Trade Continues To Focus On South American Weather
Jan 30, 2013
South American weather continues to be the main song and dance. If the rain misses Argentina this weekend the trade will look to add additional risk premium on fears that both corn and soybean production estimates will almost certainly move lower in the upcoming USDA report. I have actually heard a couple of private sources now saying "IF" the rains in Argentina remain limited, the corn crop could drop to 22-23MMT's. Keep in mind the USDA is currently estimating 28MMT's. The trade is obviously living and breathing off of every new South American weather run. This weekends rain event is being billed a MUST. All I can say is try not to get yourself chewed up in the choppy back and forth market action as the trade tries to appropriately price weather risk. More rain in the South American forecast (especially in Argentina) equals lower prices; Rain taken out of the forecast, coverage reduced or rain pushed back, prices will move higher on additional risk premium being added. Producers should be smart and take advantage of the rallies.
Corn traders continue to talk about very limited "action" as of late. Paper is basically short all the "short dated" options, such as May and July based on the DEC13 price. This means they are basically hoping futures prices do next to nothing. Most in the trade seem to be thinking "demand" might be strong enough to support our current price levels, but simply NOT strong enough to support any type of major rally to the upside. I am hoping they are wrong. From a trade perspective, and based on the low "vol" in the front-end, I am thinking the algo players might start to trade the CSO (corn spread options), buying the JUL13 and selling the DEC13 trying to catch a pop. Not sure when it happens, but I feel "demand" could be tightening a bit and an unforeseen short-term rip to the upside could happen in 30-60 days out. I say 30-60 days out because I still believe we need to get past the USDA Outlook in late Feb and past the fund roll that starts next Thursday. I also believe the ethanol industry is still in the midst of a shake down with more plants closing because of high corn prices and the fact they simply can not source any corn. Keep in mind, just yesterday White Energy's 120 million gallon plant in Plainview Texas halted production. The list of shutdowns continues to grow. In the past few weeks we have White Energy closing plants in Texas, Valero closing three plants, Poet closing plants in Missouri, Abengoa closing plants in Nebraska. I still believe exports are going to pick back up, and ethanol is going to find more stable ground, the question is when??? It is hard for me to imagine "demand" picking up with prices moving higher. That is why I believe any Producers who are still sitting up in the tree-stand waiting on a trophy buck ($8.00 or higher corn), might want to pull the trigger sooner rather than later on old crop corn. My thoughts are the closer we get to new-crop supplies coming online, the quicker your basis is going to erode, and in return your net price could ultimately suffer. Bottom-line, your next explosive old-crop move higher has to be taken advantage of.
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