It all comes down to yield and demand
Oct 07, 2009
Corn, beans, wheat and most other commodities opened higher as the dollar broke hard today on continued movement of money from the U.S. dollar to other countries exchanges. As many of you know I’ve been bearish for some time in regards to corn and bean and have held hedges in anticipation of a harvest low. Today’s gap higher action forces one to ask: “Is a short position still justified”?
First, I don’t believe a position should be liquidated just because you are losing money. There are always bounces in the market that causes one pain regardless if you are short or long. The key question is has the core fundamentals changed? Days like today are not enjoyable experiences but are a part of marketing and one has to learn to deal with them. Some producers insist this is exactly why they trade only cash but realize in many ways you have more risk in cash because you can’t adjust your decision once it’s made.
The big concern immediately in front of us is corn and bean yields. We know the crop’s behind and a frost is going to hurt. I really don’t believe anyone thought the frost was going to be late this year. Frankly, I’m glad we did not have a frost in the last week of September. The implication is it’s going to take the top end off corn and bean yields. However, I will suggest to you the top end of the crop that was so freely being talked about a couple of weeks ago, is now disappearing fast. So the rally today is more perception than actual confirmation of a fact.
So will big crops get bigger? I side with the argument that this year is going to be a different and we more than likely “going to grow” the bean yields a little in Friday’s report but the corn yield is "not going" to grow. Overall, I don’t want to argue for a corn yield above 163 bu. per acre. So I have to face the fact the bulls have some argument for strength because things have improve more than expected but is it enough to change the fundamental trend of the market?
Today is the first day the market hit buy stops. This is where traders are buying blindly because of the breakout of a certain chart point. For corn it was a close above $3.50. Equally, we are day two into some serious margin calls for the bears which is going to feed the rally potentially into tomorrow. The problem is we are now over 21 days up from the September low which is starting to suggest the fundamentals will have to turn truly bullish to extend. The momentum indicators will be getting overbought as well. So I have to say the overhead resistance level in December 2009 corn at $3.75 and December 2010 at $4.25 should be very still resistance.
The other side of the equation we must address is the demand side. I’m seeing conflicting stories here. There are areas of the country where no corn harvest has been done and basis is staying firm. Equally, there are parts of the country where corn harvest has started and basis is quickly widening. What I’m suggesting is today’s rally in the futures was not a fundamental, cash-driven rally. This makes me very suspicious of the durability. Some noted positive fundamentals that are developing is the increasing demand for ethanol. It has experienced a notable increase in refining demand over the last several months. Brazil announced it’s going to import some U.S. ethanol, could the U.S. be moving into a corn ethanol export market. I think not but it’s good for the bulls to talk about.
Summary: While the corn yields are being tempered, the overall carryover is still going to be in the 1.6 billion bushels to 1.74 billion bushels range. This is adequate inventory. To go higher we are going to need solid proof of demand growth. So today’s rally was all about short covering. The real test of if this market has confirmed a low will come later next week into mid-October when corn harvest gets under way. My bias is one needs to remain short for most of October and watch how the market handles the pressure of harvest. If the market can’t break back below $3.20, we will have to accept the reality the bottom is in.
Sidenote: For every body that’s unsold and extremely happy about today’s rally—before warned if you took crop insurance, this rally is in effect reducing your insurance payments. What happens if we rally in October, you store unsold into February and then the market dumps inventory into the market because it’s not storing well?
I would be interested in your opinion on what producers who have sold the inventory should do. Should the roll or liquidate? Send your comments to firstname.lastname@example.org.
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