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September 2010 Archive for Outlook Today

RSS By: Bob Utterback, Farm Journal

Bob Utterback has more than 26 years of experience and offers producers a disciplined approach to marketing.

Bulls Regain Control!

Sep 24, 2010

Bulls regain control of the market in a decisive way today!  The buying started first as the Chinese markets opened quite firm and technical buy stops were hit across the board for corn, beans and wheat. 

This week’s exports suggest corn is slowing down but soybeans are still full steam ahead. As I’ve reported several times, it’s all about getting equilibrium between U.S. and Chinese markets. With domestic prices more than $7.50 for corn and close to $16 for beans, incentive has existed to buy U.S. product. The estimated shipping cost from the Midwest to China is estimated around $3 a bushel. This implies $5 U.S. corn is going to start rationing China’s future export need but $11 beans still is unpriced by $2.

 
This is where it gets tough for me. The bean crop seems to be out there to support the USDA bean yield. In fact it could creep up a little. The problem is China’s concern of stockpiling beans is trumping supply right now. The end game however is if South America does get the crop planted, we could see China stop buying very quickly after the first of the year.  
 
Implication: If you are in a margin position in beans and cash flow is getting tight you really need to consider moving into a put position for old crop inventory.  My suggestion would be to roll futures position into a January bean sale and buy as much July call protection, in the form of a vertical call, as close to 50 to 60 cents as possible. I come up with this number by assuming storage would cost you 6 cents for 6 months or 36 cents. Plus a risk premium of 20 cents puts you right at 56 cents cost if you were to store in the bin at these price levels.
 
In conclusion: it’s time to think about cash flow exposure so you can stay in position and still have cash flow available to really sell the market in the first part of 2011 if the market starts to develop some of the price excitement of 2008.
BEFORE TRADING, ONE SHOULD BE AWARE THAT WITH POTENTIAL PROFITS THERE IS ALSO POTENTIAL FOR LOSSES, WHICH MAY BE VERY LARGE. YOU SHOULD READ THE “RISK DISCLOSURE STATEMENT” AND “OPTION DISCLOSURE STATEMENT” AND SHOULD UNDERSTAND THE RISKS BEFORE TRADING. COMMODITY TRADING MAY NOT BE SUITABLE FOR RECIPIENTS OF THIS PUBLICATION. THOSE ACTING ON THIS INFORMATION ARE RESPONSIBLE FOR THEIR OWN ACTIONS. ALTHOUGH EVERY REASONABLE ATTEMPT HAS BEEN MADE TO ENSURE THE ACCURACY OF THE INFORMATION PROVIDED, UTTERBACK MARKETING SERVICES INC. ASSUMES NO RESPONSIBILITY FOR ANY ERRORS OR OMISSIONS. ANY REPUBLICATION OR OTHER USE OF THIS INFORMATION AND THOUGHTS EXPRESSED HEREIN WITHOUT THE WRITTEN PERMISSION OF UTTERBACK MARKETING SERVICES INC. IS STRICTLY PROHIBITED. COPYRIGHT UTTERBACK MARKETING SERVICES INC. 2010.
 

Corn is Waiting for Consolidation

Sep 23, 2010

 
The market seems to be reaching a price level where demand is expected to start showing signs of rationing. I expect ethanol will be the first commodity to show resistance to higher prices. Based upon production statistics we did see some drop in production last week. As for exports, I believe the difference between Chinese prices plus transportation is now getting close to even money. The issue now is how much higher will Chinese officials allow corn to rally domestically.

It is my opinion for corn to move higher we will have to see solid confirmation that corn yields have declined below 160 bu./acre. This is what the trade will be looking for in the October USDA Supply and Demand report.
Right now, there is a building group of end users and speculators, who are going to be very aggressive buyers in the lead month corn between $4.80 and $5. I have to say the downside risk in old crop corn is limited at this time. Therefore, if you have any remaining old crop corn in the bins, one should continue to be a slow seller.
BEFORE TRADING, ONE SHOULD BE AWARE THAT WITH POTENTIAL PROFITS THERE IS ALSO POTENTIAL FOR LOSSES, WHICH MAY BE VERY LARGE. YOU SHOULD READ THE “RISK DISCLOSURE STATEMENT” AND “OPTION DISCLOSURE STATEMENT” AND SHOULD UNDERSTAND THE RISKS BEFORE TRADING. COMMODITY TRADING MAY NOT BE SUITABLE FOR RECIPIENTS OF THIS PUBLICATION. THOSE ACTING ON THIS INFORMATION ARE RESPONSIBLE FOR THEIR OWN ACTIONS. ALTHOUGH EVERY REASONABLE ATTEMPT HAS BEEN MADE TO ENSURE THE ACCURACY OF THE INFORMATION PROVIDED, UTTERBACK MARKETING SERVICES INC. ASSUMES NO RESPONSIBILITY FOR ANY ERRORS OR OMISSIONS. ANY REPUBLICATION OR OTHER USE OF THIS INFORMATION AND THOUGHTS EXPRESSED HEREIN WITHOUT THE WRITTEN PERMISSION OF UTTERBACK MARKETING SERVICES INC. IS STRICTLY PROHIBITED. COPYRIGHT UTTERBACK MARKETING SERVICES INC. 2010.
 

