Jan 13, 2011
The bears came out last week and looked around; but after today they have gone back into their cave to hibernate for another 3 to 6 months. The January stock number was positive across the board for corn, soybeans and wheat.
CORN: The big number was for corn; however, the USDA lowered the yield to 152.8 (down from 154.3) and increased ethanol usage 100 million bushels. With carryover now at 745, the market will be critically watching for how many acres are planted this spring, as well as for any hint of yield stress. I believe any yield concerns below trend line yield will have a significant impact on flat price action. Anyone holding unpriced inventory should expect the basis to narrow as we move into the spring time period. Anyone holding short positions should be in a covered position. In regard to what contract month to be short, I strongly urge those with short futures positions to consider rolling to July 2012 in expectation of all the carry being removed from the market. I also suggest the odds are better than 60/40 that the market will actually go to an “inverted carrying charge” in the April to May time period.
SOYBEANS: We saw yield reduced to 43.5 and carryover reduced to 140 million bushels. This allowed the market to push sharply higher to post new highs in all contract months for the current move. The risk is now very clear; we need more acres for soybeans and we need a good crop. The function of the soybean market will now be to put enough premium in the market to ration usage and stimulate production. How fast it will occur? At this time I encourage producers to start thinking about the price they want for their expected 2011 production. I suggest that, as the market approaches $14, get a floor under the anticipated 2011 crop. The next question is how much upside risk potential to buy with a call option position?
WHEAT: The wheat market saw acres increase as expected, but we also saw a reduction in the Australia’s crop due to recent floods. This market did rally in sympathy with the corn and soybean markets and the sharp drop in the US Dollar. We still believe wheat will not be a leader and will find it very difficult to move lower until the corn and soybean prices top.
SPECIAL NOTE: It now appears that coffee, sugar, rice, cotton, corn, soybeans and wheat are giving producers strong economic motivation to increase acres. This forces us to ask the important question: Will producers shift acres based squarely on price? It has been my observation that producers are very reluctant to make big changes in crops because of the impact on rotation and the operational restrictions many producers face in order to handle more production. We are left with the concern that there may not be enough acres to go around and price will have to be used to ration usage. This leads to an even more difficult question: If end users have long hedges in place, how high does the market have to go to ration usage? I suspect it will be April to May before we see any real significant slow down in demand.
FINAL THOUGHT: If the corn and soybean markets do retest the 2008 highs, the political fallout could be much worse than it was in 2008. It appears many in Washington DC do not like ethanol. If they change policy, it could really start rationing corn usage. This forces producers to be mentally and financially prepared to consider a multiple-year selling strategy during June-July if we do experience any type of perceived or actual weather event. I cannot encourage you strongly enough to call your banker and getting your financial arrangements made so you can be proactive this spring and summer.
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