What's Going On?

18/12/12 -- There seems to be a bit of end of year panic setting in, in a most unfestive manner all of a sudden. On the overnight market beans are suddenly 15-20 cents lower, with wheat and corn both 5-6 cents easier.

The jitters have spread to this side of the pond with front month Jan 13 London wheat down GBP4.00/tonne, Paris wheat around EUR3.00/tonne weaker and Paris rapeseed tumbling EUR5.00/tonne or so.

The US dollar is under pressure on "fiscal cliff" fears, and it's suddenly all looking very year-endish.

End users will be saying "I told you so" and there may be an element of nervousness now creeping in from those still sitting on ex farm wheat at home with Jan 13 London wheat now GBP14/tonne off the highs and even new crop Nov 13 currently down GBP13/tonne off the contract high set on Nov 28th.

So is this a time for capitulation, or time to stand firm?

Copa Cogenca have released their first peep into 2013/14 production, forecasting only a fairly modest rebound in EU-27 wheat production - up 2.2% to 138.3 MMT. Barley output is seen 2.7% lower at 54.1 MMT and rapeseed output up 8.8% to 20.96 MMT.

So there's nothing to dramatic and life-changing there.

There are a few signs that the US Plains may be in for some wetter weather ahead. It sure needs it. Warmer than normal conditions may mean that whatever rainfall they get may do more good than you might expect at this time of year for wheat that hasn't gone into dormancy yet. Even so the last USDA crop ratings of the year were the worst on record by fully ten percentage points, so it's difficult to imagine that being turned around overnight by a few light showers.

Argentina's wheat crop is getting worse not better. They clearly aren't going to be exporting the 7.5 MMT that the USDA optimistically suggested last week, especially not with the mooted government imposed 4.5 MMT limit. The 3 MMT that was over-estimated has a fair chance of coming from the US.

We still have EU wheat exports running at a rapid pace, and availability from here set to tighten by the spring, so there could be a sting in wheat's tail yet.

South American soybean production meanwhile does appear to be in with a decent chance of record, or near record, crops all round in 2013. Although that will come hand-in-hand with record shipping delays too no doubt. Nothing fresh that we don't already know there then either.

I'd still maintain that the fund's appetite for grains holds the key to price direction in 2013, with a break to new highs in Q1 still a quite likely scenario if we see fresh money come back in once we enter the New Year.

The further forward we go in 2013, the greater the downside risk in my humble opinion. The cash market may not follow the futures prices quite so closely in the first half of the New Year however. Technical shortages of physically available wheat and soybeans are not difficult to imagine for those needing supplies at short notice.