 

How High Do Prices Have to go to Ration Usage?

Sep 15, 2010

I was talking to Terry at Hightower about the corn market. He is currently working on the historical impact of a hot dry August on the corn market. We do not have many years to draw from but the impact has been the crop gets smaller rather than larger and we will have the details later this week. I believe it’s safe to say the odds that the October Supply/Demand report will reduce U.S. corn yields is better than 65% right now and growing. This implies carryover will move below 1 billion before the bin doors shut.

Therefore, the question this logically leads to is how high do prices have to get before demand rationing occurs. In regards to China as long as the dollar remains weak and the difference between Chinese prices and transportation is still above U.S. prices they will continue to buy. The most recent data I have still suggests there is a 50 to 60 cent incentive to buy U.S. corn. In regards to ethanol production, the latest statistics suggest the ethanol plants are running at full steam. Therefore, the current $1.4275 rally from the June lows to the current highs is not slowing down anybody. 
 
The number being thrown around is the $5.50 level basis the lead month futures. I do not have any problem with this level. The concern I have is the pattern of short crops/long tails developing. What are we going to do if lead month corn hits these levels between now and early next year? One would assume that an in increase corn acres will be motivated while demand is essentially being rationed. The problem for sellers however will be since its coming so early and concern about a spring or summer drought will be so high I believe selling will be very difficult for everybody.
 
BEFORE TRADING, ONE SHOULD BE AWARE THAT WITH POTENTIAL PROFITS THERE IS ALSO POTENTIAL FOR LOSSES, WHICH MAY BE VERY LARGE. YOU SHOULD READ THE “RISK DISCLOSURE STATEMENT” AND “OPTION DISCLOSURE STATEMENT” AND SHOULD UNDERSTAND THE RISKS BEFORE TRADING. COMMODITY TRADING MAY NOT BE SUITABLE FOR RECIPIENTS OF THIS PUBLICATION. THOSE ACTING ON THIS INFORMATION ARE RESPONSIBLE FOR THEIR OWN ACTIONS. ALTHOUGH EVERY REASONABLE ATTEMPT HAS BEEN MADE TO ENSURE THE ACCURACY OF THE INFORMATION PROVIDED, UTTERBACK MARKETING SERVICES INC. ASSUMES NO RESPONSIBILITY FOR ANY ERRORS OR OMISSIONS. ANY REPUBLICATION OR OTHER USE OF THIS INFORMATION AND THOUGHTS EXPRESSED HEREIN WITHOUT THE WRITTEN PERMISSION OF UTTERBACK MARKETING SERVICES INC. IS STRICTLY PROHIBITED. COPYRIGHT UTTERBACK MARKETING SERVICES INC. 2010.
 

Bulls are in Control!

Sep 07, 2010

It now appears last Friday was a record volume trade for the corn complex. The index funds have now moved close to 300,000 contracts long which is the highest since February of 2007. While there is still room to add more contracts, they already committed a lot to this bull move. The nearby December 2010 contract has now gone premium to the December 2011 contract by more than 12 cents which has not been seen since 2008. Remember, when a market takes away carry it’s saying it wants your grain now. Finally, one has to believe the most bullish estimate on yields are now in the market at 158.4-bu. per acre, which could project a carryover below 785 million bushels.  

I have to say that the bulls have anticipated about as much a bullish report as one can expect. In fact, the risk is exactly the opposite, a bullish report and bearish reaction. The bulls need to remember harvest is going to come on sooner and faster than last year.  So for end users wanting to get feed protection in place for winter and spring, I would suggest we have to use what limited correction we see in the month of September.  Specifically, I would be setting time targets to be getting long price protection in place say the last two weeks of September to the first of October. I would strongly suggest you have all your buying done before the October supply demand report due out the second week of October.
 
How far can this market go?  It really appears that a $5 price will be in store for corn for the first half of 2011. I however would remind everybody if the basis is hot at harvest and limited carry exists, you should really consider dumping the inventory and reowning in a limited risk long position for flat price gain.
 
