Grain Report: Grain Analysis(4)

Prepared by Tim Hannagan

(January 26, 2012) Thursday's weekly export sales report put corn sales a week ago at 958 thousand metric tons, making it a second consecutive strong week. Drought-stricken Mexico was in for 264 thousand in the eighth consecutive week of heavy Mexican purchases. Their drought is now considered the worst since records have been kept.

This will lend to talk ahead of the February 9 USDA monthly crop report that the report will raise U.S. export projections for 2012, and that will reduce already very tight ending stocks.

China was nibbling at 72 thousand tons of corn. Traders are on a China watch as it's perceived they will need to turn to the U.S. to fill their needs left from Argentina’s ongoing drought situation.

Soybean exports were 466 thousand metric tons, down 53% from the week prior but the week prior was a monster number. The key then was China, which had bought 360 thousand tons, its second-largest purchase in four weeks.

Business for corn and beans is very good but not yet great. A continuation of the drought in Argentina and southern Brazil into February 15 could lead to a surge in Asian business with China picking up the pace. The wildcard in Brazil is the dividing line of the La Nina drought pattern that has southern Brazil too dry and central Brazil receiving record rains! WXRISK.com sees up to 8 inches of rain in the next 6 to 10 days. We're starting to hear of rain-related diseases as the saturated soils are creating fungus problems. A continuation of these rain totals could lead to talk of yield cuts as problems worsen. This is a problem yet to be covered by the industry as drought conditions and their patterns are the more fashionable news events now.

WXRISK.com noted both the prized European and American models of software weather projections call for 1 to 2 inches of rain Monday and Tuesday in Argentina and southern Brazil, the driest areas. If we come in Monday and this forecast holds true, expect a lower price start to the week as more rain is forecast for February 4 and 5 as well. The break could be good as funds are fat with profits and couldn't pay handsome bonuses on profits taken before month’s end on Tuesday. Weather watchers are curious and cautious on this forecast as the last two weekends were called to be wet and when we entered the new week, prices rallied as rains dried up. We have opened higher six consecutive weeks. So, long and short positions into the weekend carry great risk and reward.

We had a emotional close today with March wheat closing at $6.53. Most importantly, it closed over its major downward resistance line on the chart at $6.40. This trend line goes back to the May highs, so traders are excited. Strength came on the heels of a corn rally, and also from talk that Russia, a major wheat exporter, may slow, delay, or even suspend wheat exports as drought hit the winter wheat crop very hard just before it went dormant.

Some suggest the Ukraine crop could be cut by 50%. This sets up the U.S. to move up in the line of exporting ports for wheat. As you know, existing wheat stocks here are huge, but most of the available wheat is low in quality only shippable into Asia. So, don't expect a massive export increase to surface, but Asian business should rise as seek quantity (at value) over quality.

Thursday's weekly export sales report showed 604 thousand tons of wheat was sold last week, up 59% from a somewhat weak 4-week average. Key players were as expected -- Japan, South Korea and Indonesia. Trend following funds entered this week with short positions on the supplemental report of a record 93,000 contracts. It doesn't take much short covering by funds to push wheat higher, but it could stop quickly. A close over $6.70 would be needed to create panic in shorts to begin covering or buying back tens of thousands of contacts. If Russia were to suspend exports, this would occur. In other words, we don't expect major short liquidation to occur until March, when dormancy breaks in the U.S. and Russia and traders worry that crops that went dormant in poor condition may not get favorable weather.

Technicals read like this for Friday. March corn support is $6.30. A close under and $6.24 then $6.15 would be the next supports. Resistance is $6.44. A close over and $6.58 and $6.64 become the targets. March bean support is a tight $12.20, then $11.90. Resistance is $12.30 then $12.45 and $12.60 on the next rally. March wheat support is $6.40. A close under and $6.25 is next. Resistance is $6.70. A close over $7.00 is next.

January 26, 2012
Tim Hannagan
PFGBest
190 S. LaSalle St., 7th Floor, Chicago, Illinois
800-935-6487
thannagan@pfgbest.com

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