Why the "Outside Markets" are so important for predicting grain and livestock prices
Aug 24, 2010
I know some of you don't like to read about them, but the outside markets such as the US Stock market and Crude Oil have a very big impact on today's grain and livestock prices. As large hedge and index fund traders begin to control market direction it is absolutely essential to understand and know what is happening in the outside markets, and more importantly how their movements will ultimately affect the future of your crop and livestock prices.
The outside markets were certainly the big news today with the U.S. Stock market and Crude Oil getting hit fairly hard to the downside on fears of further global slowdowns. Today's report on existing-home sales really rocked the boat by coming in much worse than anticipated. In Europe overnight the equity markets posted steep losses, along with Japan's Nikkei and other Asian markets falling into the red.
Moving forward traders will first be looking at Wednesday's "Durable-Goods Orders", then to Friday's second release of U.S. second-quarter gross-domestic-product data, with many fearing a sharp downward revision could be in order. If these markets continue to struggle during the next few sessions you will see the funds start to lighten their load in other areas. If this happens you will more than likely see the grains and livestock markets fall back as well.
September and October have seasonally been a tough period for the stock market, and certainly times when we have seen some of our biggest drops in prices. If you look at past performance and data you will notice that most every significant crash (1929, 1987, 2008) has occurred during this seasonal time period.
After news today of very poor new home sales numbers you have to start wondering where we are headed. From my perspective it looks as if the housing market is going to continue to place a severe drag on the U.S. economy. If you look back in time the US housing market has actually led us out of all of the last major recessions. This time, it continues to stifle and kill any and all recoveries. Home sales have basically collapsed after a federal tax credit for buyers expired in April. Traders and analyst are now worried that if foreclosures continue to mount and depress home prices any further we could eventually throw the economy back into a major recession.
With 14.6 million Americans now out of work, homeowners are struggling to hold onto their properties. I have read in reports that one in seven mortgages were delinquent or in foreclosure during the first quarter, the highest on record dating back to 1979. Foreclosures probably will top 1 million this year. Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.
In all other recoveries new-home sales have improved an average of eight months before the beginning of economic growth, and single-family housing starts have improved seven months before recovery. After today's news of falling new homes sales the big boys are certainly getting nervous about the current odds of mounting a complete recovery. Without the strength of the housing market many traders are worried about the overall validity, depth and strength of the current economic recovery.
With economic concerns again moving to the forefront of traders minds as we head into harvest I believe we may see prices continue to break without any major bearish revisions in crop production and or export demand. If this continues to play out I think we will start to see strong buying opportunities on breaks in the corn market. As I continue to preach, these outside markets now play a critical role in determining overall price direction. Certainly, I think demand will continue to stay strong, but as the large funds lose equity in the outside markets it would not surprise me to see them lighten their positions in the grains and livestock markets. For those who think they may have missed the move, I think you are going to get another opportunity in the coming weeks.
While I’m quite comfortable with the idea that U.S. corn yields have already peaked, one never quite knows where soybean yields will come in until the combines roll. This year’s reports of widespread SDS in parts of the Midwest makes the call even trickier this year. However, soybeans appear to be a bit more risky into harvest as without a major decrease in U.S. production, projected carryout will likely at least double this year’s figure even though I strongly believe that as usual, the USDA will have once again underestimated demand and that figure will decrease later in the marketing year.
To summarize: I think all producers need to make certain they have a re-ownership program in place especially for those producing Corn. The program should provide you with the opportunity to participate in upside market moves even after you have sold your cash crop. We have designed several detailed strategies with very limited risk for many of our clients. You are more than welcome to give us a call today if you would like to learn more about how we can design a re-ownership program for your operation for just a few cents per bushel (816) 322-9800.
These re-ownership programs are critical for increasing profits during these types of market conditions. We all know and understand that the Corn market could explode higher at any time, trying to predict a top is simply too difficult and can become too cash intensive for most operators. The re-ownership programs we design allow you to make cash sales when needed, and give you continued upside participation if the market where to take off after you made your sales.
For producers you need to make certain you have your floor in place and a re-ownership program ready to implement once you start making more cash sales. Producers can look to build a floor by Selling $5.00 calls and Purchasing $4.00 puts at a 2:1 ratio. Looking to lift these hedges when you make a cash sale and roll into your re-ownership position.
To all of our spec and fund followers the chance to establish new long-term bullish corn positions may present itself in the coming weeks as we approach early harvest and falling market prices. look for the outside markets to continue to apply pressure to the downside ahead of key economic data, but look for lower yield estimates to add some support to corn. More than likely beans and wheat will not get this type of yield support and we may see continued pressure in these markets. Once the outside markets begin to stabilize, we will more than likely be off to the races once again in the corn market.
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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