September was a brutal month for the bulls, but it brought vindication for the bears. The grain bulls have ruled the markets since June 2010. The grain bears have ruled for only 25 days, but they got their revenge much faster. We have not seen such a rapid drop in prices of corn, soybeans, wheat and other commodities since the 2008 crash.
While I suspect some producers have sold a portion of their expected 2011 inventory, I also suspect there is still a considerable amount of inventory that needs to be priced or stored. The question that I’m starting to hear is, should crops be stored or sold?
We are entering an extremely dangerous time period for not only the U.S. grain producer, but the global consumer as well. In fact, when I look at the corn and soybean fundamentals, a seasonal low seems likely. Combine this with the oversold nature of the market, and you get a technical picture that supports the bottom.
It’s a good idea to store inventory because in mid-October end users were pushing cash basis levels hard in corn and, to a lesser degree, in soybeans. Normally, this is an indication of strong underlying cash support. In the past few weeks, harvest finally started moving full steam in the
Midwest; as a result, harvest pressure finally hit the market. The October Supply and Demand Estimates report had no real bearish surprises. In a normal year, the odds are good for the lows to be posted by the end of October and for prices to resume an upward trend once the bin doors shut.
So why is there so much gloom and doom in the grain marketplace? In two words, it’s the outside markets. The continued debt crisis in Europe, anemic job growth in U.S. and the resulting slowdown in China has many worried about future demand. Essentially, we are entering the dark side of the boom-and-bust economic cycle. We are now in a downward spiral of slow economic growth, along with high private and governmental debt exposure that saps consumer and government disposable spending, resulting in slow job growth that leads to less tax revenue. Talk of a double-dip recession is giving way to concern that we could actually be looking at something much worse—the big "D." The end result is fear, which is becoming a force in the market whose effects are difficult to predict.
Subsequently, we are now in a time period when the supply and fundamentals for corn and soybeans are still important but will indicate only about 40% of the price direction.
As I write this column, I’m inclined to believe that for the next six months, the pink elephant in the corner will be the direction of the outside markets. If the Dow makes new lows, the funds and professional speculators will be forced to move aggressively to the sidelines.
As a result, at least in the short term, it could be extremely painful for a net long. Long-term, we should get values down to levels where demand will be stimulated and production discouraged at a time when we actually need the opposite. The upshot is that the lower the market goes in the next three months, the more likely the chance that demand will stabilize and then increase while supply is still tight, leading to a dangerous upside price event.
If we continue to see increased savings by consumers and companies and reduced spending on a global basis, along with U.S. and global banks expanding the money supply, we could be setting the stage for explosive inflationary risk exposure if any type of weather event would occur.
Bottom line: I’ve been involved in commodities for most of my career, and I’m very uncomfortable with the current state of affairs that our politicians are allowing. They need to work together to change the tone in Washington, sending the message that the best times are ahead of us rather than fighting for their individual power bases and the next election. Now more than ever, we need to be a United States of America that’s focused on our children and future!
Sales index key
|Excellent sales opportunity: 10
Excellent buying opportunity:
The ranking for corn should be peaking and heading lower, indicating that the low is in or near. At this time, I suggest storing corn on the farm. Remember that when farmers hold inventory big-time in the bin, the upside will be limited. The talk in the markets is that producers want $8 corn back, but that happens when bins are empty and the crop is stressed. So store and be realistic about upside expectation.
A $1.50 rally off the extreme low is about the best I expect to see next spring. In regard to a game plan for 2012, buy the $7 to $7.50 calls now so you can comfortably sell December 2012 corn between $6.50 and $7 next June and July.
Soybean yields should improve, but the reduced harvested acres and tighter stocks should create an offsetting position. Soybean harvest should be done by now, so most of the off-the-combine sales should have already peaked. Don’t sell cash unless it is for cash-flow purposes. In fact, end users need to be buying their soybean meal and producers should be buying their call protection for the 2012 crop.
In mid-October, the cattle complex was trading at the top of the range for the past year. With the extensive pressure on western cattle herds and general overall cowherd liquidation, the supply side of the cattle equation is getting more bullish. The main limitation is the uncertainty over how much consumers will pay for higher-priced beef products.
Cattle prices will stay firm to higher, and profit margins will remain strong. Cattle producers’ main exposure is on the corn and meal input side of the equation. Get feed needs locked up by Thanksgiving and run a trailing stop below the market in live cattle to buy a put if the market starts to break technical support.
The hog market is experiencing some of the same positive fundamentals as the cattle sector; but, as we know, hog producers can expand production much faster than cattle producers, which implies more caution. June hogs are moving above $100, an impressive price level that should not be ignored.
To protect your profit margin, focus on protecting input costs, such as corn and meal, right now, rather than aggressively selling futures and cash. Keep a floor below the market in the form of a put option and roll up as the market improves in price. However, be aggressive in scale-down buying of corn and meal on harvest pressure between now and Thanksgiving.