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Current Marketing Thoughts

RSS By: Kevin Van Trump,

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

Understanding The New Marketing Game & How To Make Profits

Oct 13, 2010

 Here is an interesting fact you need to consider. Both Corn & Soybeans set new records in trading volume during Monday's session. Corn traded slightly more than 570,000 contracts (thats 2.85 Billion bushels) that is more than 1/5 of the entire US corn production traded just in one day (unbelievable). Soybeans traded almost 367,000 contracts, blowing the old soybean volume record out of the water by more than 70,0000 contracts set back in April of 2008. You still believe those who say the game hasn't changed, or those that continue to market and hedge using strategies developed 5 years ago. Those days are gone, and will never return. The volume is here to stay and is only going to increase. You have no choice but to get on board,or be left behind...this train is leaving the station.

To start receiving our FREE Daily Trade & Strategy Report just click the link below.  There is NO COST & NO Obligation of any sort.  This information is helping producers everywhere improve their cash marketing results and hedging performance.  I have include a few samples of today's report.

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Don't Fall Asleep On Wheat... The Next Bull Story
Everyone is playing the La Nina card, and there is certainly reason for their concern. Personally though I am just not sold on the severe dryness story. I think it could be a suckers bet, these areas are very tropical, we have seen this before. Yes it will push plantings back, but I don't see it affecting yields until we get a few more weeks of no rain.  There are already reports of scattered rain in several of the areas in question, so I just don't see it as of yet.  What I do see developing though is a story about Russian wheat acres. I know, I have been preaching for weeks that wheat was the dog of the group, and we have made great profits trading it that way. Now, I think we may need to alter our plan. Sure we may leave some profits on the table, but as I have learned through the years picking the tops and bottoms is no way to bank profits.  We have picked up over $1.20 in our corn and bean calls against the wheat, lets bank it and move on. What I am concerned about is the fact that some players I regard as "in-the-know" are telling me that only about 40% of the entire area seeded has seen good germination, the other 60% of the crop is anywhere from spotty to zero germination. You have to believe as Russia heads deeper into winter, crop abandonment and winter kill may be much much higher than most would anticipate.  Not to mention that the long Corn short Wheat play is approaching a top. I just see very little downside from here in wheat regardless. Maybe that is why I have changed my opinion, the risk to reward is looking better and better each day. The funds could pour a ton more long positions into the wheat market and it could race in a hurry. In addition if they start to ration more corn you have to think it will only naturally push a percentage of the feed grain demand over to wheat.

*I like being long the March KC wheat contract.  You could consider selling the Chicago $9.00 calls against the long KC futures to get a 25 cent bump.  If they both trade up and into the money through expiration, I believe the KC will gain on the Chicago, so why not collect the premium.  it also gives us a little help on a break. Cash marketers should be no more than 20-40% sold in 2011. Look for supplies to tighten after the new year.

I Hope You Are Watching The Basis: We had been reporting some significant improvements in the basis just a few weeks back, now we are starting to see them ease on the recent bull move higher.  Basis was down a penny for corn and down around 3 cents for soybeans at the Gulf. You have to believe the current harvest, and several days of dry weather is putting more supplies in the pipeline.  If traders really start to push the front months higher your basis could certainly widen.  For those still looking at a positive basis or a break-even I would consider locking a portion of your sales. 

I have been asked about the ethanol credit and blend increase several times this past week, so I thought I would provide my view once again on the issue. Yes, I think the US will  approve an ethanol blend increase from 10% to 15%.  I think this will happen sooner than later, possibly within the next 30-days, and certainly before year-end. The 45 cent per gallon ethanol blenders' credit is an entirely  different story. I honestly doubt the credit will pass. It expires on Dec 31st of this year, and just seems to have too many opponents. With corn prices at seriously high levels, and the thought of loosing more bushels to create fuel just doesn't seem to sit well with the masses. If Crude Oil was trading above $100 a barrel you may see more concerns.  Now that corn prices have skyrocketed and we have ample crude oil supplies I think it will be tough to get it sold. In typical government fashion they will pass the measure to increase the blend ratio, but cut the incentives. It seems to get votes you need to oppose government spending (ie. ethanol incentives), and you need to be concerned about global population and world food shortages (ie. using food for fuel will not get you many votes).  Politicians love to ride the fence.  They will try and please both sides by granting the increase in ratio, but taking away the credits. 

You Have To Be In Position To Capture The Move
The way these markets are trading has greatly changed just in the past couple of  years. The global economy is much more fragile than it was in 2008, and you have to believe both the end users and the creditors are much more concerned about risk associated with the markets and how they can mitigate it. With this in mind I am a little concerned that we may see a massive spike in prices over a very short period of time. If creditors or end users start to panic you could see major scrambling, first higher then immediately lower. I am talking about a spike that could push Corn to over $8 or $9 then back down in the $6 range in the blink of an eye.  We could level off back in that area where we may trade for a rather long period of time before it all gets sorted out. I am not sure we are that point just yet, but you need to have a game plan in place if you have any hope of capturing this move.  I think we are going to be at these levels for a longer period than most may think, but the meat of the move I think will happen fast and feverishly, acting more like a "weather" market, than a supply and demand issue.   

