High Stakes "Poker" in Old Crop Corn
May 14, 2012
Old crop corn is definitely a bird of a different color right now, and in my opinion is extremely dangerous...unfortunately in both directions. Let me explain: while I doubt the bushels exist, and I also doubt the US farmer will sell what he has left on the recent break, we still need to consider a couple of important thoughts. As a trader, and as a friend to a lot of traders, I have learned through the years that as we make a lot of money we start to get extremely cocky or start believing that we can NOT be wrong. Many of the guys who are still holding cash bushels have obviously done insanely well the past couple of years, and now "truly believe they are just that good at marketing." All I can say is be extremely careful driving the car at high speeds looking in the rear-view mirror. I have crashed in these markets several times making this simple mistake.
Producers left with "old crop" supplies, in my opinion, are now playing an extremely dangerous game of high stakes poker. Unlike last year (and I hate to say it), but YOU (the producer with old crop bushels) may end up being the ones ultimately holding the "bluff" hand. I realize the USDA has thrown out their bluff by reporting the 851 ending stocks number, while you are actually the ones that own the old crop corn bushels and feel as if you are in control. I am not trying to make anyone mad, but just let me explain a little more about how this game often plays out.
If we look back to last year, I would have to say the hedge funds ultimately held the "bluff" hand. Meaning they simply bid up the futures, the trade bought their bluff and they banked big profits as they blew out north of $7.50. From where I sit, the funds look as if they have tried the exact same strategy this time around, buying most every break and getting killed in the process. Simply stated, no one bought their "bluff," production in South America never really fell apart, in fact the USDA is now estimating Brazil will have an extra 200 million bushels compared to their last estimate, and their prices are well below the US for July corn. We also have to realize the US has had next to ideal planting conditions and the thoughts of one billion bushels coming into the pipeline "early" are running rapidly through the trade.
All of a sudden the bet moves around the table to the "farmer" who is left with the actual corn, he "calls" the bet, and in some cases due to extreme stubbornness and anger over the USDA he actually raises (by re-owning more on the board). The problem I see for the "farmer" is who will now bid up the bushels he is left holding. Witness how the May contract has broke more than $0.70 cents in the past few days and the positive basis in many areas have backed off by $0.10 cents or more. Remember, this game ends in less than 35 trading-days. Meaning that the July futures contract will be past first-notice-day, and no wants to be the last one to bluff. Basically no one wants to be the guy without the "chair" when the music stops playing. Do you think producers who are looking at a basis of over $0.50 cents in the July contract will want to carry the corn forward and take the flat price hit and the massive basis hit as well? I doubt it, but if no one else "bluffs" or bids up the bushels then where do we end up? This is exactly why I didn't want to hold "old crop" bushels this late into the game...
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