Capture The Price Moves In Corn & Beans
Oct 07, 2010
I thought I would post one of our daily reports so everyone could get a better idea of what type of information we put out. Below is today's report 10-7-10. Remember we send out the reports for FREE and do our best to help producers first and foremost with their cash marketing. Many clients use our research to help them time their cash sales while keeping their current advisory relationship in place. I know we can add some real value to your current team.
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AG HEDGE Daily Strategy Report & Commentary 10/7/2010
Are We Heading For The Next Big Bull Commodity Cycle
Some of the big boys are now starting to argue that commodities are a win-win for investors. Their thoughts are that if the economy weakens the Fed will be certain to print more money. We know if this happens it will devalue the US Dollar and money will move into hard assets like commodities. On the other hand, if the global economy recovers and shows additional strength, commodity price will also go higher on thoughts that global demand will be increasing. You have others buying up commodities as protection against the effects of inflation, as currencies around the globe become more devalued.
Check Your Basis
I am hearing from more of our clients that the interior Corn basis is really starting to tighten. Rumors in Illinois are starting to circulate that some are offering 20 cents over. The bottom line is that processors and exporters have been forced to bid up prices to obtain needed supply. Normally, we will see the cash well below the futures this time of year. I am even hearing now that corn is being bid at six cents over December for December delivery in Lincoln, Nebraska. You have to believe the recent setback tested the market to see if demand was actually strong enough to justify higher prices. I think the response from the basis answers the question. I would be very careful if you are short the December contract and spread long against the back months. If this situation continues you should see the Dec contract gain significantly on the deferred months.
Gasoline Price May See A Jump
We are now into our 9th consecutive day of the French refinery worker's strike, I am now hearing that it might soon start to affect production to some degree. Strikers are still up in arms regarding the French government's pension reform measures. Reports indicate they are currently sitting on about one weeks worth of supplies, if the strike goes past that point it could certainly start to cause concerns for higher gasoline prices.
Growing Corn Demand From China Certain
I am now hearing reports out of China that the corn crop may not live up to recent expectations. In addition we are now actually getting confirmation that China, because of its growing livestock production and needs for animal feed, will continue to buy more U.S. corn in the years to come, this comes in a report released by the US Grains Council...not just a rumor! The report says China will import between 2-3 million metric tons of corn during this next marketing year from the US. The US Grain Councils President and Chief Executive Tom Dorr has now released statements that China's imports from the US will continue to grow each year, and could peak out in 2015 at 15 million tons. One of the national grain directors in China was quoted by sources as being concerned about a tight supply-and-demand situation as they move forward. From what I am hearing from reliable sources is that China will produce about 158 million tons of corn this year. The USDA thought China would produce about 166 million tons. The 158 number is still higher than last years crop of 155 million tons but certainly less than they had been anticipating.
Estimates For The USDA Report
Corn - Average corn estimates are coming in lower at around 159.9 bushel per acre yield. Traders are also anticipating a rise in ending stocks to around 1.172 billion.
Beans- Average soybean estimates are coming in slightly higher at around 45 bushels per acre. Traders think ending stocks will be down some to around 337 million. Most also believe the USDA will raise export numbers by 20-30 million for beans.
Wheat - Traders are looking for ending stock in wheat to come in around 873 million bushels, that is down from the 902 million reported earlier. For wheat though more important numbers will be an estimate for the Australian crop and the forecast for Russian plantings. As of right now both are expected to be down from the last report.
Shipments To China
Global soybean shipments to China last month totaled around 2.825 million tonnes. That is more than double last years amount which totaled 1.227 tonnes shipped in September. Just look at these numbers I found in a recent report that showed total Chinese Soybean imports for the last three years. 2008: 37,815,686 2009: 41.094,825 2010: 50,613,657 they just continue to import more each and every year.
Two Sides Of The Story In Soymeal
First of all you need to know world soymeal shipments in September were up over 30% from last year. Some of it can be explained by the shortfall in Europe rapeseed output. Asian demand has to also be picking up some, and you cant rule out the short wheat crop. All of this sounds bullish as can be, but there is one problem. Demand for US soymeal is terrible. In fact US soymeal sales are now down by about 40% from last year. The bottom line is we can not compete with Argentina. They are offering soymeal well below our levels. The real kicker is they are now offering the meal clear out through the March shipment. I think traders here in the US where hoping Argentina would run dry by December and the US would get some of that action, right now that just doesn't look to be the case.
