Don't let anyone trick you into believing this bull market is over!
Nov 12, 2010
The funds certainly headed for the exit door in a big way Friday. There was serious bleeding
across the board. The US Stock market got hammered, Crude Oil lost more than $3, Gold was down over $40, Cotton traded limit down, Sugar and Coffee got blasted...and the Grains got hit just as hard. Right now fear on the floor is that China is going to tighten their money supply and possibly raise rates again to help slow their economy. I call B.S.! Unfortunately it looks as if we are going to allow China to buffalo us into believing more of their rhetoric so they can swap US dollars for more hard assets like grains, metals, and crude oil.
Don't let your marketing advisers or the so called "technical guru's" talk you into selling this market. This "bull market" is just getting started. Be patient give it time to develop. My hunch is China is in a real jam and is blazing mad about the valuation of the US dollar. They are very shrewd business men and understand the game very well. They understand and know the most assured way to slow inflation is to import more food and more raw materials. They also know their country is at the mercy of others and can not keep pace with current demand or supply the goods needed to slow inflation, no how...no way. By importing more food and more raw materials they will have more on hand, this prevents prices from surging drastically higher and prevents one user from trying to outbid the other. Trust me they understand how to slow inflation. They also know how to play the markets. I told you weeks ago they had been selling huge quantities of Dec corn puts at $5.50 and lower. I told you something smelt very odd about these sales, and that it wouldn't surprise me to see something happen to cause these markets to drastically fall back. They understand and know that the markets will react accordingly to whatever news they feed it. They have certainly done a number on it this time. This move should save them billions on their next buying spree.
It all started to unwind when our good friends over at INFORMA released their acreage estimates for next year...completely absurd, but we must pay attention as they have drastically affected trade perception. Next, China came out with the news that they might have to do something drastic to slow down inflation. They later topped that one by releasing a statement that the government will sell 2.6 million metric tons of soybeans from their reserves in open auction to further slow prices and imports. I am surprised the USDA didn't get in on the game and announce they miraculously found a couple hundred million bushels of corn in some secret storage bin. Obviously I am being a little facetious, but I find it highly ironic that we continue to fall hook line and sinker for China's game every time.
I am here to tell you the supply and demand picture does not change. The bullish scenario from the past few weeks only intensifies off this break. Export sales where great for both corn and wheat Friday as you will see below. Informa's acreage estimates for beans basically puts the market at a ZERO carry. We were supposed to be taking prices higher in order to ration corn demand, now all of a sudden we have people coming out of the wood work looking to buy corn. End users and consumers of grain are swapping place in the market with funds and small specs. You tell me if that doesn't add a more solid base to this move. The technicians can talk all they want about "double tops", and "triple lindies". I worked alongside and studied for years under some of the industries most respected technical analyst, and right now we are simply in unchartered territory as far as global demand and money flow is concerned. The charts can be used to some degree but this is a whole new ball game. From here out all bets are off on the technical front, you can use it to help select entry and exit points, but to predict overall market direction simply will not work. People need to eat , and no amount of "oversold", "overbought" or any other technical talk will stop them from buying what they need to survive. Hang in there, expect a few more down days ahead as those traders on big margin calls will be forced to liquidate if the market doesn't reverse by Wednesday or Thursday. I have to believe new crop corn below $5.00 is going to be of real value. New crop beans below $10.50 should also be a steal.
I have included some additional info and commentary below that I released in my daily report. Make certain you get singed up to receive all of my cash marketing strategies, hedging techniques and market commentary. The information is FREE and is sent directly to your e-mail each and every day. There is NO Cost and NO Obligation. Hope You enjoy it.
How To Trade These Types Of Bull Markets
I hate to sound like a broken record, but I can not stress enough that you need to make certain you do not get yourself too overextended while trying to ride this "Bull" market. You have to make certain you maintain managable positions. If you are feeling uncomfortable at scale back. I will be scaling back some and making adjustments myself on the break. If you need to, think about eliminating the futures and buying the calls on the set-back. Now is the time to re-evaluate your positions you have to make certain you can ride this thing out. End users should see the coming break as a complete blessing and should look to extend coverage. The export market will be your signal that prices have stabalized enough to encourage new demand. Along with more demand coming in at lower prices, I still believe qwe will see lower production estimates in January. Remember since1974, there were three times that the US corn yield fell in Sep-Oct-Nov and in each case, the final yield in January was also lower.
***Cattle guys that still need corn coverage should consider buying at the money calls and selling deeper out of the money puts to finance it on the breaks.
