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Current Marketing Thoughts

RSS By: Kevin Van Trump, AgWeb.com

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

Will Grain Prices Be Higher or Lower Next Week???

Nov 24, 2010

I want to start by admitting I blew the Sunday night call.  We opened up lower, but it fizzled out quickly and the market headed higher.  Basically China came out Sunday before the markets opened and made a few announcements regarding how they were going to fight inflation. What they announced was not near as harsh as many traders had anticipated. From what I am told, the Chinese Government said they were going to work very hard during the next several years in an attempt to boost crop production and would provide additional subsidies to farmers that would consider expanding their operations.  No monetary values were mentioned, but they did say they wanted banks to extend lending limits to the farmers. The also announced they would be limiting fertilizer exports, to ensure enough supplies for the farmers in China.  As I mentioned a couple of months back, make sure you have your fertilizer costs locked in.  When China pulls their fertilizer off the market it will certainly raise the cost for farmers here in the US.

  • I think during the next couple of weeks we will start to see some of the big players add a weather premium back into the prices of both corn and beans as traders become more concerned about the dryness and possibility of drought like conditions spreading through parts of Argentina and areas of Brazil.  
  • Goldman Sachs fired out a statement to their investors late last week that they are raising their Soybean price estimate for the next six months to $14 on thoughts that beans will eventually loose out in the acreage battle this coming Spring...We need all the help we can get to make new high's.  Daddy Goldman's blessing are always welcome. Lets just hope they are right.
  • From everything I can see, it looks to me that most Farmers are content with the sales they have made up to this point. As farmers kick back and wait to make sales the basis should drastically improve during the next several weeks. Be sure to pay close attention to the basis in your area, it might provide you with the opportunity to enter a basis contract of some type. 
  • Irelands debt issues along North Korea trying to flex their muscles against South Korea had the outside markets very concerned this past week.  If more issues arise look for the US dollar to strengthen and hold back the grains.

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I wanted to throw out a few additional thoughts to my Corn followers... 

As you know, I could talk for hours about the Corn market...and in particular about how the numbers simply don't add up.  I have been telling my followers this for months...nothing has changed. You have to look no further than the USDA's most recent estimates for China. It started back when the USDA came out and reported that they estimated China's feed usage would actually drop this year (corn used for animal feed). Are they serious?  China is exploding and the USDA is throwing out estimates that their feed demand this year will shrink...Come on, who is kidding who here? If the USDA is listening to China, and taking their word on this stuff then we must all be nuts. The USDA had corn used for feed estimated 1 million tons less than last year.  I have to believe they are going to end up using 3-4 million tons MORE than last year at least, simply due to their massive demand for pork and poultry. Realizing their mistake the USDA came back in November and upped the feed usage number by 2 million tons. Somehow they just all of a sudden realized they might be off by 2 million tons.  Here is where it gets even better, to make up for the 2 million tons they added to the demand side in feed, they simply raised the production numbers by...you guessed it 2 million tons. All of the domestic Ag Advisory services in China are telling us that their production is going to be down, but somehow the  USDA raises it's estimates. None of this makes any sense to me. Either we are trying to help China keep their food cost down in return for them continuing to buy US debt and paper, or we simply continue to let China feed us a bunch of bogus numbers so they can manipulate price.  Regardless the number just don't make sense.  I realize the reporting agencies have a tough job, and can only be as accurate as the numbers and data they are given, but something has to be done with China and the data we continue to be sold. 
 
Here is something else I can't seem to figure out. Both China and the USDA continue to tell us that everything in China is "A-OK" there are no shortages and no problems of any sort. Yet the Chinese government is forced to auction off record amounts of their corn surplus right during the heat of harvest to help slow down prices that are skyrocketing.  Don't you think prices are skyrocketing because people are willing to pay more for the corn. Wouldn't you also assume prices might be skyrocketing because there isn't enough to fill demand. I might not be the sharpest tool in the shed, but I know something is not right about this picture in China. Your in the middle of what you claim is a record harvest, you are dumping several million tons of corn on the market as well as from your reserves and prices continue to go higher.  You tell us everything is great, there are no problems, and we say "OK". On top of that it looks like you are out trying to strike new deals with Argentina and any one else you can as you prepare to import a record amount of corn.  But still we believe you when you tell us your numbers and say everything is "OK".  Well, I call B.S. on the whole deal.  This same thing happened in Cotton just a while back and look what happened to prices.  I certainly can not "guarantee" prices are going higher and that we will see new highs in 2011 corn, but I have done this long enough to realize that when 2+2 does not equal 4, something crazy is getting ready to come down the pipe.  As with any market, timing is everything.  It may not happen today, tomorrow or next week, but eventually these manipulations of the numbers will catch up, and when they do watch out, this ball game will drastically change.
 
Floor Traders Report 15,000 Dec $5.50 Corn Puts Bought Back
Word from the floor is that there was heavy December Corn Option Liquidation yesterday.  Remember me telling you about all of the Dec $5.50 puts that had been sold several weeks back.  The sales were made at that time collecting a $0.30 premium. Essential this ultimately put the seller (who many believe was China) long December corn from $5.20.  Guess what,  all of the puts were bought back today... No wonder we couldn't rally, this is like hitting the market with a sell order of 15,000 contracts.  This should help us longer term, because if they would have let the options expire in the money.  They would have had to eventually be "sellers" in the futures market to offset the losses.  I am a little worried though as they may feel the market is going to break even further and simply wanted out of the trade prior to any additional break.
Cattle Hedges To Think About
From what I hear cattle ranchers in Kansas/ Missouri are selling to packers in the $101-$102 range, while many in Oklahoma & Texas are turning down the bids looking for higher offers in the $103 range. I heard early in the day that more than 18,000 head had changed hands in Kansas alone, so cattle movement is strong despite holiday trading. Many of the guys on the floor are telling me that they have seen several larger players step in and repurchase a number of hedges in the Globex market in both the December and February contracts. The front months in my opinion certainly look more attractive than the deferred contracts right now.  I will even go as far as to say producers should consider buying at the money puts to establish a floor in this market and selling out of the money calls to finance the deal. I am not going to argue the fact that feeder cattle supplies are shrinking, but I am thinking the supply of feeder cattle outside of the feedlots is actually down while placements are up some.  We both know this  can’t go on forever. I am also worried that with the good weather and descent premiums the feedlots may choose to hold onto the cattle, this could push a substantial amount of heavier cattle onto the market during the early Spring months. I believe demand will be steady and maybe even increase from here, unfortunately I think that is all ready priced into the market.  I continue to recommend that producers should consider selling the April $112 calls and buying the April $104 puts, at even money or better (should be able to collect a little at this level).  This gives you a good free floor at $104, and provides you with a sale at $112. I would not do this on all your cattle, but rather 25% or so.  For those of you wanting to make a play in the Feeders consider selling the August $124 call and buying the $114 put.  You should be able to get it done at close to even money.  This would give you a floor at $114 and a sale at $124 if prices should rally higher.
 
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