How Much Higher For Corn, Beans & Wheat???
Oct 29, 2010
If you are long the grain markets or still less than 50% sold for 2010 you may want to consider booking some sales. Yes I am long-term bullish, but you have to reward the market when it makes a nice move. I am also a little nervous that fact that we could see the Feds disappoint the market after their Nov 3rd meeting, simply by doing "nothing". If they elect not to go through with another round of "quantitative easing" this session, and opt for a "wait-and-see-approach", I feel the knee-jerk reaction by the funds will be to exit commodities across the board. The US Dollar will strengthen and the funds will essentially take their "chips" off-the-table so to speak. The main reason the Fed was proposing another round of easing was to encourage businesses and investors to "buy-now" rather than continuing to believe they can "buy-later" at a cheaper price. The Fed wanted to spark inflation just enough to jolt the market. They ultimately believe this will encourage growth and help improve the current job situation. The reason I am worried is because I fear they may now do nothing, or at least less than originally anticipated because the fire has already started. They may not need to stoke the inflationary flames. China certainly believes that inflation is on our their door-step. They have raised their interest rates 0.25% because they are fearful of inflation, they have issued harsh warnings about speculators driving up commodity prices and possibly triggering massive inflation across the board. Japan is worried about the valuation of the Yen now in relationship to the US Dollar, and claims they will continue to intervene if necessary to strengthen the US Dollar in comparison. For the first time in a long time the Durable Goods number was higher than expected, telling me that businesses as a whole are starting to buy more goods in fear of higher prices down the road. We are seeing new highs in Cotton, Sugar, Silver, Gold and Copper along with much higher prices in Corn, Soybean, Wheat, Cattle, Hogs, etc..The Fed knows they are playing with fire by trying to spark inflation. The last thing they want to see happen is runaway inflation that would ultimately force them to raise rates. With our government having so much new stimulus debt on the books, I can't imagine them wanting to see the rates go higher. Therefore if their original goal was to make the market, the businesses and the World be fearful of inflation and concerned about higher prices down the road, I believe they have done their job. A good friend of mine once told me "Perception is Everything..." I think the market and the consumers now perceive higher prices coming our direction, which is the ultimate goal of quantitative easing. With this said I simply can not see the Fed shocking the market by doing more than anticipated. I do not see them buying back more than $500 billion or $1 trillion in debt. I look for their actions to be anticlimactic, ultimately making traders "less" excited and less fearful about "hyper-inflation". The knee-jerk reaction of the funds will be to take some length out of the commodity markets, and this is where I will be looking to buy the grains. Particularly the deferred Corn contracts.
Yes we may see a rally going into and through the elections as the market will respond to Republican victories. The feel on the floor is that if the Republicans gain ground then there is a much better chance of us seeing the ethanol and bio-diesel tax credits approved. This will give the bulls some additional leverage, but if the Fed disappoints the air will certainly come out of their sales. After that the market will clearly be awaiting the Nov 9th USDA report. I am anticipating a bullish report, but you never know what you will get with the USDA numbers. I am just letting you know if they come out better than expected and do not lower the corn yields significantly and or don't dramatically raise the soybean export numbers this market will be heading lower in a hurry. I am not trying to scare you, just pointing out the facts. I think ultimately we will be heading higher in the corn market.
You may want to use the election rally to price a little more grain. If the Fed disappoints the fund managers, and the USDA report is Bearish or even Neutral we may see significant pull-backs, taking us another 30-60 days to reach the current levels. I am just letting you know that if you need to make cash sales during the next couple of months you might want to consider making a portion of them on Tuesdays or Wednesday morning election news.
I prefer being 60% sold in 2010 corn, 75% sold in 2010 soybeans and about 45% sold in new crop 2011 wheat. New crop corn I would price no more than 20%, new crop beans no more than 30%.
***Below you will find just a few of the highlights from my reports and commentary from this week. Producers and traders have found the information to be invaluable at helping them predict market direction. You can receive the Daily Trade & Strategy Reports for FREE each morning by simply clicking the link below. There are no commitments or obligations of any sort. Many regard the information as some of the best in the industry. Get signed up today, so you can start receiving the information and commentary as it happens not a day or two later.
