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Current Marketing Thoughts

RSS By: Kevin Van Trump, AgWeb.com

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

What Will Affect Corn, Bean & Wheat Price The Next 60 Days.

Nov 10, 2010

With the November report behind us and no real significant news until the end of December or mid January the market will be concerned about the following news and information. Certainly there are many more topics for debate, I just wanted to throw out a few thoughts.  

  1. The Crop - What will be the final crop size in the January USDA report? What will the size of China's corn crop end up being? 
  2. Exports - Will China step in and buy corn? Will they continue to buy beans? Could they eventually be buyers of Wheat?  Will Russia step in to buy? If exports strengthen from here the market will respond with higher prices. 
  3. Weather - Will South America's "La Nina" weather scare actually cause problems or fizzle out? Will the US continue to stay dry? Will extreme weather patterns affect Russia, China, Australia, Canada, etc...? Any production scares will cause prices to rally, ending stocks are just too low right now. 
  4. The Funds - Will the fund managers look to lock in "big bonuses".  Bonuses are generally paid on "closed" positions and not "open equity".  This means to realize year end bonuses fund mangers may need to bank and close a few of the "long" positions they have on the board. To close their longs they will need to be sellers at some point.  This pressure could weigh on prices short-term.  Will the Funds look to allocate more money to the US Stock market as investors pressure them as the market trends higher? If they reallocate and move money into the stock markets they will inevitably take some money out of the commodity sectors. Will the funds look to balance their grain positions? If so you could see selling in corn and or buying in wheat to balance the portfolio. 
  5. Politics - Will the ethanol tax credit pass? If not corn prices may suffer some set-backs. Will the biodiesel incentives be reinstated? Will Japan and the other countries continue to allow the US Dollar to weaken? If the dollar strengthens grain prices could stall out. Will China look to slow their economy and continue to raise rates? 
As you can see there are many unanswered questions that lie ahead with everything considered I think we may see a short-term top in corn and wheat, while beans try and hold their ground. I still believe March corn will trade to $6.75 and beans to $13.50 maybe higher, we just may see some set-backs before we get there.  
 

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Recent Developments 

  • The USDA revised Corn US ending stocks to their lowest level since 1995. On a global basis however the USDA expects stronger Chinese production on higher acreage and yields to partly offset the downgrade to US supplies. I think this is where they may really be off base.  I doubt China is telling us the entire story...Keep an eye on this as we move forward.
  • In addition the USDA is expecting higher global soybean production from Brazil and Argentina to offset lower US supplies and higher global demand. In the end this may not be the case. With the thoughts of extreme weather in South America yields could end up much lower than anticipated. The USDA is currently looking at the most optimal scenarios, there are other analyst basing their estimates on the most extreme scenarios.  I think somewhere in between has to be the most realistic scenario.   
  • The USDA essentially confirmed all of my previous reports that we will need at least 5-6 million more acres of corn and 2-3 million more soybean acres next year. I continue to think there is real value in November 2011 soybeans, and December 2011 corn.  The risk to reward seems much more manageable.  You can see that from yesterdays price action.  I continue to believe the deferred contracts will find support much quicker than the front months. 
  • Celeres says farmers have sold almost 30% of Brazilian new crop soybeans forward compared to 18% last year and plantings for the entire country are actually now running ahead of schedule. How quickly things change.  This tells me farmers in Brazil like the prices, and their fears about planting problems may have subsided.
  • Rumors are floating around that Beijing may restrict production of ethanol from corn in China as prices continue to climb.  I cant see this being a good thing for corn, but rationing has to eventually be expected at some point. 
Read Before Making Any New Cash Sales 
If you are going to need to make a cash sale before year end on a portion of your 2010 crop, make certain you are implementing some type or form of re-ownership.  Call into the office and we can help you get one set-up, I just don't want to see you make a sale on set-back during the next 60 days and then watch the market explode higher after the first of the year. Trying to time these types of markets can be almost next to impossible.  The best way for producers to play it is to make the sale then re-own with some type of "limited-risk" strategy. Make sure you use a strategy that gives you unlimited upside potential, where you can participate on any move higher, but with limited and pre-defined downside risk.  Just give us a call if you need some help, everyones situation is different.  

Ways To Play The New Crop
As I continue to recommend the December 2011 corn contract and the November 2011 soybean contract I thought I would throw out a few trade ideas. On hard breaks to the downside I continue to pull profits out of the markets by selling puts and buying calls.  You can then lift these positions into the rallies, or simply stay long if you are comfortable with the exposure.  Example: Sell the Dec 2011 480 puts for $0.35 cents, and use the premium collected to buy a $7.00 call at break even. Another simple play you can consider is buying the futures and selling covered calls.  Example: You can buy July Wheat @ $7.90 and sell the July $9.00 calls @ just over $0.60 cents. This gives you $0.60 cents of protection to the downside on a break lower and over $1.70 of upside potential per unit ($8,500).

Short-Term Trade Strategy
If you are looking to take a shot and don't mind getting long corn consider selling the December 2010 $5.60 corn puts @ $0.10.  These puts only have 12 trading days left on them until expiration.  If the market breaks you are long corn from a net $5.50 price level.  On the flip side if prices on expiration settle above $5.60 you will bank $500 per unit. 

I Have Been Talking For Weeks About the Upcoming Acreage Battle 
Have you ever rally sat down and tried to pencil out this acreage problem? I am starting to wonder if Wheat might be the sleeper in this whole thing. I know corn has to buy some serious acres, but at what expense will these acres come from. Here are a few interesting statistics I heard the other day that I though you would want to see. 
  • 1990 the US planted just over 77 million acres of wheat, a little more than 74 million acres of corn, and about 58 million acres of beans. This gave us a total in 1990 of about 209 million acres.  
  • 2000 we planted a total of 216 million acres (gaining just over 7 million acres). Corn acres rose by about 5.5 million acres, Bean acres rose by more than 16 million acres, but wheat lost 14.5 million acres.  
  • 2010 we gained more than 3 million more acres, and planted close to 220 million acres. Corn gained more than 8 million acres, soybeans gained cloe to 4 million more acres (in fact set a new record at almost 78 million acres planted.  Wheat however lost another 8 million acres and is now down to just slightly more than 54 million acres planted. 
That is almost a 30% loss in total wheat acres since 1990.  Do you see what is happening with wheat acres? I realize global wheat production has improved, but with production set-backs in Russia, and China and India being net importers this market could be setting up for a big run.  Wheat abandonment could be big with beans, cotton, corn and others surging higher, and abnormally dry winter wheat conditions. If we really do have to add more corn acres, I think you can see the trend has been to take it away from wheat. We need to keep our eye on this as we move forward. Producers could be quick to scrap the wheat and try to plant something else. 
 
Cotton Prices Continue to Climb Higher
December Cotton closed above 151, up the 500 point daily limit yesterday.  This market is absolutely unbelievable right now. The limit tomorrow will be expanded to 600 points higher. In case you hadn't heard, the USDA report showed a big drop in US yields. In addition they hiked up the export business by a quarter million bales. All of their fancy math work dropped our ending stocks to right around 2.20 million bales, which happens to be the lowest since 1925. You heard me right...1925. World cotton ending stocks also declined.  This market is extremely volatile, so be very cautious.  You have to believe as long as cotton continues to push higher beans will need to rally in some degree to fight for acreage.  Keep your eye on prices as we head into next year.  It will all be about acreage. 
 

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