February 22, 2012

Due to improved rainfall in South America, the CME Group corn and wheat markets closed sharply lower Tuesday.  The market is pricing in favorable South American weather.  After finishing the week at their highs last week, we come in yesterday and priced in the weather in South America first. Rains in the driest areas of Argentina and southern Brazil were very good.  More rain yesterday and possibly late week takes much of last week's drought rally out.  Putting a floor under the break is the strength in outside markets.  Pricing rain or no rain is always how we seem to start the week.

Follow-through from lower overnight trading is expected to keep pressure on the CME Group corn, soybean and wheat markets.  The Early Calls for the commodities are lower. Corn is seen opening 2-4 cents lower, soybeans 4-6 cents lower and wheat 2-4 cents lower.

In overnight trading, the March corn futures contract traded 2 1/4 cents lower, March soybean futures traded 6 cents lower and March wheat traded 3 1/2 cents lower.

The outside markets are slightly favorable for today's grain trade.  The markets could find support from fresh export news.  Japan buys 1.8 mmt of U.S. feed-grade corn for April-June delivery, according to the Dow Jones Newswire. The business comes as a result of Ukraine halting shipments due to cold weather.  Also, Japan seeks 300,000 mt of U.S. feed wheat.  Taiwan buys 58,000 mt of Brazilian soybeans.

"The Iranian thing is a mess and it will most likely get worse before it gets better."  That's a direct quote from a grain analyst that is watching how this oil feud could impact U.S. ethanol and corn prices.  On Sunday, Iran's oil ministry blocked crude shipments to British and French companies in retaliation of sanctions by the European Union on Iran's fuel exports.  Specifically, the sanctions include an oil embargo set to begin in July.  As a result of Iran's announcement, March crude oil futures were trading at a 9-month high.  You have to be concerned that gasoline prices could be running up to $5.00 per gallon.

Because corn, ethanol, and diesel are all married to the crude oil crushing market, those agricultural commodities could react this week to the international oil volatility.  Up to this point, ethanol prices haven't followed gasoline prices higher.  But, this Iranian situation could eventually cause a gasoline rally and ethanol rally.  China's monetary easing announcement and Iran's oil feud should spell a higher trade.  Short term technicals are also bullish.  This Iranian deal should scare the traders that are short and could spark them to buy the corn market.  The oil issue was going to happen anyway.  The real scare may be Israel.  Israel is threatening a pre-emptive strike on Iran if they don't open up their nuclear facilities to inspection.

For most of 2012, ethanol prices have been sitting around $2.29 per gallon, while gasoline prices have jumped from $2.60-to-$3.03 per gallon, in that same period.  For ethanol producers, this has kept margins at a weak level.  This Iranian row between the European countries may boost ethanol prices.  As the cost of producing gasoline vs. ethanol goes higher, this will spark a drawdown some of our record ethanol stocks and give the corn market something to work with.  With record U.S. ethanol stocks, despite tighter margins, and sharply lower gasoline demand, ethanol prices have not been following gasoline prices higher.  Certainly, the fact that the government removed a 54¢ ethanol blending credit January 1, immediately pushed the price of the corn-based alternative fuel down and it hasn't recovered.  But, this Iranian oil situation could mean higher prices for everything tied to the oil industry.  A wider premium between gasoline and ethanol has been needed to get blenders to produce more of the ethanol-based fuel.  This Iranian situation just might be the thing that boosts ethanol and as a result corn prices.

On the flip side, higher gasoline prices is a negative for the U.S. consumer and for the U.S. farmer trying to buy fuel for the upcoming planting season.  It's a negative for the farmer for sure. I'm not sure how much hedging farmers do on diesel supplies, but that certainly wouldn't be a bad idea.  Meanwhile, export sales to Iran could become a sticky issue.  Iran also has purchased wheat from multiple-origins around the world. However, with Iran tightening down restrictions of shipments coming to Iran, the grain market could see price support from that scenario, in the coming weeks.