Additional Highlights From This Weeks Reports
* We got long March Chicago Wheat on Monday 10/25 @ $7.10 it has been a terrific trade up to this point. We then secured some of our profits on Friday by selling a March $8.50 calls against them collecting 38 cents in premium. We currently have over 50 cents of profit in the position ($2,500 per contract).
....Highlights From the 10/28 Report (Friday)
New Record In Ethanol Production...Corn Usage Exploding
Yesterday's ethanol production report showed a new record in production for the month of August. From what I can gather we produced just over 1.13 billion gallons using just over 400 million bushels of corn...Wow! This is close to last years USDA number for the year. On top of that, ethanol stock levels were reported at just under 730 million gallons, making this our lowest stocks on hand since December of 2009.
China Maybe In the Market For Wheat Now
You heard me right...I said Wheat! There have been some talks from traders in South East Asia that China is looking at importing wheat. The word right now is that they are considering Australia, Canada and the US. I have not heard how much, but China importing any amount of wheat would be unexpected.
Hog Prices Could Continue Lower For Another Couple Of Weeks
The downward price action in the hog market has lasted longer than I had anticipated, but I think there is some light at the end of the tunnel. Right now the market is still focusing on larger supplies and heavier than normal hogs. From everything I hear most of the US pork processing plants are close to full. There are still a few facilities buying shipments in order to meet slaughter needs, but not very many. The lack of purchasing has really hurt the cash market, and it has dropped a little more than $15 the past few weeks. Hogs are simply much heavier than they were at this time last year. The bigger the hog the more pork you get, plain and simple this is adding to our supplies. They are telling me from out in the field that the hogs are gaining weight much faster than they had anticipated because of this year's higher quality corn, and terrific weather. I have to believe this glut of new supply will have run its course by mid-November. I am hoping the December contract can find support in the $60-65 range. I continue to stay short the April $70 put and will be looking to purchase calls on further breaks.
Looking To Buy Cattle On A Pull-Back
There has certainly been a noticeable set-back in domestic demand, I am not really that concerned with it though as I know it is not really all that unusual for this time of year. I do believe the front-end cattle supplies are actually on their way downward. Front month futures are at a discount to the cash market, and in my opinion will prompt the cattle to move out of the feedlots. From everything I can see, the front-end supply will be tight as we head into the winter. Packers should now be able to buy cattle at a slightly cheaper price this week, and maybe even cheaper next week. I am thinking that we could eventually see the cash fall back to $97-98. If this happens you should consider trying to buy the Dec contract in the $96-$97 range with profit objective back above $100.
....Highlights From the 10/28 Report (Thursday)
Where Will The Acres Come From?
I think this has to be your main question or concern as we move forward. There is no debating the fact that corn will need to add 4-5 million more acres this spring. The problem is Wheat may have taken a large portion of those acres (somewhere in the neighborhood of 3-4 million could be the guess). If that happens to be the case we are going to see corn and beans start to slug it out as they each try to add more acres to their respective crop. Right now the math just doesn't add up. To get farmers to come up with another 5 million corn acres, December 2011 Corn is going to really need to rally. I think you may see farmers shy away from planting corn on corn after this years yields, especially if they are looking at $11-$12 beans for harvest next year. The only way it happens is if prices in Dec 2011 corn rally even higher. We also might see the soybean growers in the south plant more cotton at these price levels. I am telling you now when the music stops playing, either corn or beans will be left without a chair. This battle for acreage is why I see very little downside risk in Dec 2011 corn contract. If your an end user like an ethanol plant, live stock feeder, cereal mill, etc... You had better make certain that you get your corn coverage in place.
Could Iowa Corn Yields Fall By 30-40 Bushels?
I heard around the rumor mill today that well respected grain analyst and professor at Iowa State University, Bob Wisner, believes the yields in Iowa could come in 30-40 bushels an acre lower than they were in 2009. This is almost unbelievable considering it could come from one of the US's top corn-producing states. If we see anything even close to this from the USDA this market will explode. I think this is a little far reaching, but who am I to suggest he is wrong in his calculations. Bob's statements have been confirmed by several sources, and his work in the past has always been credible. It will be interesting in the weeks ahead to see just how accurate he is.
Russia May Be In The Market For Corn
There is starting to be a buzz now that not only China but perhaps even Russia may be inquiring about US corn. From what I can gather traders are a little worried after they heard Russia was trying to barter for 2 million metric tons of Ukraine corn. I am told that Russia wants to trade milling wheat for Ukraine corn, but Ukraine wants cash for the deal rather than giving up their corn. It’s hard to believe that Russia is actually going to be in the market for additional feed supplies. I personally doubt Russia will be a buyer of any US corn in the near future, but stranger things have certainly happened.
