Ray Grabanski is President of Progressive Ag, a Fargo, ND-based hedge brokerage firm. Reach Grabanski at (800) 450-1404.
Outside markets have had an impact on grains the last few weeks, with some major changes in crude oil, the dollar, and US interest rates that do affect grains. If not for these triple play influences, grain might have had a rally the past few weeks!
Perhaps the biggest outside market directly related to the grains is crude oil due to the direct relationship of the corn use for fuel and crude oil as an energy price indicator. Crude oil has dropped from $106 just a few weeks ago to near $88 today, a huge decline in that short a period of time. That 17% drop has occurred while corn prices have changed very little during that time. That is actually incredible for corn, which has held its own despite the rapid descent of the crude oil market. However, the past 3 weeks have included some major dry periods for corn growers, as after early planting there has been a significant dry period, especially last week when corn conditions declined a large 5% from the G/E ratings. The first Pro Ag corn yield model of the year indicates a 162 bu/acre corn crop, well below USDA's recent assessment of 166 bu/acre, and just slightly above the Pro Ag 'trend' yield number of 161 bu/acre (vs. USDA's 'trend' yield of 164 bu/acre). So actually, the corn yield is BELOW the projected USDA yield based on the rapid decline in conditions last week.
While crude oil has tumbled, the interest rate indicator, the T-bonds, have rallied to a all-time high of 150 - meaning a drop in interest rates to an all time low for long term rates (an inverse relationship exists between interest rates and t-bond values). This significant drop in interest rates is indicative of a weak economy - both in the US and in the world. Basically, people almost need to give away money for free in order for people to want to use it!!! If banks weren't so tight in their lending policies, perhaps the US and world economy would be much stronger! But alas, bankers are very tight with lending practices due to being burned by the recent housing market crash that sent bank losses soaring. So bankers walk even more stiffly today (they are typically tight a es)!!!
The final outside market that has a significant influence on ag commodities is the dollar, which recently has exhibited strength again after languishing around the 80 level for quite some time. Yet in spite of the negative outside influences of the outside markets, grains have held their own the past few weeks. Could it be that the growing season, which was off to a great start in early planting into adequate soil moisture, has turned to the negative??? That's a significant development, as prior to this the US winter wheat crop looked like a record shattering yield, with Pro Ag yield models near 49 bu/acre at the high before losing recently (2 of the last 3 weeks) to now be 48.4 bu/acre. That still is above the recent USDA projection of 47.6 bu/acre, but it represents a significant decline from 49 bu just a few weeks ago, with dry KS conditions reducing that crops yield potential significantly the past 2 weeks. While harvest is just a few weeks away for much of KS, recent rains should have stemmed losses (it's raining in KS today), but still we have gone backwards recently in yield potential for winter wheat. Perhaps the only market where conditions have recently improved have been in HRS wheat, which from memorial day weekend rains improved significantly from last week (ratings up 5% in the G/E category the past week). That is significant, as combined with Canada, the US HRS wheat crop might match winter wheat for production potential this year (more acres planted in both Canada and the US, which we will discover in the June acreage report).
If not for the influence of bearish outside markets, perhaps grains would have mounted a significant rally in the past few weeks. But as it is, the bearish outside market influences do affect grains, and that influence recently has been to the negative side. But then, shouldn't the fact that most other commodities are in an established downtrend have a negative influence on grain markets???