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GrainAnalyst.com Floor Analyst Vic Lespinasse takes you INTO THE TRADING PITS with on-going reports all day. Direct from the CBOT floor to your email or mobile device! Vic Lespinasse has been analyzing commodities for 35 years and is recognized as an authoritative commentator on the markets with literally hundreds of appearances on all major television networks and radio stations. GrainAnalyst.com is a division of Cytrade Financial, L.L.C. Sign up today!

The series of USDA reports on January 12th proved to be a "cereal killer" for the grains, driving prices limit down in most pits by the closing bell. Winter wheat acreage was the only report that was friendly. All other reports-final 2008 corn and bean production, December 1st quarterly grain stocks, ending US carry out stocks and world carry out stocks, were almost all bearish, in many cases extremely so. The bullish numbers: Winter wheat acreage was estimated at 42.1 million acres versus trade ideas of 44.2 million. Hard red wheat was guessed at 30.2 million versus trade ideas of 31.1 million and soft red wheat was put at 8.3 million acres against trade estimates of 9.4 million. White wheat was estimated by the USDA at 3.6 million acres versus trade ideas of 3.8 million.

The bearish numbers were overwhelming. Final 2008 production was 12.101 billion bushels for corn, roughly 100 million bushels higher than expected. Bean production came in at 2.959 billion bushels versus trade estimates of 2.910 billion. December 1st quarterly grain stocks were guessed at 1.422 billion bushels for wheat, 55 million bushels higher than expected. Corn stocks were estimated at 10.084 billion bushels, a whopping 245 million bushels higher than the 9.839 billion bushels the trade expected. Bean stocks were guessed at 2.276 billion bushels, 95 million bushels higher than indicated by the trade. Ending carry out estimates were also bearish: 655 million bushels for wheat, 55 million bushels than traders anticipated; 1.790 billion bushels for corn, an astounding 300 million bushels higher than expected, and 225 million bushels for beans, almost 40 million bushels over trade estimates. The soybean oil carry out was increased 110 million pounds from last month's estimate to 2.143 billion pounds. World carry out numbers were mostly higher also, especially corn, which is now estimated at 136 million tonnes versus last month's guess of 123.8 million tonnes. The world wheat carry over was 148.4 million tonnes, up 1 million tonnes from December. The world bean carry over was trimmed slightly to 53.9 million tonnes versus 54.2 million tonnes estimated last month.
 
Among individual countries, the USDA jumped their Chinese corn production guess for the 2008-09 crop year to 165.5 million tonnes versus their 160 million tonne estimate last month. Due to poor weather in Argentina, they trimmed their Argentine corn crop guess to 16.5 million tonnes from 18 million tonnes and their Argentine bean production estimate to 49.5 million tonnes, down 1 million tonnes from December. Following improved weather in Brazil after a dry spell, the USDA left their Brazilian bean production guess unchanged at 59 million tonnes.
 
Finally, the USDA cut their estimate of the amount of corn to be used to make ethanol by 100 million bushels to 3.6 billion bushels. Two months ago the USDA thought 4 billion bushels of corn would be used to produce ethanol, but as the price of crude oil continues to fall, so does the demand for alternative fuels such as ethanol. For the second month in a row, however, the USDA left unchanged their guess on demand for bean oil to produce biodiesel fuel at 3.1 billion pounds.

The US corn export guess was cut 50 million bushels to 1.75 billion, reflecting the continued very slow corn export pace. Bean exports were increased 50 million bushels to 1.100 billion bushels due to continued very strong Chinese demand. In conjunction with this, the USDA announced China bought another 454,000 tonnes of US beans. This follows an announcement by the Chinese government that they are going to buy another 3 million tonnes of domestically-grown beans on top of the 3 million tonnes they have already committed to buying, to build state reserves and boost rural income. This is a bullish development for US bean export demand to China as Chinese farmers will keep selling their beans to their government which pays a higher price. This will force Chinese bean processors to import more foreign beans, mainly from the US until South American supplies become more available in a month or two.

If you cannot view the Corn chart, go here.

It is apparent much of the bearishness of these reports is due to the worldwide economic slowdown, reducing grain demand and allowing stocks to build, especially in the case of wheat and corn.

The US and world economic situation will continue to play a major role in determining the direction of the grain market over coming weeks and months. Until last fall, booming economic conditions in some countries, especially China, helped drive grain prices higher as demand steadily grew for US grain exports. At the same time, many countries limited or banned grain exports to preserve domestic supplies and keep inflationary pressure under control. This added additional support to the seemingly never-ending rally in grain prices. All-time highs were achieved in wheat, corn, and beans, surpassing previous highs by a wide margin.
 
When the world economic pie started to shrink last fall, grain prices were not immune, falling precipitously along with equities and overall economic well-being. Consider at least the near-term economic outlook, meaning the next few months, in trying to determine the direction of the grain market. This task is made more difficult than usual by the change in administrations in Washington DC from January 20th when President Barack Obama was inaugurated. The hope, certainly, is that an economic revival will commence with the Obama presidency. If this is the case it would be an underlying bullish influence for the grain market.

A more direct major influence on grain prices over coming weeks and months will be South American weather. In South America right now it is the equivalent of late-July in the Northern Hemisphere, well into the growing season. Up to this time, weather has been far from ideal, especially in Argentina. A dry pattern has persisted there the last few months. This has lowered Argentine wheat, corn, and bean production estimates and further reductions are likely if the dry pattern persists.