Soybeans Struggling To Attract Buyers
The recent drop in soybean prices attracted some buyers early on the break this past week, but then things have fizzled out. The barge market has been fairly quiet, the Oct was bid at 58 over and looking for an offer. Farmers continue to roll with harvest, but slowed down their cash sales on the lower prices. Cash bids in Illinois are still anywhere from 5-25 under, while I am hearing in Ohio and Indian it could be as far out as 40-50 under. The foreign export business as well as others seem much more interested in buying corn at these levels than they do beans right now. I think with good yields forecast there is no real sign of immediate concern. This market is totally going to be driven by planting and growing problems in South America.
The South America Soybean Situation
I have received tons of information and reports from traders and individuals concerned about the lack of rain in Brazil. Yes Brazil is dry, yes they are behind two-three weeks in planting now, but from all of my sources on the ground they continue to be confident that beans will get seeded and the rains are coming. From what I am hearing now forecasters are calling for large rains during the last two weeks in October. If that rain doesn't hit, things will certainly start to heat up in the bean market. Right now though there is more concern about when the new crop beans will start to come to market after the significant delays. Generally beans coming from the North are available for export in late Jan or early Feb, while beans from the South generally hit the market in March sometime. I am now hearing that things could get real tricky because of the delays. Locals are telling us that the beans from the center west could be arriving at the same time as those from the south hit the market. This could be a big pinch logistically for South America and cause some serious delays in getting the beans exported. Many feel that if this starts to happen big players like China will simply go with the US beans rather than risking delayed shipments and internal shortages causing massive price rallies.
Ethanol Credits Closer To Passing
I heard some additional rumors that the 45 cent ethanol blend credit was more than likely going to get a one year extension from the government. This would be big for the corn market.
If you are looking for a low cost way to get bullish corn and beans you may want to consider the following trade. It certainly does not come without any associated risk, but I like the potential. The play basically puts us Long Corn & Beans against Short Chicago Wheat. You could make the play in the futures, but I believe we have found a better way to make the play. Go out in the March Chicago Wheat contract and sell the $8.00 calls. Once you are filled use the premium collected to purchase a March $5.50 Corn Call. You should be able to do the trade at a slight credit to help pay for your cost (basically a free trade). Why I like the trade, is because you can position yourself just 50 cents out of the money in corn and be $1.00 out of the money in wheat. If we project the trade forward and assume wheat trades penny for penny higher with corn, we could potentially earn 50 cents ($2,500) per contract on a free trade. If corn gains on wheat during the next few months (which I personally believe will happen) then we could gain even more. If we are dead wrong and both markets break lower...we lose nothing...not even fees or commissions. The risk though is unlimited beyond the $8.00 strike if wheat decides to take off and corn does nothing. Certainly that could happen, but I think wheat planting in Russia is moving along at an improved pace, wheat planting here in the US is adequate (a little dry in areas), and world supplies at this time seem to be in good shape. During the next few weeks or months I simply think corn and beans will continue to lead and be the story that drives the markets.
If you can stomach a riskier trade you may want to also consider Selling the March $8.00 Chicago Wheat Calls and Buying the January $11.60 Soybean Calls. This gets you about 90 cents away in the beans and $1.00 out in the wheat. Beans will generally trade 2-1 against the beans, so if we run higher the Jan bean calls could explode. The additional risk is obviously in selling the "March" wheat and buying the "Feb" beans. You will more than likely need to exit this trade before expiration. The additional time value of the wheat could cause this trade to be a little trickier to manage than the corn. It has bigger potential, but with it comes additional risk.
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The comments and information above belong to Kevin Van Trump, Ag Hedge, and their team of professional trade analyst. The information is believed to be reliable but no guarantee either written or implied is being made. Hedging and or Investing in derivatives, futures or options may not be suited for all producers or investors. This information is solely a recap of theories and strategies being used by Ag Hedge and or it's team of trade analyst. Any investment or hedge decisions that you make are solely your responsibility. Please consult with your licensed advisor and read the entire "Risk Disclosure" statement before you consider using any of the above mentioned strategies or trading techniques.