Should You Be Making A Cash Corn & Bean Sale Now
Oct 15, 2010
I have had several calls this week asking about ways to play the widening basis. Obviously many of you will be considering using an HTA (Hedge To Arrive) contract. Simply meaning that you will contract with your local elevator on an agreed upon price but will not set the basis. As the market heated up the past couple of weeks the basis in many areas has seriously widened. I had told our clients this would happen several weeks back when the basis was much stronger. Many followed our lead and locked in the basis at those good levels, right now they are very pleased with their results. For those of you looking to make a sale but hate the current basis, you should certainly consider the HTA. the only problem is several elevators have stopped offering HTA's with the markets at such extreme levels. I say... Big deal!!! Theoretically you can create your own HTA by simply selling a futures contract on the board. Essentially you are making a sale of 5,000 bushels per contract at the board price. There is no basis being established with the elevator, making it the same play as an HTA. We have had some producers call in this week in a bit of a panic when they found out they could no longer do an HTA, all you have to do is sell the futures and you have created your own HTA...Hope this helps.
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Wheat - I personally see very limited downside risk from these levels considering corn and beans stay in strong demand. I see good support in the Dec Chicago contract in the $6.85-$7.00 range. On the upside I believe we could see $7.50 before hitting a wall. This gives us a risk to the downside of about 5-15 cents, and profit a potential of 40-50 cents. If you are just getting to the dance I think the girl you have go with right now is Wheat. Looks to me like the least amount of risk with a good amount of upside potential.
Corn - I look for Dec Corn to push higher into the $6.10-$6.25 range. Heavy technical support seems to be in the $5.30 to $5.55 range. That places our short-term downside risk between 15-40 cents and our upside profit potential between 40 and 65 cents. Look to add to your long positions on a pull-backs be apprehensive about adding any more length on the rallies. Be patient, you will get your shots.
Soybeans - I look for Nov soybeans to push higher into the $12.40-$12.70 range. Support seems to be back in the $11.25 to $11.50 area. In my opinion this gives you short-term upside potential of around 40-70 cents (certainly the most upside potential of the three). Downside risk exposure though could be anywhere from 50 to 75 cents. To me the beans are certainly the "hottest" girl at the dance (providing you with the most upside potential), but I would have to suspect she will be the girl most apt to ruin your entire night of fun (be careful entering the bean market at this level you could see some significant breaks before making the next leg hgiher).
The Longer Term Picture
I have been preaching to producers for months not to get oversold, now things are starting to intensify. I am telling you know the acreage battle for 2011-2012 is going to be the story. In case you weren't paying attention, look at what Cotton did yesterday. We traded "Limit-Up" 4 cents higher. the options locked "Limit-Up" 8 cents higher. Cotton is now at the highest level since 1995. From what I can gather several of the big exporters might have actually reneged on their sales. That may have left those buyers who where counting on the cotton in a serious pinch. On top of that many of the big boys are saying that China has sold out its cotton reserves and will need to replace supplies. With cotton surging higher I just have a hard time figuring out how corn, beans and wheat are going to gain the acres need in 2011-2012 to accommodate demand and replenish the shrinking stock levels. *** This is why I continue to stay bullish the grains. The only place I can see these markets going longer-term is higher. Yes, there could be some significant set-backs along the way, but I have to believe higher prices are in our future.
Do Not Panic About The "Basis" Just Yet
Many of my followers have called in during the past few days concerned about the recent weakness in the basis. Yes, I have warned you that in highly volatile markets you will see the basis widen as elevators and end users become increasingly more concerned about capital requirements needed to hold hedge positions on the board. Not to mention we are in the heat of harvest. I think this time around things might be a little different, I certainly hope I am right on this. I believe once we start to work our way through the harvest supply, you may actually see the basis snap back some in most areas.
What I Am Hearing About Global Weather Problems
Extremely dry weather continues to worry producers in the Western Australian wheat areas, and more dry weather is forecast for this area during the next week to ten days. In my opinion South American weather has changed very little since my last report, and despite what others want to report there are adequate rains forecast for the next 10-14 days allowing wide spread planting. I am telling you now the the South American weather forecast has vastly improved. We may certainly see La Nina cause some weather problems down the road, but this time around I believe the story will be put to rest by late next week.
Consider Buying The Pigs
The hog market has suffered a major set-back, I believe it will be very short lived, if you have been waiting for an opportunity to get long this market you may want to consider getting started. Several of the big livestock dealers are reporting that many of the large pork processing plants are almost completely full for this week and next week. The buying stations are thought to be drastically lowering their quotes to either stop or slow the deliveries. There is just simply no where to place additional hogs for at least a couple of weeks. Basically producers dropped a glut of of slaughter-ready hogs on the market due to profitable prices, fear of higher corn, and a large number of contracted loads tied to the October lean hog futures contract. I firmly believe that continued weakness in the US dollar and poor breeding numbers will ultimately cause prices to rally. I personally believe the recent jump in corn prices may cause some producers to reduce their breeding herds even further. ***I think you have to be a buyer on the breaks and look to sell out-of-the-money Puts and buy out-of-the-money calls. I think there is significant upside potential in this market.
