Todd's Take

Tue. Apr 28, 2015 8:06 AM


By Todd Hultman
DTN Analyst

A month ago, I talked about this year's bearish start in corn and soybeans and, so far, the bears continue to win in April. The success of record soybean crops in both Brazil and Argentina has been the main driving force behind grains' lower start with assists from the rising U.S. dollar and the startling spread of avian flu.

Grain markets typically ignore the U.S. dollar index, but that wasn't possible in March as the index broke the 100-point mark for the first time since 2003. The European Central Bank embarked on a new program of quantitative easing on Mar. 9, as talk circulated that the Federal Reserve may raise interest rates as early as June. The glaring contrast between the two economies fed the dollar's buying frenzy and many worried about the bearish impact of a 25% jump in the dollar in less than nine months.

In early April, the dollar's bullish narrative finally eased as Europe posted small improvements in unemployment while talk surfaced that U.S. GDP growth probably stalled in the first quarter. The U.S. Commerce Department will release the first GDP report for 2015 on Wednesday, Apr. 29, but the one-way buying frenzy in the U.S. dollar index has already ended, closing below its 50-day average on Friday for the first time since mid-July.

It would be fair to expect the dollar's recent pause to help grain prices stabilize, but that wasn't the case in April as grains were blindsided by a second bearish surprise, the spread of avian flu.

What started in January with the finding of the H5N2 virus among backyard poultry in Washington has now spread through 12 states, resulting in the death of over seven million birds and is showing no sign of slowing down yet. Turkeys in Minnesota were taking the biggest hit until Apr. 20 when 3.8 million egg-laying hens were confirmed infected in Osceola, Iowa.**

Until the spread of the disease gets more under control, it is difficult to assess the actual impact on feed grain demand, which is part of the problem as market fears run amok. The eventual loss of feed demand will likely be manageable, but until more is known, it will be difficult to convince potential buyers back into the market, a bearish dynamic for grain prices. On Monday, July corn posted its lowest close in six months at $3.64 3/4. Similarly, July soybean meal ended near its lowest prices in six months at $314.00 a short ton.

The body blow of South America's big crop, followed by the one-two punch of March's rising dollar and April's startling spread of H5N2 is a tough combination hitting grain prices and has put the kibosh on early hopes for a spring rally. However, a quick glance at monthly charts shows July corn and July soybeans both bloodied, but still standing, holding above their October lows as we start a new growing season.

Why might grains be so unwilling to take a dive just yet? If you have been following my comments this year, you know the demand side of the market is Exhibit A. Friday's CFTC data showed commercials net long 68,716 contracts of corn and 72,871 contracts of soybeans. Their willingness to own grains at this unpopular time is helping offset the bearish impact of early selling and is an obvious recognition of attractive value at these current prices.

Exhibit B is the growing season ahead which has not yet been revealed. If this year's El Nino gives us the kind of cool and wet summer that DTN Senior Meteorologist Bryce Anderson described on Apr. 20 (read "U.S. Corn Yields Projected Above Trend Line With El Nino Onset"), corn and soybean prices may be in for a longer, bearish decline, but it's still too early to know. Bird flu isn't helping prices, but this year's weather will have the final say.

** USDA's updated avian influenza findings found at:

http://tinyurl.com/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(CZ\SK)

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