Caution Being Short The July Corn
May 19, 2011
Caution Being Short The July Corn
I have been telling you for weeks to be careful 'bear" spreading or shorting the "old crop vs the "new crop" corn and or beans for that matter, and I think we are starting to see why. To add more confirmation, I urge you to remember we will still have close to 20 million more acres of corn to plant even after next week's USDA crop planting report. Throw in the fact that most producers have already marketed a large majority of their "old crop" corn, and the fact that the USDA may have simply been "hoping" that higher prices would curtail ending stocks to the level they have forecasted, is reason enough to heed serious warning to the recent basis explosion. This has been and continues to be a "demand" driven market...period. If the Eastern rail market continues to feel as if it may not be able to get enough corn to satisfy demand then watch out. As I mentioned in the opening comments, this market is not 2008 all over again. This market is more demand driven. If the Eastern rail market feels as if they will be unable to obtain the corn needed to fill demand they will continue to pressure and bid up the basis. I have producers in several areas of the Midwest that say they have never seen corn being loaded in the mass it has been lately on to rail and heading out of town. Many in the Midwest are starting to become a little more concerned that higher coastal premiums may eventually leave the midwest short corn later in the summer. With thes South somewhat hampered due to heavy rains you have to wonder just how much of the new crop will arrive early, how much will it need to be dried down, how will the quality be in comparison. With so many unknowns, more end users seem content on paying up now rather than risking the consequences of finding "NO" corn down the road, or having to pay huge premiums to get their hands on it. If the USDA was wrong in their estimates we could very well see one of the biggest short squeezes ever in the history of the corn market coming down the pipe in the July contract. I am not going to guarantee anything, but I urge you to be very careful listening to anyone that wants you to get short that July contract at this stage of the game. They may end up being right and the market fizzles out, but I simply see too much risk to try and prove your point at this stage. You may actually start to see "longs" in the marketplace starting to play for keeps. My thoughts are west end-users have become more concerned that they may not be able to secure corn later down the road. With this in mind they are willing to pay up aggressively now for the corn to secure their needs. Throw in the fact that poor pasture conditions in Kanas, Oklahoma and Texas have prompted many farmers to move cattle to the feedlots early, now forcing the feedlots to secure more feed which is also pressuring the bid. If some of the end users start to have trouble securing the bushels they need locally or from their regular sources it could become a very real possibility that you see longs actually try and take delivery of their July futures contract. Simply stated, "shorts" who are waiting for the "longs" to buy back their positions may be faced with the more realistic chance of having to deliver on their short positions. If you don't have the physical bushels to play this game and cover your short position I would simply steer clear. If you actually have the bushels and are looking to play the basis then that is whole different game. Remember, June options expire on this Friday, all I can say is keep your head on a swivel and start looking for the volatility in the markets to heat up even further.
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