BEFORE TRADING, ONE SHOULD BE AWARE THAT WITH POTENTIAL PROFITS THERE IS ALSO POTENTIAL FOR LOSSES, WHICH MAY BE VERY LARGE. YOU SHOULD READ THE “RISK DISCLOSURE STATEMENT” AND “OPTION DISCLOSURE STATEMENT” AND SHOULD UNDERSTAND THE RISKS BEFORE TRADING. COMMODITY TRADING MAY NOT BE SUITABLE FOR RECIPIENTS OF THIS PUBLICATION. THOSE ACTING ON THIS INFORMATION ARE RESPONSIBLE FOR THEIR OWN ACTIONS. ALTHOUGH EVERY REASONABLE ATTEMPT HAS BEEN MADE TO ENSURE THE ACCURACY OF THE INFORMATION PROVIDED, UTTERBACK MARKETING SERVICES INC. ASSUMES NO RESPONSIBILITY FOR ANY ERRORS OR OMISSIONS. ANY REPUBLICATION OR OTHER USE OF THIS INFORMATION AND THOUGHTS EXPRESSED HEREIN WITHOUT THE WRITTEN PERMISSION OF UTTERBACK MARKETING SERVICES INC. IS STRICTLY PROHIBITED. COPYRIGHT UTTERBACK MARKETING SERVICES INC. 2010.
 
 

 

 
 

Is a new bull phase in place?

Sep 03, 2010

The corn market closed into new highs and has now officially moved into a new bull phase of the market. This means the bears must dig a hole and pull down the hatch because it could get nasty during the next couple of months. By this I’m implying all sellers of futures need to consider liquidation or moving into a long put position. My suggestion is to remove short futures because of cash flow drain potential. As for liquidating cash positions, I would strongly recommend against it. Instead focus on buying call protection prior to the September USDA Supply and Demand report and then react accordingly.

I expect you are all wondering how bullish this can get. First I’ve been suggesting corn yields are around 163.5-bu. per acre on the national stage. I’m being forced to reduce my expectation closer to 161-bu. per acre. If this occurs, the potential for carryover to go below 1.15 billion bushels is better than 70%. With the potential that ethanol blend will be increased to 15% and China already saying they are going to keep buying corn—it appears lead month corn prices will have to move higher than $5 before any signs of demand cooling is seen.
So when will our biggest export stop buying? Essentially, our domestic price has to get high enough to make it unattractive to buy. To get a handle, one has to look at Chinese values and back figure it to U.S. prices. Currently yesterday’s benchmark prices close at roughly $7.54/bu. for corn and $15.99/bu. for beans.
Freight cost from the Midwest to the Far East is estimated at $2.45/bu. for corn and $2.57/bu. for beans. If one assumes a $4.50 cost plus $2.45 freight, you get $6.95 which implies 60-cent working margin. This is where it gets difficult to estimate demand. How much does local transportation and export fees require? I just don’t know but I get the sense that it still pays exporters to buy corn from U.S. So until we get this spread, which is at 60 cents, close to zero I believe the exporters will continue to buy corn.
In summary: Today’s technical breakout above $4.50 in corn is the key indicator to watch. Its going to pull up beans and wheat. 
BEFORE TRADING, ONE SHOULD BE AWARE THAT WITH POTENTIAL PROFITS THERE IS ALSO POTENTIAL FOR LOSSES, WHICH MAY BE VERY LARGE. YOU SHOULD READ THE “RISK DISCLOSURE STATEMENT” AND “OPTION DISCLOSURE STATEMENT” AND SHOULD UNDERSTAND THE RISKS BEFORE TRADING. COMMODITY TRADING MAY NOT BE SUITABLE FOR RECIPIENTS OF THIS PUBLICATION. THOSE ACTING ON THIS INFORMATION ARE RESPONSIBLE FOR THEIR OWN ACTIONS. ALTHOUGH EVERY REASONABLE ATTEMPT HAS BEEN MADE TO ENSURE THE ACCURACY OF THE INFORMATION PROVIDED, UTTERBACK MARKETING SERVICES INC. ASSUMES NO RESPONSIBILITY FOR ANY ERRORS OR OMISSIONS. ANY REPUBLICATION OR OTHER USE OF THIS INFORMATION AND THOUGHTS EXPRESSED HEREIN WITHOUT THE WRITTEN PERMISSION OF UTTERBACK MARKETING SERVICES INC. IS STRICTLY PROHIBITED. COPYRIGHT UTTERBACK MARKETING SERVICES INC. 2009.
 
 
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