Inside China
I have heard from several sources that China has raised their minimum purchase price for 2011 wheat and soybeans. They raised their ordinary class wheat to $7.53, up 45 cents a bushel.  They also raised their soybean purchase price to $15.40 per bushel. Sources in China are also reporting that they have raised their import expectations for soybeans in October by almost 30% (from 3.3 to 4.2 million metric tons). Soybean demand from China is starting to look like a bottomless pit...I see no real signs of easing or slowing down in the cards. If they have any set-backs in corn who knows where this market will end up. One final note is that China is now officially the world’s largest consumer of energy, just as with beans there looks to be no real end in sight regarding their demand for crude oil either. With Chinese auto sales up almost 20% in Sept you have to only assume they are just getting revved up.  

What The Hell Is QE2?
If you watch CNBC or the financial channels all you hear is talk about "QE2".  QE is now referred to as Quantitative Easing.  QE2 is the US governments sequel to the ever popular block buster hit QE1. Basically in the first production back in 2009 the Federal Reserve playing the lead roll purchased $300 Billion of US Treasuries.  This was such a big hit we now have the sequel (QE2) scheduled to debut later this month or early next. This time around though the Federal reserve will raise the stakes and buy $500 billion of US Treasuries, and as a teaser they are threatening to buy even more. This info is coming straight from Goldman.  Remember, Goldman is one of the few select primary dealers that trade directly with the Fed. I have to believe they are on the inside track. This is nothing that the big players have not already been banking on, as they have driven our two-year yields to record lows on fears that the Fed will continue to buy more Treasuries as it battles to keep borrowing costs as low as possible. Some are now saying that the Fed may be forced to hold interest rates at the current low levels until 2015 or even beyond. Be very careful shorting the Treasury markets, I know they look very overdone to the upside, but this market has broke many players trying to short it, being on the opposite side of the guys running the printing press could get very costly. 

What You Need To Know To In Order To Make Profits
I must sound like a broken record, but this business is about making money, not about simply being right.  This is where it gets very tricky, and certainly a conversation I have had several times with clients the past several days. As Kenny Rogers once sang, "You got to know when to hold'em...and know when to fold'em..."Lets just look at corn and beans for an example: I certainly believe corn will work hard to get into the $6.25 to $6.50 range fairly quickly, and that soybeans will trade at a 2:1 ratio if not higher ($12.50-$13.50). The tougher part is how do we capture that move with out loosing a significant amount of capital in the process.  We have to respect the fact that these markets are going to be extremely volatile.  With that said you have to understand there are going to be many violent moves, both higher and lower. These moves will certainly test our convictions and our commitments to the positions. These types of markets make it next to impossible to predict short-term market direction. We both know and understand that the market is trying to find price levels that will ration and slow demand. We may go up 50 cents in corn only to find there is very little if any buying interest for days. The market will violently fall back until support steps back in. This type of action could play out for weeks and even months before it finds stability.  If you get over-extended you could easily get shaken out of your positions. Even though we have a very good idea of where we are headed we have to respect the market and its ability to knock us out of the game in the blink of an eye.  If you need help building a strategy or have questions about getting too over-expsosed please feel free to call our offices (816) 322-9800.

Trading Strategy
Last week we initiated 2 new positions in which we sold March $8.00 Chicago Wheat Calls, and used the premium to purchase March $5.50 Corn Calls, and Jan 1160 Bean Calls at a credit.  Obviously the trade has exploded and worked well in our favor. We have been buying small increments of KC wheat on dips to offset a portion of the short wheat calls but we still have some outstanding short Chicago wheat expose.  I am now recommending that we adjust the position by buying back any portion of the Chicago wheat that is not covered by the long KC wheat.  We have taken over 30 cents out of the Corn/Wheat options and another 40 cents out of the Bean/Wheat options, we should reward the market by unloading the wheat options.  Those wanting to protect and off-set some of their net long exposure, may want to consider selling the March $7.00 Corn calls against 50% of the $5.50 calls that where purchased  last week, also do the same in beans by selling the Jan $14 Bean calls.  This should ease the pain on days when the market breaks, but still provide you with huge upside potential. 

To start receiving our FREE Daily Trade & Strategy Report just click the link below.  There is NO COST & NO Obligation of any sort.  This information is helping producers everywhere improve their cash marketing results and hedging performance.  I have include a few samples of today's report.

Free Ag Hedge Daily Trade Report (click this link to sign up)

The comments and information above belong to Kevin Van Trump, Ag Hedge, and their team of professional trade analyst. The information is believed to be reliable but no guarantee either written or implied is being made. Hedging and or Investing in derivatives, futures or options may not be suited for all producers or investors. This information is solely a recap of theories and strategies being used by Ag Hedge and or it's team of trade analyst. Any investment or hedge decisions that you make are solely your responsibility. Please consult with your licensed advisor and read the entire "Risk Disclosure" statement before you consider using any of the above mentioned strategies or trading techniques.

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