From The "Milk Man"...Nik Sutter
I want to welcome on board a new analyst and producer Nik Sutter. Nik has joined our team and will be heading up our Dairy Division. Nik is very proactive and has been a highly successful with his cash marketing and hedging strategies during the past several years, and I wanted to bring him on board to help our Dairy producers. If you have any specific Dairy marketing or hedging questions please feel free to call in and we will put you in contact with Nik directly.
Bloomberg published an interesting article this week claiming Milk Futures to be an "Amazing Buying Opportunity". They claim milk futures right now are the cheapest they have been in relationship to corn since June 2009. In fact during the past three months, milk futures have fallen more than 1% while corn futures have rose by more than 45%. Some traders are claiming that the milk market could be one of the biggest beneficiaries of the current bull market in grains. The theory is that investors can make significant returns with less downside risk by buying milk futures at their current levels. On a risk to reward level they may be on to something here. If you are a speculative trader looking for an "outside" way to play the grains check into milk futures. For our producers who have not yet sold milk for 2011, this recent rally should provide you with a great opportunity to establish a price floor and still participate in upside market movement. I am certainly not saying that you should price 100% of your milk, but I would consider rewarding the markets action by pricing 10-20% at this time. Producers can make the sale on the board by simply buying the July $14.00 Put's, and selling the July $17.00 calls for $0.10 cents to the buy side. The entire position will cost you a dime and provides you with protection below $14 and a sale at $17. Using this strategy, you can establish a position each month for July through December 2011 for about $200 per contract. I feel this is one of the more appealing opportunities we have seen thus far to hedge milk for 2011. If you need any more help or assistance in designing a plan for your milk operation just let me know.
....Highlights From the 10/27 Report (Wednesday)
Getting Paid To Sit And Watch Cattle
Not a lot of action as of late in the cattle market. Our play last week recommending selling the calls and the puts is looking good. If you missed the boat you may want to consider selling the December $1.04 calls if the market rallies back up. We sold them at $0.95 cents and they are now at $0.60. I am not certain it will happen, but if you get the chance I would recommend taking a shot at it. I have no real interest in being either short or long this market from the current levels. Long below $97 looks inviting and short above $105 would be enticing. Selling both the calls and puts provides me this opportunity, if neither happens I collect the premium while sitting and patiently waiting for the market to determine it's next move.
What Are We Looking For At The Next Fed Meeting
Obviously the fund traders are highly tuned into the "outside" markets and the price action of the grains the next few weeks will be determined by their actions. Lets take a look at the Nov 3rd FOMC meeting where the market is anticipating Fed Chairman Bernanke to preside over a decision to buy more US backed debt assets in an attempt to increase the rate of inflation and reduce the cost of borrowing in real terms. I have heard the big boys at Bank of America-Merrill Lynch are estimating the Fed will allocate a total of $1 trillion to the plan, and those in the know at Goldman Sachs think it will be more like $2 trillion before it is all said and done. Both currently agree that they Fed will more than likely start by announcing an initial commitment of $500 billion after the Nov. 3 meeting. What the Fed is trying to do is actually increase inflation and reduce the cost of borrowing money. In essence they are trying to break the current psychology in the marketplace that many seem to have..."Why buy now when I can just sit back and wait for cheaper prices in the future..." If the Fed can successfully spark inflation and prompt individuals and business to borrow more now in order to buy more now because of fears of higher prices down the road, they believe they will ultimately stimulate job growth, the key part of the equation they have yet to solve. This is a very dangerous game to play, once the inflation fire is stocked it has a chance of eventually burning out of control. If the Fed does not implement "QE2" as anticipated and postpones the plan, you will see the US Dollar gain strength and the Fund Money exit the commodity markets causing prices to fall. If they allocate more to the plan than anticipated the US Dollar will weaken, more money will flow into the commodity markets and prices will rally. Pay close attention to this meeting as it will have a direct impact on grain prices next week.
