The Morning Vibe

10/01/12 -- The overnight grains are narrowly mixed, but there's no real sign of a significant Turnaround Tuesday at this stage.

Of undoubted note is the significant inflow of fund money into the grains sector over the last couple of weeks. Having spent months reducing their corn length, getting down to around all square on beans and establishing a weighty wheat short there are signs that they may have rediscovered their risk appetite.

Four months ago non-commercial funds had a net long position of over 270,000 Chicago corn contracts. By Christmas those same funds were long less than 45,000 contracts. Last week's commitment of traders report (to Jan 3rd) shows them doubling that length in a week, they are thought to have continued in the same vein since. An updated COT report will be out on Friday.

As long as fund money is prepared to flood in at this rate then it looks like we'll go higher. Developments in Europe will almost certainly govern the latter.

The pattern for 2012 then looks set to be decided by who wins this particular tug-of-war game, just as it was for much of 2011 in my humble opinion.

Merkel and Sarkozy met in Berlin yesterday and said that they don't want any country to leave the eurozone and that progress in being made to treaty changes which will need to be ratified by all 17 countries that use the single currency. They also conceded that there's been no progress on re-negotiating the Greek aid package.

In other matters it is interesting to note I think that Jan 12 Paris wheat, which goes off the board today currently stands at an EUR1.50/tonne premium to Mar 12. That differential has eroded from EUR8.75/tonne on the last trading day before Christmas.

Exactly how Paris wheat has managed to find itself in a position where these large front-end premiums have become the norm during this crop year is a mystery. There is clearly no clamour for spot physical wheat as maybe there was last spring.

We are heading into an important few days with rain potentially on the cards for Argentina pushing northwards over the next few days. Whilst these may be less widespread than thought last week, there seems to be plenty in the forecast for Brazil.

Of course we also have the USDA out on Thursday. The market is expecting cuts to 2011/12 US ending stocks for wheat and corn and little change for beans. They will also give us final production numbers for 2011 in the US with corn seen at 12.265 billion bushels versus 12.310 billion last time. Soybean production isn't expected to show much change from the previous 3.046 billion bushels. The wheat planted area for the 2012 harvest is expected to be raised from 40.646 to 40.933 million acres, although some estimates suggest as much as a 2.2 million acre increase.

The USDA will also give us their ideas on South American production. The average trade guess sees Brazilian soybean output falling from 75.0 MMT to 73.8 MMT, with Argy soybeans down from 52.0 MMT to 50.8 MMT. Brazilian corn production is seen falling from 61.0 MMT to 59.5 MMT and that of Argentina from 29.0 MMT to 25.8 MMT.

If those average trade guesses come true then we've seen soybean production for the two major South American producers decline from 127.0 MMT to 124.6 MMT, a drop of 2.4 MMT from the December report. That's less than 1% of world soybean production "lost" yet CBOT prices have risen 11.4% from the December lows.

For corn we're looking at a combined loss of 4.7 MMT, or just a half percent of world production yet CBOT prices are up 12.6% from the December lows.

Fund money inflows are clearly once again influencing prices by far more than the fundamentals are. Will Europe poke them in the eye?