Early Call On Chicago

08/08/11 -- The overnight grains were lower across the board in part of a general commodity/stocks sell-off based on S&P's US credit rating downgrade late Friday.

Beans closed the Globex session 16-19 cents lower, with corn around 13 cents easier and wheat falling 18-20 cents. Crude oil is 3 cents away from being USD4/barrel lower as I type.

European grains are sharply lower too with Paris wheat and corn down around EUR5.00/tonne and rapeseed declining more than EUR10.00/tonne.

The ECB have been busy buying Italian and Spanish bonds in an attempt to assure the market that it has a plan, even if it only thought of it over the weekend. The stock markets aren't hugely convinced with the FSTE100, CAC40 and DAX all down around 2.5-3.0% today.

The US weather outlook is fairly benign for August. The question now is how much irreversible damage was done in July. There are plenty that think that the answer to that one is "shitloads actually" - we will have to wait and see.

If they are right, then we appear to be developing into a tug-of-war between grain fundamentals and wider global economic woes. If they are wrong the we really are in for a bear market.

The USDA are out with their box of tricks Thursday, my head tells me that they will be higher than the trade has factored in on US corn yields. It's their almost unerring capacity for a shock that has me scratching my head, pondering if they will come up with something outrageously bullish instead. Again we will have to wait and see.

A bearish set of numbers (ie hardly changed from last months yield of 158.7bpa) would probably be quickly dismissed as the USDA talking rubbish again. That is if it wasn't for this overtly large set of outside bearish influences kicking around at the moment.

Corn prices HAVE to go up, that's what the frustrated bulls are screaming. We need to ration demand, we've only got fifteen minutes of carryover stocks left, the stuff is dying in the fields etc, etc. That's what they're saying.

The thing is, the way things seem to be going, the world won't use appreciably more corn if the price was USD5/bushel so long as everything else moves down within the same parameters - as they likely would. Neither would the world use significantly less if it was USD10/bushel either, with the rules of the game as they stand at the moment and with other raw materials increasing by a similar amount.

The two most important factors in deciding market direction right now, in my opinion, are the same as they have been for the last five years or so: a) the inclination of spec money to either stick with or exit the market. b) who has the grain to sell, is it the cheap shops or is it Harvey Nicks?

We already know the answer to the second one. If that was to combine with an "I want out" response from the "smart money" to the first then the market is going lower. If the USDA throw a bearish hat into the ring Thursday as well then who knows how much lower? Especially as a significant move to the downside now would trigger some weighty stop-loss selling from the non-believing bulls.

The USDA have announce the sale of 120,000 MT of corn to Egypt and 100,000 MT of HRW wheat sold to unknown this afternoon.

Early calls: beans 15-20c lower, wheat 18-20c lower, corn 12-15c lower.