to buy back their short hedge positions held in the market.  Ethanol producers look to seasonal lows to stock up on years inventory as well as exporters looking to fill bins, putting control in their hands.  

The last two years farmers held grain on the farm and held control as to when they sold it, leaving commercial interests having to pay up in the cash market to get grain.  Contract lows should not occur before the October 10th monthly grain report.  But not long after possibly a week or two we probably will look back and say to ourselves; there was the low.

Corn stocks of 1,235 mb imply June-August feed/residual use of 415 mb, up 169 m from last year. But annual corn feed/residual disappearance is calculated at 5,137 m, some 40 m below the USDAs annual forecast. This additional supply will be pushed into the new crop balance sheet, which along with higher yield (and despite lower harvested acreage) argues for a 100-200 mb boost in 14/15 corn stocks in the October WASDE. On-farm corn stocks at 462 m are up 187 m (68%) from last year, and account for an 8-year high 37% of total stocks. Producers have abundant old crop supplies left to sell.

The Trade

With this in mind I propose the following trade. I look for December Corn to press new lows through the middle of October. Aggressive traders can sell futures above 320.0 with a target of 2.98 before profit taking and short covering again set in. I would not look at puts in corn because of decreased volatility near term. Risk a close over 3.32 for stop loss orders.

Webinar

For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 pm central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. If you cannot attend live, a recording will be sent to your email upon signup.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.