Silver Could Make A Big Jump Very Soon
We have all heard for years about the massive short silver position JP Morgan has on the books. I have often wondered if it was purely rumors and speculation or if it really existed. The plot looks like it may be starting to thicken. I hate to speculate or even report on rumors, but this is just getting too good to let slip by. From what I am told JP Morgan's "Super-Star Silver Queen", Blythe Masters, may be in a very serious jam. The word on the street is that she could be caught short 150M oz of COMEX silver, and may have already lost over $900M during the past 60 days on a mark-to-market basis. Keep in mind this more than likely is just their COMEX short positions and not all of the other silver derivatives they have shorted. When they go to unwind these short trades, or are forced to unwind all at once, the market may explode higher. If this story is true this could be huge, we are approaching the 6 month position limit implementation deadline. If the CFTC steps in and forces their hand it could get nuts. The market looks like it may have already been tipped off by the recent trade action and explosive move to higher ground on anticipation...I am certainly glad I am on the right side of this freight train. *** We continue to recommend being long silver and adding to your positions on the breaks. If you are just now looking to initiate a new position, be prepared for an extremely rocky ride.
A Must Read Regarding Ethanol & Corn Demand
As I had anticipated the EPA approved increasing the Ethanol blend rate from 10% up to 15%. This came as no real big surprise, but could be huge for corn producers long-term. I am also hearing rumors that rather than doing away with the tax credit all together for ethanol producers, they may just reduce it to 25 or 30 cents per gallon, rather than the 45 cents per gallon they currently receive. Did you you know that Ethanol margins have actually been improving the past few weeks? I had no idea. I figured they where getting worse and really starting to suffer with rising corn costs. In actuality it has been just the opposite. On the global front I now hear that US based ethanol is the cheapest on the planet, and is now the world leader. Brazilian Ethanol today was priced as high as $2.91 per gallon, US ethanol from the Gulf area is priced just below $2.40. The reports show that the Sugar market has risen significantly higher than corn and has now allowed the US to become the leader in the global market. With US ethanol cheap to world buyers, and profits being made by the producers the demand for corn doesn't look like it will slow anytime real soon. Look for corn price to continue higher. With ethanol prices here in the US being 50 cents under Brazil it leaves me to believe we are at least 50 cents away from that happening. Keep your eye on Sugar prices and watch the spread for inside edge.
If You Are Oversold & Looking For Re-Ownership
I have had several clients that due to shortages in production and too many early sales have found them selves oversold in the corn market. Many have rolled the sales forward to 2011 and would like to somehow re-own. Yesterday we placed on a position that you may want to consider if you are in a similar situation. We Sold the Dec 11 $4.50 Puts and Purchased the May $6.80 calls at a slight credit. Our producers are ok with re-owning the corn if prices fall back below $4.50, and the $7.00 calls will give them upside potential into the acreage battle. If prices stay in this zone it cost the producer nothing, any rally in price from here will produce profits. If prices fall back the producer will re-own at $4.50 on the board. Margin on the position yesterday was running around $1,100 to carry.
Soybean Prices Might Need A Rest Before Moving Higher
With Bean harvest starting to wind down in the east, I am hearing that some of the processors and elevators are full and others are getting close to being full. There seems to be some problems in the shipping, and from what I can gather trucks are being restricted in certain areas. The markets still continue to pay the elevators a significant carry to hold beans until December. Soybeans are certainly coming in by the truck loads, we will just have to see if this market can support this much on hand supply. My hunch is that as the cheaper western soymeal is taken to the east coast there simply may not be enough continued export demand to support it all. Especially now that China has opened back up the door to Argentina. I am not saying the run is over, just that beans could cool off at some point during the next few sessions if we don't see continued export demand. Things have been great up to this point, how they play out during the coming could get a little sketchy. You may see the bean market take a rest and follow both corn and wheat before starting another leg higher.
Traders see the need for 2011 contracts to rally to give feedlots the incentive to place more cattle onto feedlots as corn continues to rally and provides an incentive for feedlots to avoid new placements. The estimated cattle slaughter came in at 129,000 head yesterday which was higher than expected. Normally, this would be seen as a sign that packer demand is strong but some traders may be fearful that the higher slaughter pace could be the result of higher corn prices. This brings the total for the week so far to 259,000 head, up from 255,000 last week at this time and up from 247,000 a year ago.
