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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.

Why the Funds Believe Corn Could Go To $6.00

Sep 02, 2010

I have had a huge response from producers and traders wanting to know my thoughts and opinions as of late about the Corn market. In particular producers want to know what I have been hearing from the trading floor, the funds and from my other grain trading connections around the globe. To summarize, I have include a brief list of issues that most of the big traders are worried about as we move forward. For more specifics and detailed strategies be sure to sign up below for my daily e-mail updates and market strategy report. We send the information out Free of Charge and with No Obligations.

 
There is absolutely no doubt in my mind that Corn prices will trade higher. The question becomes how high will they go and how soon will it happen. Certainly we may see some sideways action or even a slight pull-back but rest assured this market is getting poised to make a significant run to higher ground. 
 
* Demand is simply unprecedented and looks to continue to grow as we move forward in the coming months. In fact the word we are hearing out of China is that they are now drifting cautiously below a critical stock level, and during the next couple of years have plans in place to be aggressive buyers of corn on fears of possible wide spread shortages. I know we have all heard the China story a million times. the word this time around is that they have flushed old corn just like they  are trying to flush out old crop beans with plans to replace the old with new in the coming years. I am not talking about massive one time purchases but rather additional small continuous buys to refresh and replenish their supplies.
 
* In addition you have ethanol demand rising each month. The US Energy Information Administration released its weekly ethanol production data yesterday and now show production at an average of 856,000 barrels per day. This is up 21,000 barrels per day (2.51%) versus last week and up 129,000 barrels per day (17.74%) from last year. If we pass the bill to allow 15% versus the 10% margin the demand for corn could get significant.
 
* The big kicker right now has to be additional fears of lower yields. Certainly seasoned traders have to believe the market has a 162 yield currently factored into the current price of corn. The USDA estimated the crop at 165 in their August report, but will more than likely lower it next week into the 160-163 range. I believe this number is currently priced into the market. I don't believe we have a 150-155 number priced into this thing, unfortunately before it is all said and done I think we may ultimately see it there. 
 
* Corn is now trading at a new 8-month high and now needs to be carefully evaluated as we could well be on our way to significantly higher ground. 
 
* Demand is simply unprecedented and looks to continue to grow as move forward in the coming months. In fact the word I we are hearing out of China is that they are now drifting cautiously below a critical stock level, and during the next couple of years have plans in place to be aggressive buyers of corn on fears of possible wide spread shortages
 
* In addition you have ethanol demand rising each month. The US Energy Information Administration released its weekly ethanol production data yesterday and now show production at an average of 856,000 barrels per day. This is up 21,000 barrels per day (2.51%) versus last week and up 129,000 barrels per day (17.74%) from last year. If we pass the bill to allow 15% versus the 10% margin the demand for corn could get significant.
 
* The big kicker right now has to be additional fears of lower yields. Certainly seasoned traders have to believe the market has a 162 yield currently factored into the current price of corn. The USDA estimated the crop at 165 in their August report, but will more than likely lower it next week into the 160-163 range. I believe this number is currently priced into the market. I don't believe we have a 150-155 number priced into this thing, and unfortunately this is where I think we are ultimately headed. 
 
* I don't think you will see very many large traders short the Corn market heading into the USDA's Sept report. Especially not this year. This is vastly different than in years past where the USDA has normally not made a large adjustment in the their estimates between these tow months. This year with the advanced maturity of the crop it will allow the NASS to pull ears and decipher actual ear weights. Remember, in August the NASS used an ear weight that was the 2nd largest on record and extremely high. A drop near normal ear weights could potentially cut US corn yields down to 160bpa or even lower. Just realize this number could be worse than the trade is estimating. I am not saying for certain that they will drop it big this go around but it could certainly be a significant cut. 
 
* Lets assume we leave the demand numbers unchanged (even though I believe they will increase) and we see a reduction of 349 million bushels (somewhere in the 160 yield range) in production, this means our ending stocks would come in around 960 million bushels and leave us with a stocks to usage ratio of just above 7%, or the second lowest levels in our history.  If demand continues to grow this number could shrink in a hurry.
 
* I spoke with a trusted friend from an elevator in Indian. He took 2009 corn at 13% moisture and it took 74k kernels to make a bushel, he then took and dried down the 2010 corn to 13% and it took well over 90k kernels to make a bushel. I think this is where we are going to be caught off guard. I am no agronomist but from what i ma hearing from our clients in the field the kernels simple didn't get much depth due to the heat. From the outside they didn't look bad, but once the farmers are getting into the ears there is just not a lot there.  If this is the case we wont see the USDA make this adjustment until at least October and maybe even November. By then the funds and big traders will have jumped the market and we may be well above the $5.00 mark and heading higher.
 
With these circumstances in mind we are going to continue recommending that you buy breaks in this market and look to build a long-term bullish position. We personally believe you have around 30-40 cents of downside risk in this market currently. If you wait until we rally to the $5.50-$6.50 range the downside risk of getting long will have dramatically increased.  As I have preached all along, have your hedges in place and a reownership program ready to launch when you make your cash sales. I am afraid when this market moves to the next level it is going to be in a real hurry, so you need to be prepared. 
 
**Make certain you have signed up to receive our daily trade wire and strategy report, it is jammed pack full of all the details and daily market strategies direct from the floor. There is NO COST or obligation and the report is e-mailed directly to you each day. Just follow the link to our website and sign up for free. Free Ag Hedge Daily Trade Report 
 
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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