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Grain Hedge

RSS By: Brock Schimbeno,

Grain Hedge is a self-directed discount brokerage that saves farmers money when trading in the futures and options market. For $7 commissions per side producers can execute their marketing strategy with authority, any time the markets trade.

January -- A Month in Review

Jan 31, 2012

The first trading month of 2012 is nearly over with mixed results, so let’s take a little time to review the trade from this month.  For most of the month, three items were the main drivers of price direction and they were: South American weather, the dollar index, and the USDA reports of the 12th.

Persistently dry and hot weather in January has plagued the growing areas of Northern Argentina and Southern Brazil.  The governments and private forecasters of these countries have reduced anticipated production several times over the course of this month.  These reductions have given way to tentative plans to add an export levy on corn and wheat for Argentina.  These factors have been the key bullish fundamental force driving our grain markets higher domestically.  Another factor lending some support is a slightly weaker dollar index.

Debt crisis concerns have once again come to the forefront in the Euro zone.  The dollar index has been fairly volatile in a relative tight range.  Early in the month, the dollar index hit multi-month highs sending the grain markets lower.  The Euro currency comprises the largest portion of the dollar index and when the Euro was weakening it caused the dollar index to rally.  To counteract a strengthening dollar, which causes our exports to be more expensive on the world market, the trade had to send prices lower.  Towards the end of January, we are seeing the inverse situation occur.  The last piece of the trade puzzle for the month was the surprising USDA reports of January 12th.

On the day of the USDA reports, we saw double-digit losses across corn, soybeans, and wheat, with corn being the leader to the downside hitting the daily limit of 40 cents.  If we could take this day out of the month corn would have been positive to start the year.  We cannot, however, erase that day from the books.  We can learn and prepare ourselves for the next big report which comes on March 30th, the Prospective Plantings report.

By the numbers, corn was down 19 ½ cents for the month.  Soybeans were down 28 ½ cents and Chicago wheat actually ended the month higher by 9 cents.  As far as volatility is concerned, corn was less volatile (as measured by standard deviation from the mean) than the average of the previous 3 years as was Chicago wheat.  Soybean prices were more volatile in nature than the previous 3 years average.  What can we learn from this month’s trade activity?  Be prepared for the unexpected moves to the downside.  Those moves will cost producers and traders the most on their bottom lines.


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