What INFORMA Acerage Numbers Represent
In a nutshell INFORMA estimated 2011 total corn acres would be around 93.1 million acres. This is an increase of 2.7 million acres from their last report just 60 days ago. And almost 5 million acres higher than their 2010 estimate. As you can imagine this has taken the air out of the trade and the current concern about acreage. Yes it is just an "estimate", but right now the market is taking it as fact and has nothing else to go by. Obviously INFORMA needed to see a brake in the deferred contracts. How you come up with a number like this is beyond me, but it looks like they are trying to stay consistent and top last years failed effort. If you recall last year they where high by about 1 million acres in their initial estimate and the year before that they missed it by almost million to the high side. Regardless the market is rattled up. We have fund traders who are massively long this market, and I hate to say it may get cold feet on this type of news. Throw in the fact that the Ethanol tax incentives may not get passed and we have the makings of a major set-back. Those of you who thought you may have missed the opportunity to get on board may have just been given a second chance, don't let it pass you by this time. If you need help establishing a position or strategy to catch the move higher as we pull back gives us a call (816) 322-9800.
- Soybeans are a completely different story, with INFORMA estimating soybean acres will fall by 1.6 million acres to 75.8 million. Once again somewhat nuts in my opinion considering many producers I have spoke with as of late are talking about double cropping beans more than ever before. But if this where the case, beans prices will be skyrocketing and supplies could fall to zero.
- INFORMA also reduced total wheat acres for 2011 by just under 1 million acres.
- INFORMA raised their projections for total Cotton acres by 1.2 million acres putting the total now at 12.2 million. This would be the largest year-to-year change with almost an 11% increase in total acreage. That increase would send cotton plantings to their highest level since 2006. I know cotton prices are high and look very good to many farmers, I am just not sure we will see as many acres move to cotton as these people are projecting. Producer equipment prices and ginning resources may force many to rethink this plan.
A Couple Of More Reasons I Don't Believe The Highs Have Been Posted
I know we are suffering a set-back, but nothing I didn't tell you could happen several days ago when I mentioned the large unusual sale of $5.50 puts in the Dec 2010 corn contract. Some will look at this as a definite market top, and bail on the 'bull-run". I urge you think twice and try to recall the last time you saw the corn market make this type of run during harvest. Also let me know the last time you have seen the basis narrow and strengthen like it has during the past few weeks at the peak of the market. Generally the basis will start to widen as the market reaches it's final push higher. This final surge in price is not caused by lack of supplies but from a final wave of investors entering the market. This is not the case right now. Elevators want the corn and basis has been gradually strengthening.
Export Sales Numbers
USDA Exp Sales: Corn 2010-11 Net 573,600 Tons;11-12 55,000 This is slightly higher than anticipated.
USDA Exp Sales: Sbns 2010-11 Net 809,800 Tons; 11-12 120,000. This is lower than expected.
USDA Exp Sales: Wheat 10-11 Net 832,000 Tons This is higher than the trade had expected.
* Just as I had anticipated...soybean exports are starting to slow and corn and wheat are starting to gain steam.
Buying Interest Could Be Heating Up
We maybe seeing some of our first signs of more grain buying from abroad. Here is what I have heard happenign so far this morning:
- Iraq purchased 100,000 in US wheat
- South Korea Friday snapped up at least five cargoes of corn and wheat totaling 275,000 metric tons. South Korea is world's second largest corn importer after Japan.
- Major Feedmill Group Friday purchased three cargoes totaling 165,000 metric tons corn of U.S. No. 3 or better quality grade..
- One cargo of 55,000 tons each has been purchased from Itochu, Cargill and Archer Daniels Midland at $297/ton, $297.87/ton and $297.50/ton, basis cost and freight, for arrival by March 15, March 10 and end-March respectively. Itochu is likely to supply U.S. origin corn and the other two companies' cargoes may be of optional origin.
From what I can gather the funds have sold close to 100,000 contracts of corn this week. They are now net long less than 360,000 contracts. Yesterday alone the sold close to 20,000 contracts. The are long now less than 200,000 contracts of beans, and may be flat the Chicago Wheat Market.
*We traded over 760,000 contracts, blowing away the old record of 570,000 from last month. Try telling me these markets have not changed...
USDA Even Thinks The Price Of Corn Will Be Higher
You might want to sit down for this one. I have heard rumors that at a meeting in Boston some USDA analysts where heard saying that corn could trade much higher, possibly even reaching $7.00 in the next few months. You read that right, I said the USDA. If they think it could eventually go to $7, I might want to raise my estimates to double digits. Just kidding, but I am somewhat floored they would even consider throwing out such a bold number. That is just not their style. I felt like sending them a fruit basket or something, I am not sure I can remember the last time they were on our side They still have their average crop year cash estimate at $5.20, the rumors were, before this little set-back, that they might move it up to $5.60...who knows now.