How Much Further Can The US Dollar Fall
As many of you know the weaker the US Dollar becomes the better the chances of exporting US grain and livestock. I have had many calls as of late asking about how much further I thought the US Dollar could fall. To be honest, I am not really sure. The world is very different right now. From a technical standpoint you have to believe that we will certainly test the most recent lows established back in 2009 at 74.94, and we may drop even further testing the 2008 low of 72.16. I am certainly not guaranteeing that the US Dollar retreats to new lows, but all signs are pointing in that direction. A few things that could cause it to rally rather than fall would be a growing domestic economy and reduced federal debt (don't see that happening any time soon). The Dollar could strengthen if a few of the other global economies fell apart. Traders would look for strength in the US Dollar if they saw China, Brazil, India or Russia begin to struggle. If inflation becomes such a problem that the Fed has to reverse ship and begin to tighten therefor raising interest rates, you would almost certainly see the US dollar strengthen. You could also see some short-term knee jerk reactions higher on news of further rate hikes in China, India, Brazil, Russia, etc...This should help give you some downside guidance and things to look for that could cause the Dollar to strengthen.
I have had several technical questions regarding Corn as of late, lets take a look inside the action. From everything I hear the trend following funds have been liquidating their corn positions since mid October. Corn futures have only dropped slightly because the commercials have started to take ownership of the crop, and have swapped positions with the trend following funds. Just as I mentioned in wheat yesterday, this type of price consolidation is very bullish in my opinion. I guarantee you the commercials are going to be much stronger longs than the trend following funds would have been. December corn posted a two-year high of $5.88 after the last bullish USDA crop production report, the market has since seen mostly choppy lower sideways action. Regardless of what others might tell you, I think this consolidation is healthy and is natural in long-term bullish markets. Big Bull markets need to take time to breath and digest the fundamental news. I have to believe a test of the recent highs at $5.88 will reignite the fire and the next leg of the bull run will begin. I think this time the market may try and test the $7.00 level. On the downside a major drop below $5.25 would suggest a market top is in place and we may see some additional downside pressure from Fund trying to play the break lower. We may stumble one more time before the Nov 9th report, but I would look to have your purchases and strategies in place before that date.
....Highlights From the 10/26 Report (Tuesday)
Could Soybean Oil Be Getting Overvalued
This is an interesting twist but something I think you may want to consider. As most you may know I was extremely bullish Bean Oil for sometime and have made great profits this year trading it on the long side, both outright and spread against soy meal. I now may have a slight change heart as it compares to soy meal. Let me explain a little further in detail. First you have to consider that China’s soybean imports in the 2010-2011 marketing year might reach 57-60 million metric tons compared with just over 50 million tons last year. Primarily the gains can be attributed to increase demand from consumption and an increase in crushing capacity. As the crushing margins continue to expand it seems that the crushers are afraid of getting caught short on inventories, therefore we have seen the pace of imports explode. We know with the increasing demand for meat they are hungry for meal to provide protein for feed. By increasing their imports and supplies so quickly China may be left with a glut of Soybean Oil in the early summer and or late spring months. Many of you will argue that they continue to import soybean oil, I will agree and say that only escalates my concerns. With Bean Oil now being valued at 42.5% of the crush I think it maybe time to look at reversing ship. I hate to buck the trend, but this may be the time to start considering going long the Meal and short the Bean Oil.
Crude Oil Could Be Stuck In A Range
I am hearing more and more talk from traders that current crude oil prices simply may be too high to justify current inventory levels. Other traders and money managers may have the same fears as I continue to see more liquidation. In the last six sessions alone open interest in crude oil is down more than 87,000 contracts. I continue to advise selling the Jan $70 put and the $95 call to play the range.
Hogs Prices Could Tumble Even Further - Traders reacted heavily to the Monthly Cold Storage data and several longs exited the trade on news total pork inventories rose sharply in September. Yes this is bearish news, but I still like hogs to the upside longer-term. Pork inventories did jump higher, but still remain almost 20% below last years levels, and 12% below the five year average. I am told one of the big reasons for the jump in inventories was because a huge number of hams were put away in cold storage. You have to believe ham inventories most generally increase this time of year in anticipation of the holiday demand, the problem was the increase this September was the highest since 1970. I think the numbers may be a higher than normal partially because Mexico put a 5% tariff on US pork back in August. This had to slow down some of the trade. If you remember back they did this in retaliation for tougher US truck inspections. I mentioned back then this would have a negative impact at some point on hog prices...well here we are. I still like selling deep out-of-the-money puts on heavy down days collecting the premium. Long term I think we are headed back higher. I would be cautious if you are net long the futures market, the ride could get very rough during the next few weeks.
