Is It Time To Sell or The Start of Next Bull Move?
Jul 15, 2010
We are seeing strength across the board from a weaker dollar and longer term weather concerns. As we have been preaching for the past several months, our "weather rally" is finally starting to gain some traction. How long will it last seems to be the magic question?
Clients want to know if this is the start of something much bigger, or their last opportunity to make cash sales before we break lower once again?
Below I have included just a quick update and overview of our current situation and what we think may happen in the coming weeks.
Soybeans: Nov beans continue to rally and have now reached levels that we have not seen in several months. Supplies are tight and the weather is becoming an issue of concern. The Monsoon rains in India continue to disappoint and are well short of normal for this time of year. Here in the US longer term forecast for more heat seems to be the big concern. Short term demand is still looking good and will continue to drive prices higher during the coming weeks. Longer term though you have to fear that a jump in ending stocks will eventually limit upside gains. With this in mind I believe we could see the Nov contract rally up into the $10.40 to $10.50 range on short term weather fears. If the weather doesn't create a major problem I think you will see us quickly give it all back very quickly. We will continue to reward this market with small incremental sales on the way up with hedges tightening as we continue to gain ground. I am not a big fan of "selling-it-all" so be selective and patient with your strategies.
Corn: New lows in the US Dollar and more heat added to the forecast seems to be the recipe for higher prices in corn as well. Corn though looks much better longer term than beans in my opinion simply because we may see a very tight ending stocks-to-use ratio even with a record crop. I just believe the demand for corn is really starting to gain steam, and any glitch in production could really spark prices. I believe hotter weather and surging demand could push the December contract as high as $4.45-$4.50 in the coming weeks. If you still need to move some old crop do so with a conservative re-ownership program in place.
Strategy: For those of you who still have puts on the board for protection and corn in the bin you may want to consider making small cash sales as the market continues to rally. Make larger sales if they are willing to pay a 3-5 cent premium (we have heard reports of some elevators doing this as of late). Then simply buy a futures contract and sell out of the money calls against the futures contracts. This gives you upside potential to the level of the call strike price, and also could add additional revenue if the market decides to stall out. You have your puts in place to provide downside protection along with the premium you collected from selling the calls. For some of you this may be a fantastic way to play the upside with very limited risk or exposure. It also allows you to free up some cash and clear out the bins.
*If you need help with this strategy or want to know more about how you can make this play, just give us a call or send me an e-mail and we will be more than happy to walk you through the details.
Wheat: I certainly don't need to say I told you so, but we have been talking for months about how wheat was setting up for a huge jump...here we have it. The funds had been massively short this market, we knew when they started to close or where forced to exit their positions heavy "buy" paper would flood the floor and drive prices rapidly higher. that is exactly what has happened. the large short positions started to get squeezed out a few weeks back on news of Canada's wheat crop damage. That has been followed up with news out of several major and minor producing countries that they are also experiencing wheat production problems. The list of countries that have lowered estimates is really starting to grow (Canada, Russia, Kazakhstan, Morocco, France, Germany, Hungary, Ukraine and Bulgaria), and rumors are that we may now see some downgrades coming out of China and India. All of this news has caught the short positions by surprise and has them scrambling for coverage. Keep your eye on the long term forecast here in the US because the slightest hint of hot hot weather across the major growing regions could hurt spring wheat yields and force the US to be the next in line to trim estimates. It may not amount to much but it will certainly add fuel to the fire and force more shorts traders to the side-line. I believe we could see Dec wheat move well above $6.50 in the coming weeks, giving us all an opportunity to make some final cash sales and start to consider pricing our 2011.
As I have stated in the past make sure you pay close attention to the "outside markets". The US Dollar has gotten hammered the past few weeks, while Crude Oil and the US Equities have rallied significantly. Remember the "funds' control the game these days, if the outside market direction starts to change look for the funds to adjust accordingly. As for now the markets look to be headed higher on weather concerns and demand issues. The funds are on board and we are off to the races. Reward the market by making small incremental sales on the way up and tightening your hedge protection to the downside.
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