The week started in a dismal position for the grains complex that the Chicago Board of Trade. Coming off a week of significant losses last week, the weeks trade opened on a continued sour note, reaching limit down on Tuesday.
Then China entered the market and suddenly the situation in Japan didn’t look as bad long-term and prices went limit higher on Thursday. The combination of those two things, with the fact that corn reached it’s lowest levels since last fall, sparked the late-week rally. (Click here for the December 2011 corn chart.)
"It was during the limit move down, we got down to the November highs of last fall. We exceeded those at that time when we realized that there was a problem with supply and demand. All we did was go back to that November high breakout."
Interestingly, this week’s lows also corresponded with the market highs seen in August 2008, just before the U.S. financial market troubles began.
"The market is like it’s saying we need to go higher because of food and now we have a problem with Japan. The downdraft was also caused by some spread traders who were buying July and selling December contracts, and got caught. They had to sell July and that’s how July collapsed all the way down about 70 cents, when it was higher than December." (Click here for the Corn Spread Matrix.)
The market is also indicating that corn has value at $6.00/bu., he says. Another indicator is the price was getting close to levels where crop insurance was becoming a factor. The GRIP contracts were getting near payoff levels. The revenue protection contracts were also nearing payoff levels.
"Of course this being the first two weeks in March, we don’t even know what the planting survey says, we don’t know what the weather will be, and that doesn’t look good. Suddenly you say why would anybody want to sell grain down that low when you get the implied payoff through insurance. Just let it run."
Gulke, being one of the true actual farmers at the Chicago Board of Trade, had many questions from speculative traders of the insurance situation. After they heard from Gulke and other farmers about the situation, they began to see that there was little reason to sell their crop.
For the short term at least, Gulke believes a floor has been reestablished in the corn market. Technical analysis shows that new contract highs also have to be established to prove that the market can get any more bullish that what we’ve seen recently.
"I don’t know if we’ll get that in the March 31 stocks report, but if it implies that stocks are getting even tighter, then June 30 you might take the July contract a lot higher." If that happens, he says this will mean that nobody will touch corn except for the people who really need to have it.