Why I Continue To Preach "Get Long Wheat" ...Technical Trading
I continue to like the March Chicago Wheat Contract. As you can see form the chart we continue to see increased open interest on price consolidation. It is believed by many technical guru's that a breakout from a trading range is much stronger if open interest rises during the price consolidation phase (just what we are seeing happen in wheat). This is because many traders will be caught on the wrong side of the market when the breakout finally takes place. When the price moves out of the trading range, these traders are forced to abandon their positions. Some technicians take this rule one step further and say the greater the rise in open interest during the consolidation, the greater the potential for the subsequent move. Look for major support in the March contract to be in the $6.75 range with longer-term resistance to be up around $7.85. I continue to advise playing this market to the upside.
....Highlights From the 10/25 Report (Monday)
I have told you several times that the Russian Drought would affect production for many areas for several years. Late last week, Russia announced that its winter wheat seeding was down more than 30% from last year and that they were going to need to extended their export ban at least out into July. I personally think you may eventually see them extend the export ban until 2012.
Elevators Urged To Prepare For Higher Prices
I was sent an e-mail that was being passed around by one of the larger elevators regarding margin and capital requirements for their operations. It read the following, "During the next few months, prepare margin lines for corn to move to $6.50 plus and and beans to move to $14.00 plus. This evolving situation into 2011-2012 will create explosive upside movement. Potentially at times "Out-Of-Control"...Make sure you widen your margins on cash purchases accordingly.
Rumors Of China Buying US Corn Will Not Die
As I mentioned in previous reports it simply doesn't pencil right now for China to import US corn, but I continue to hear more and more talk of it being a possibility. Don't rule this out simply because I said it made no economical sense for China. They may in fact import US corn if they believe their stock levels have fallen to unsafe levels...regardless of the cost or expense. The reason I mention this is because I continue to hear more talk that China is taking offers on US corn for delivery out past March. I have not been able to confirm this information with other sources, but the story of China importing US corn is still alive and well. Don't rule it out. Understand if they step in early, corn prices will be off to the races.
What The Fund Money Was Doing Last Week
In the reports I had read, the funds increased their net long corn position by more than 2,000 contracts last week to just over 434,500 contracts. They also increased their net long position in soybeans by almost 18,000 contracts, and are now long about 194,000 contracts. Funds cut their net long position in Soy Oil futures by about 800 contracts and increased their net long position in Soy Meal futures by about a 1,000 contracts. I am glad we banked our profits in long Oil short Meal, I thought they would start unwinding some as we move towards year end. I did hear from some good sources that the Funds actually unloaded around 4,000 net long wheat positions last week, and are now net long only about 8,000 contracts. I am telling you now "IF" Wheat ever catches some bullish news and attention, there is certainly room for the funds to come pouring in...be cautious getting caught short this market.
Corn Usage For Ethanol Production Could Top 5 Billion Bushels
Secretary of Ag, during a speech on biofuels, said that Washington will allocate near $500 million for a 15 year payout to stimulate production in order to meet aggressive congressional ethanol mandate targets. Secretary sees ethanol plants dotting the rural landscape and providing a form of welfare for farms grossing less than $250,000 annually. At the moment, ethanol production seems unphased with high prices. October 15 weekly production report showed a new record of more than 880,000 barrels per day. If this pace continues you have to believe annual corn usage for ethanol will be near 5 billion bushels, well above USDA’s current 4.7 billion forecast.
Wheat Starting To Be Used As Feed
There are now some talks that durum and soft winter wheat is being fed on the west coast, along with talk of off-grade Canadian wheat looking to move into the US. As wheat continues to loose ground to Corn, you have to believe we will begin to see more of this.
Now Is The Time To Buy Wheat ***Trading Strategy*** 10/25
If you are interested in playing the wheat market you should take a look at the March Chicago Wheat contract. For a bullish play consider Selling the March $6.50 Puts and Buying the March $8.50 calls @ even money or a slight credit. This position will require margin so make sure you consult with your broker prior to entering. Your downside exposure is wheat closing below the $6.50 strike. The options have 117 days left on them. I will be looking to exit the position once I have picked up 30 cents.
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