Look For Opportunities If They Substantially Break Bean Oil
I am hearing from many sources that China will officially be lifting it's ban on soybean oil from Argentina. As I have been reporting, China has been in a real pissing match with Argentina and had banned two of their largest state owned oilseed and grain companies from importing any Soybean Oil from Argentina. From what I am told both Cofco Ltd. (China's largest grain trader), and China Grain Reserves Corp. are now cleared to import bean oil. I have heard they have even taken it one step further and will be allowing Argentina bean oil to clear customs even if it fails to meet the limit on solvent residues. I think China needs bean oil, how about you? Obviously the market will absorb the new supply as bearish, but I think longer-term it only solidifies my theory that global bean oil demand is surging. If they beat up the oil during the next several sessions in comparison to the meal I will not be afraid to step back in. I will keep you updated.
The Battle For Acres Will Direct Prices
I personal believe all of the "smart-money" is very concerned about the supply outlook for 2011-2012. There is absolutely no questioning the fact that more acres will be needed. Not just more Corn acres, I am talking about more acres for all of the big crops. I am hearing talks now that we may need 12 million more acres of just corn, beans and wheat planted just get our stocks back to acceptable levels, and meet export demands. The battle for the acres will ultimately hold all of our answers about price and long-term market direction. This battle will continue to keep the big boys in the market and on the edge of their seats for the next several months. This is also why I think price will continue to stay elevated through the winter. As the cards start to play out in March or April you may see the markets pull back one by one, until then there are just too many variables.
Livestock Will Ultimately Trade Higher I think we will ultimately need to see higher meat and poultry prices so the producers can stay afloat and keep pace with shrinking margins on higher corn costs. Several well respected traders are now telling me that they anticipate meat prices to continue higher even though we are already trading at almost 30-year highs. The thought is simple, with corn and soymeal prices skyrocketing, very few producers will look to expand their herds. That could be a real "pinch" considering the US cattle herd in July was already the smallest on record dating back to 1973, and our total number of breeding hogs last month were reported at one of the lowest levels ever. You can continue to wait to buy breaks in this market, but you may miss the bus. I have been pricing orders for weeks in the Dec contract between $95 and $96 and just never seem to be able to get filled. I hate to chase it, but we may not have a choice. Our only hope now is that we see the cash cattle or beef markets soften a bit...I am just not sure what will cause it at this point. Everyone is telling me that forward booking interest for the holiday season is fairly strong, and if there is going to be any set-backs it probably won’t happen until November. If you are long-term bullish this market like I am you may want to consider selling Puts @ the $95 level in the Dec and collecting the premium. If the market breaks and trades through our strike we are long from $95 and will be holding the position for a longer-term play. If you are looking for more time head out in to the April contract. You can apply the same strategy in Hogs. I think we are ultimately headed to test the 1996 highs up around 90 cents a pound.
Cash Marketing Talk: I have had a lot of producers call in lately asking about marketing strategies for 2011. Our updated and revised "Cash Marketing & Strategy Guide" will be available at the end of the week or first of next week. For those that have never seen it, make sure you request a copy, I have had some really positive feedback.
Those of you itching to pull the trigger for 2011 you may consider dipping a toe in the water, but I would be apprehensive. Personally we are still 0% sold in corn and beans for 2011, we are about 20% sold in wheat. Make sure you start small with the intentions of having NO more than 30-40% priced by April in Corn and or Beans. I wouldn't suggest pricing anymore than 5-10% of your total estimated production at this time. I really don't like the thought of pricing any just yet, but if you must do it in small doses. If you are using HTA's make certain to note the basis. If you are pricing corn consider locking the basis, for beans you may want to wait until things start to tighten up. I like pricing wheat a little more aggressively than corn and beans at this time, but still in very small doses....
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Cotton Continues To Surge Higher: Traders continue to worry about the tight ending stock situation, and that fact that producers and those holding long futures positions are still reluctant to sell. this market is really getting squeezed. Even thought the USDA's Crop Production and supply and demand report was nothing to write home about, the previous day's Export Sales report was very bullish. Reports showed export sales for the week at nearly 4 1/2 times the average needed to reach the USDA's current export estimates. On the year we have already sold almost 65% of the amount the USDA had projected. On a normally year we would be about half that far along. Obviously the USDA is going to have to revise their export projections, and this will even further escalate the tight ending stocks situation. I have to believe with this many sales occurring while we are making new 15-year highs only means that we are heading higher. Continued export purchases will continue to shrink our stock levels even further. For now the ending stocks are at 2.7 million bales. I have to believe we will quickly be below 2.5 million in a hurry. They have recently raised the yields here in the US by 2 pounds to 841, but this was counter-balanced by a 500,000 bale reduction in beginning stocks. You have to believe with the other grains making new highs cotton will have a tough time finding a way to pick up the acres needed to meet the demand (I am thinking it needs 2-3 million acres). I think you have to start looking at the 1995 highs to be the next stop for cotton. Don't be surprised if you see the market trade above 115.00 during the coming sessions.
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