Corn Usage For Ethanol Could Be Higher...But
Yes the acreage estimates will play center stage, but we must continue to look a the total picture. I found some interesting data that I think you need to consider regarding corn usage from ethanol production. If you look at the September and October implied ethanol production data, you can see total corn usage is around 820 million bushels. If we assume a similar type increase in November (in line with the Sept-Oct gains), our total 1st quarter corn for ethanol usage would be just about 1.26 billion bushels. Which is a gain of about 200 million bushel during just the 1st quarter. From what I recall the USDA was only anticipating a gain of 232 million bushels for the entire year. Something just doesn't jive. Either demand has to rapidly decrease or these projections need to be revised much higher. The problem though now is that the ethanol tax credits look to be in big trouble. I heard yesterday the deficit reduction committee recommended sharp cuts in Medicare, Social Security and other entitlement programs. One committee proposal I heard discussed suggests cutting farm subsidies by $3 billion per year. Any direct cuts or eliminations of this magnitude will certainly rock the market on a near term basis.
Will The Corn Market Test All-Time Highs In 2011?
Do you realize that right now we have just slightly higher than a 6% carry out to usage ratio in corn. I have heard reports that this is the lowest Nov stocks to usage estimate in the last 30 years. The previous low happened in November 1995, and it was more than an entire percentage point higher than current figures indicate. Soybeans now also have the lowest Nov ratio since 2003. If China steps in and starts buying up corn and continues to buy beans with levels this tight it could be lights out. I don't know about you, but if I am China I would certainly feel much more comfortable buying US corn, beans and wheat rather than US treasuries. I am honestly more bullish now than ever. Setbacks are going to happen. I have been conservatively predicting corn to move higher ($6.50), if all the stars align we could easily test all-time highs and beyond at some point.
Let The Technical Guru's Have Their Day In The Sun
When I first started trading over 20 years ago I worked alongside some of the industries top technical analyst. I swore it was the only way to trade, that was until I missed some of the markets most impressive moves. Then I flipped sides and began trading from a totally fundamental standpoint, that had some significant drawbacks as well. Today I use a combination of fundamental and technical analysis. I use fundamental information to help me predict and determine overall market direction, and technical indicators to help me determine more precise entry and exit points. I have heard several of the big "technical guru's" the past few days talking about a key technical reversal setting up in corn. Technical guru's have been saying Gold was overbought at $600 an ounce, now we are trading over $1,300 an ounce. Technical traders are notorious for trying to predict market tops and bottoms. The problem is if this is not the top, and we turn back around and head higher they will all tell me that the previous sale was just a "false signal". I certainly respect technical analyst, I just don't like placing all of my chips on the table based on their analysis. I think there is still too much uncertainty about acreage and how it will all unfold for the markets to get hit too hard to the downside, regardless of what the technicians want to say. In fact I think the scenario has been amplified by the recent USDA report. If you look back in previous reports I was thinking that corn, wheat and cotton would more than likely try and steal acres from beans, that is not going to be the case anymore. Based on the most recent USDA numbers and China's relentless demand for beans...they are now going to be trying to steal from the other three. Bottom line look for the acreage battle to continue to add support to the markets. Certainly we will see some breaks and set-backs, just don't let the "technical guru's" talk you out of your position.
Consider Buying Soybean Meal
I really like soymeal and think we are building a big case for higher meal prices. Soymeal usage in China has simply exploded. Do you realize that meal demand in China increased by about 6 million metric tons in 2009, and this year it jumped by slightly more than 7 million metric tons. That equates to a jump in demand of more than 13 million metric tons in two years. The kicker is I don't think it looks to be slowing down anytime soon. As their livestock industry becomes more modernized and a demand for higher protein meat begins to penetrate the marketplace soymeal demand will explode. I have been trying the past few weeks to build a long soymeal position, but have not had much luck. The problem is I continue to spread off the risk of owning the contract outright and shorting soybean oil against it. Needless to say the bean oil has advanced higher than my meal contract the last two times I tried it. I am going to give it one more shot, then drop back and re-evaluate. If you want in on some of the fun you can consider buying the March Soybean meal and selling the March Soybean oil, you need to risk at least $1500 on the trade as it can become extremely volatile. There is a strong seasonal tendency for meal to gain on oil from here through year end, so maybe that will provide us with some help.
Winter Wheat In China Could Struggle
I am telling you now all it will take is confirmation of a production glitch in China to send prices skyrocketing. I don't want to get your hopes up, but reliable sources yesterday reported that China’s winter wheat crop may be heading for problems as conditions are extremely dry. To be specific winter wheat crops in the North and in the East are seeing "emerging signs" of drought after below-average rain fall since planting.
Could Fertilizer Price Be Heading Even Higher
From what I am told Urea is up well over 50% in many parts just in the past six months. This problem doesn't look to be getting any better as China may cut exports of fertilizers including urea and diammonium phosphate this year to boost local supplies and lower internal prices. The word is China may instate some new policies as early as December that would restrict crop-nutrient exports in order to ensure their domestic supplies. You have to believe reduced shipments from China will make supplies tighter and prices in-turn could move much higher. Make sure you are getting your inputs locked in.
Make certain you get singed up to receive all of my cash marketing strategies, hedging techniques and market commentary. The information is FREE and is sent directly to your e-mail each and every day. There is NO Cost and NO Obligation. Hope You enjoy it.