Riley: Negative media attention on ethanol drives down prices

May 06, 2008

Corn Commentary By Jim Riley

The corn market closed very weak on Monday as the market sold off late in the day with traders concerned about better crop plantings and the negative media attention that ethanol is receiving. July closed 19 ½ lower, 9 cents off the lows and December closed 16 ½ lower, almost 8 cents off the lows. The corn market really traded in a tight range most of the day but the last 35-45 min, the market broke down. A lot of traders wanted to talk about the market getting spooked about better crop planting number released by the USDA after the close and farmers telling their brokers that they are planting corn. I know I talked to different farmers from around the Midwest and most had planted or were planting corn, but most said it was on ground that was marginal, not the best for planting. With the lack of news, corn just can’t seem to hold any gains and this time of the year is a really tough time to rally the grain markets. Traders also pointed to technical weakness and the corn price being over priced when compared to wheat. Volume was moderate/heavy, almost 300,000 contracts, and funds were net sellers of 6,000 contracts.

Overnight, the corn market rallied a little after the release of the USDA plant progress numbers after the close. The USDA estimated 27% of the corn planted vs. 45% last year and 59% 5yr average. This number was looked at a little bullish because after the drop on Monday, many traders I talked to said they were now expecting a much bigger number. The concerning part of the numbers were the lack of progress in Illinois, Iowa, and Missouri, some of the biggest corn growing states. After looking at the Illinois number, some traders thought it was too small and not accurately estimating number of acres planted, there is actually more corn acres planted. The corn market recovered a little overnight, but probably not as much as some expected after the big sell off yesterday at the end of the day. The corn market should open a little higher today but after not being able to rally last night, I would expect the market to have trouble today. The weather remains wet/cool, just like it was forecasted last week which should put a stop to many planters, but the market just seems to shake off this news. As one veteran traders said yesterday, it is hard to impossible to kill the corn crop this time of the year, so nobody is willing to step out and buy corn with both hands.

Globex Overnight

Contract Last Net Change High Low

ZCK8 584^6 2^6 588^4 584^0

ZCN8 597^0 3^0 601^0 595^0

ZCU8 607^0 2^4 610^6 606^0

ZCZ8 615^4 2^6 619^4 614^0

ZCH9 624^6 1^0 630^0 624^6

Early Opening Calls: 2-3 cents better

Top News

-- USDA's Corn weekly planting estimate was pegged at 27% complete, well behind last year's pace of 45% complete & the 5 yr avg pace of 59% complete. Corn emerged was 4% vs. 12% last year & the long term average of 17%.

-- Monday's USDA Weekly Corn Inspections: 30.727 mln bu; expected 37.5 mln bu

-- Australian Crop forecasters group pegged the upcoming Canola crop at 1.55 mln mt a rise of 43% from last year's drought hit crop. They also raised its 08/09 Barley crop estimate to 9.54 mln mt, that's 57% above last year's output

-- EIA reported daily ethanol production in February reached an all time high of 518,000 bpd. Feb.’s figure was 8,000 bpd higher than Jan. February's total ethanol production was 15.03 mln bbls, up 39% from the year ago Feb.

-- Wednesday May 7th Stats Canada will release its March 31st grain stocks. Collectively, traders peg stocks of Wheat at 10.8 mln mt as of Mar 31 vs. year ago stocks of 15.977 mln mt. Durum Wheat stocks are expected at 2.0 mln mt down from the 3.18 mln mt same quarter year ago. Canola stocks are forecast at 20% lower at 3.8 mln mt, down from 1Q 2007 stocks of 4.755 mln mt.

-- 16,000 mt European Feed Barley tender issued by Israeli group, with bid deadline set for May 6th

-- 100,000 mt of barley tender was issued by Jordan's state grain buying arm on Monday, the bid deadline is May 20th. 50,000 mt are expected for LH June & the other 50k mt are expected in FH July

-- CBOT May Corn Delivery: 279

-- Active January Corn futures on Dalian Exchange settled at 1,986 Yuan/mt a drop of 8 from the prior day

-- Globex Corn Vol: 255,434; Pit Vol.: 34,677; Open Interest change: + 3,050

-- Weather: 6-10 Day Forecast: Below Normal Temps. Normal to Above Precip. Today will be mostly dry for the Corn Belt. Tonight showers and thunderstorms will move west to east into Friday. Saturday looks dry. Temps normal to below.

-- Outside markets: Energy Complex -0.35 at $119.62; Gold & Silver: +0.6 at $874.6 & -0.003 at $16.761; US $ is trading lower vs. Euro & Yen.

Cash Markets

-- CIF Corn steady off 2. May +22 to +26, June +32 to +35, July +37 to +41, Oct. +42 to +45, Nov. +42 to +46 Dec. +44 to +47

TREND:

The corn sell off was fairly dynamic late today. The lower trade was used by many commercials as a chance to expand coverage. The lows came and went pretty fast so that the best opportunity was fleeting. Following the planting progress expect corn to firm again overnight as the recent trading range remains intact. Not sure wheat keeps up with a lot of selling resting above today’s highs. Beans may fall into the same category but with the energy market on a tirade today moving crude and products moving into new contract highs, expect the soyoil remain firm. This could support beans more than wheat?

Most of this gain came from the weakness in corn prices but the strength in the energy complex cannot be ignored. The chart below is the crude oil contract. Note the signs of power with an island left on this last test of support. Each day since that island was created has left the previous days close until the market moved into new contract highs. This market cannot be denied.

If you have any questions, or if you would like to discuss specific trade recommendations on any markets, contact me directly.

Jim Riley

Linn Group

877-787-6278

jriley@linngroup.com