La Niña weather conditions are forecast to continue the next several months in the Pacific Ocean, according to the latest National Oceanic Atmospheric Administration forecast. La Niña is associated with below normal rain in Argentina and Southern Brazil, which has certainly been the case so far this season in Argentina. According to agricultural weather specialist German Heinzenknecht of the Applied Climatology Center in Argentina, the central farm belt of the country is having one of its worst droughts in the last 30 years with 70% of the bean crop in bad shape.

If you cannot view the Soybean chart, go here.

The weather picture is much better in Brazil with previously dry areas in the south benefiting from recent significant increases in rainfall. However, Conab, a division of the Brazilian Agricultural Ministry, cut their bean production estimate in January to 57.8 million tonnes versus 58.8 million tonnes in December and 60 million tonnes last year while reducing their corn production estimate to 52.3 million tonnes versus 54.4 million last month and 58.7 million last year due to dry conditions earlier in the season. Further reductions are likely if the drier than normal weather pattern returns, a distinct possibility in southern Brazil due to the influence of La Niña.

The US bean carry over is forecast to be 225 million bushels, according to the January 12th USDA estimate. This is tight by historical standards. If Argentine bean production is cut due to adverse weather this season, this will shift bean export demand from Argentina to the US and Brazil, tightening the US bean carry over even more, especially with China continuing to buy large amounts of US beans. The situation is potentially so bullish that even a further fall in the price of crude oil and a continued rally in the US dollar would not be enough to stop beans from rallying if Argentine bean production keeps declining due to hot and dry weather. The effects of a tighter bean carry over could extend well into this year as any threat of weather problems for US beans this coming spring or summer would drive prices even higher-all due to the tight bean carry over in the US and the La Niña induced hot and dry weather in Argentina.

Yet another strong influence on the grain market is the demand for biofuels. At this time in the US, corn is chiefly used to make ethanol and soybean oil is used to make biodiesel fuel. President Barack Obama is widely known as a strong proponent of biofuels so continued growth in their demand is likely. While the biggest determinant of biofuel demand, the price of crude oil, is beyond government control, government incentive programs of one type or another are likely to maintain support for ethanol and biodiesel fuel, underpinning corn and bean oil prices.

One looming bearish influence, at least for corn and wheat, has been the sluggish pace of exports so far this season. The corn marketing year started September 1st. Corn export shipments through January 1st totaled only 13.6 million tonnes versus 22 million tonnes last year at this time. The USDA is projecting corn exports of 44.45 million tonnes this marketing year, a goal that is unlikely to be met at the current export pace. The wheat marketing year began June 1st. Wheat export shipments through January 1st reached 17.6 million tonnes, well below last year's 21.2 million tonnes seven months into the season. The USDA wheat export target is 27.2 million tonnes for this marketing year. Currently, US wheat export prices are roughly $40.00 or more a tonne higher than Canadian or Australian wheat export prices for milling quality wheat, putting the USDA target in doubt. Underscoring this point, weekly export sales for wheat in the week ending January 1st were only 42,000 tonnes, a marketing year low.

Bean export shipments have fared much better, thanks to very strong on-going Chinese demand. Shipments total 14.3 million tonnes from September 1st, the start of the bean marketing year, through January 1st. The USDA bean export goal for this marketing year is 30.0 million tonnes and bean exports are on-target to reach this level. The shipment pace of the meal and oil products, however, is well behind the level needed to reach the USDA marketing year targets, especially in bean oil. Thus, with the exception of beans, grain exports so far this season are a bearish factor for the market.

For index funds, which are always long, the last 6 months were terrible. The five largest funds ended 2008 with losses averaging over 40%. They are expected to wield much less influence in all commodity markets, including grains, at least the first several months of 2009, if not longer, as a result of this poor performance. Most index funds are heavily weighted toward the energy sector, not the grains, so a big rally in the energy market would boost their appeal and influence much more than a rally in the grains.

1972 was a seminal year for commodities. The Russians unexpectedly bought an unprecedented amount of US grain, catapulting the grain market into the headlines and sparking huge growth in commodity trading, especially grains. The interest in and growth of trading has continued unabated to this day, showing no signs of stopping. 2008 will long be remembered as a noteworthy year also. Prices rallied to never-before seen levels in all pits, only to come crashing back down late in the year as the world wide economic debacle festered. Following such a tumultuous year, the future of the grain market, like the times we live in, is more uncertain than ever. As far as trading is concerned, this isn't necessarily a bad thing as heightened uncertainty breeds heightened opportunity -- and risk. Here's to a prosperous and profitable new year!

Vic Lespinasse has been analyzing the commodities markets through a career spanning 35 years of the industry's most explosive growth and dynamic change. From his unique vantage point on the trading floor, Vic has gained deep insights into the markets, forging key relationships and developing expert strategies in fundamental and technical analysis. While a full member of the Chicago Board of Trade from 1974 to the present, Vic broadened his experience and contacts into the business as a floor analyst for Clayton, Dean Witter, AG Edwards, and international grain trader, Louis Dreyfus.

Vic is recognized as an authoritative commentator on commodities with literally hundreds of appearances on all major television networks and radio stations. His observations on the markets have been quoted by numerous newspapers including the Wall Street Journal.

Work the markets like a floor trader!

GrainAnalyst.com Floor Analyst Vic Lespinasse takes you INTO THE TRADING PITS with on-going reports all day. Direct from the CBOT floor to your email or mobile device! Vic Lespinasse has been analyzing commodities for 35 years and is recognized as an authoritative commentator on the markets with literally hundreds of appearances on all major television networks and radio stations. GrainAnalyst.com is a division of Cytrade Financial, L.L.C. Sign up today!