Corn Outlook! Corn and Beans On The Move
Sep 24, 2009
Today was the first time in a long time when corn and beans moved opposite of the dollar and oil in a decisive way. Specifically, the dollar was up over 67 points while the oil was down close to 70 cents. Normally, this would really pressure the grains, because a stronger dollar means weaker export and a lower oil value implies weaker ethanol values. While I do note this divergence today, I don’t believe it’s the start of a long-term trend. The grain market is simply lacking any supply pressure right now to break prices. Near-term the corn market is actually tight since producers are not wanting to sell at current values but end users need inventory for ongoing operational needs. We believe in about three weeks the pressure will start on corn and it will be on going well into November. The current price bounce is about all you can expect for corn and beans and should be used for any final sales that need to be made. If you are not taking advantage of the current gains you are not going to be selling until the April/May time period of next year!
There is some talk of a frost scare next week in the northern Corn Belt. Our weather man suggests it will only be a scare and not a really hard freeze. The event will only be a one-day pattern and will we will heat up afterwards. Granted, there will be some impact on potential yields but at this time it should be limited. We are building a classic buy-the-rumor and sell-the-fact situation.
My long-term concern continues to be that farmers are not prepared for this year’s big crop. According to several independent sources, I get the sense that a very small percent of this year’s crop has been forward sold. The producers are building bins to store the crop. This implies to me it’s going to be a long grind and has all the potential of contributing to a multiple year cycle low in the fall of 2010. While I will be preparing for a low in the November time period and rally into spring it’s going to be less than many clients really want. I’ve gone on record as saying unless we get a surprise yield reduction or a unexpected demand event it’s going to be very difficult getting lead month corn above $3.50 from January to July next year.
In regards to beans, the market has lost it bullish luster we enjoyed clear most of the year. As we are now starting to harvest some of the early beans the market continues to go to the negative side. It’s no longer pulling corn but is really being a negative feature in the market. As we move into October, the trend will be for the beans to be pressured by harvest. I do however expect beans will bottom well before corn. Downside targets are close to the $8.00 level.
The wheat market saw an unexpected price surge in Chicago wheat yesterday. I would suggest it was more about short covering than any new big demand buying program. One of the things that does concern me about wheat is the lateness of the corn and bean harvest could cause concern for producers wanting to rotate into wheat. Additionally, the low price is causing the insurance program levels to be at levels which will actively attract acres and may entice producers to look at other crops. Overall, I feel the $4.50 level could prove to be a bottom. The only issue is upside could be very limited especially if the outside markets of corn and beans come under pressure as we move into harvest. At this time I’m looking at selling deep out of money March wheat puts against my short out of money corn calls to give me a more balance risk profile.
One of the lessons I’ve learned from the 2007/2008 experience is the necessity of protecting the cost of inputs. Many clients in 2008 would not allow me to pull the trigger on multiple year sales because of their concern about higher input cost. To this end, I believe producers need to be focused on locking up long term lows in natural gas to protect fertilizer values and sell 10-year T-Notes to protect interest rates. In my brokerage operations we have started buying natural gas in September. Currently the position is ahead. We like the buying of futures and selling of out-of-the-money calls. We would encourage producers on corrections to get a multiple year fertilizer strategy started. As for the bonds, we are lightly positioned in some short T-notes and short out of money puts for about 50% of needs. We are waiting for one more strong price bounce in the bonds into the first quarter of 2010. Our thinking is the current administration realizes the economy is not growing as fast it wants. It knows there is some risk for the mid-term election in the fall of 2010. Since voters will be looking at their pocketbook it will be important that the economy is looking good by September. I would suggest for things to work right, President Obama will need to introduce a second stimulus program sometime shortly after the first of the year. At this time, I would expect the Fed to continue to keep interest rates very low. We are watching keenly for a move to the 118 and hopefully 121 or higher levels before we con move to a 100% short position to cover intermediate to long-term interest rates.
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