Is a new bull phase in place?
Sep 03, 2010
The corn market closed into new highs and has now officially moved into a new bull phase of the market. This means the bears must dig a hole and pull down the hatch because it could get nasty during the next couple of months. By this I’m implying all sellers of futures need to consider liquidation or moving into a long put position. My suggestion is to remove short futures because of cash flow drain potential. As for liquidating cash positions, I would strongly recommend against it. Instead focus on buying call protection prior to the September USDA Supply and Demand report and then react accordingly.
I expect you are all wondering how bullish this can get. First I’ve been suggesting corn yields are around 163.5-bu. per acre on the national stage. I’m being forced to reduce my expectation closer to 161-bu. per acre. If this occurs, the potential for carryover to go below 1.15 billion bushels is better than 70%. With the potential that ethanol blend will be increased to 15% and China already saying they are going to keep buying corn—it appears lead month corn prices will have to move higher than $5 before any signs of demand cooling is seen.
So when will our biggest export stop buying? Essentially, our domestic price has to get high enough to make it unattractive to buy. To get a handle, one has to look at Chinese values and back figure it to U.S. prices. Currently yesterday’s benchmark prices close at roughly $7.54/bu. for corn and $15.99/bu. for beans.
Freight cost from the Midwest to the Far East is estimated at $2.45/bu. for corn and $2.57/bu. for beans. If one assumes a $4.50 cost plus $2.45 freight, you get $6.95 which implies 60-cent working margin. This is where it gets difficult to estimate demand. How much does local transportation and export fees require? I just don’t know but I get the sense that it still pays exporters to buy corn from U.S. So until we get this spread, which is at 60 cents, close to zero I believe the exporters will continue to buy corn.
In summary: Today’s technical breakout above $4.50 in corn is the key indicator to watch. Its going to pull up beans and wheat.
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