Joseph Vaclavik is the president at Standard Grain in Chicago. Standard Grain provides futures and options brokerage to farms, feedlots, elevators, processors, end-users and traders. Visit www.standardgrain.com for more information.
Ag Markets Mixed to Start Friday
Jun 08, 2012
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The ag markets traded lower overnight after trending upward for the majority of the week. Warm weather is slated to blanket much of the Corn Belt during through the 10 day period, which some cooling to occur only Monday and Tuesday of next week. The September and December corn contracts may be hugely undervalued at current levels IF heat issues persist into the beginning of July. Excessive heat was the main reason why corn yields were disappointing in ’10 and ’11. Weather markets are among the most difficult to trade, as forecasts can turn on a dime at any point throughout the trading day or night. The story with old crop corn remains the same: Tight cash supplies have resulted in phenomenally strong basis levels as elevators and processors struggle to source corn. Basis in Decatur, IL is still 50+ cents over the board. All of the pieces are there for a significant blow-up in the July corn contract shortly before or during the delivery period.
Macros are negative today, which may be the main reason for the break overnight. The Euro currency is sharply lower along with most other commodities. Crude oil is trading near the $82 area after trading over $87 yesterday. Gold and silver have also seen significant selling late yesterday and this morning. Fed Chairman Bernanke spoke yesterday, essentially squashing hopes for a QE3 type scenario over the short term, contradicting earlier ideas from Fed Vice Chairman Janet Yellen and other officials.
Today’s macro-based selling may provide speculators an opportunity to take conservative long position in the old crop corn market. The best bet for a long position may be at-the-money July call options. We also like being long the Dec contract to a lesser extent. August options expire at the end of July and will take traders through the majority of major weather events that will affect the corn market. We believe the likelihood of the Sept-Dec corn spread moving to a carry is good, given historical movement.
Wheat yields across the Plains continue to come in mostly mixed. Above average warmth during the last several weeks may have taken its toll on much of the crop, especially in the West.
26% of US corn production received less than 1.00" of rain during the last 30 days while warm weather continues. Shorts in the grain markets may look to take cover if patterns persist. Everyone have a great weekend!