Outlook: No Summer Vacation

April 27, 2012 08:12 PM

This past winter, I said the corn market was in a very tight trading pattern and once it breaks out, watch out! This is exactly what is happening now. The market got a little too bearish before the March report and corn, soybeans and wheat sold off too much. Once traders realized domestic corn and soybean stocks were tight, prices shot up sharply.

Now that we are moving into spring, weather will be a key influence on price. As if corn and soybeans did not have enough fundamental action to deal with, we must still keep an eye on the outside markets. The Fed is not going to do any quantitative easing before the election, which has stock market watchers worried. Home foreclosures that were on hold are now moving full steam ahead. The European situation has stabilized for now, but concern is very high that the
underlying reason for the debt crisis has not gone away. I expect economic worries to resurface as a new U.S. administration takes office.

In light of all the major fundamental crosscurrents, it could be easy to lose one’s way when determining a marketing plan for 2012.

In the past, I focused on locking up profit as the key to stability. Now, with the recent correction in new-crop corn values, the market is nearing a level where producers are shutting down all marketing decisions. I fear that if they are not careful, a rather low percentage of expected 2012 corn inventory will be sold before harvest.

This may not be the case in regard to soybeans. If the November 2012 soybean contract can get above $14 and steal away corn acres, it’s a good enough price to actually price expected inventory as well.


Sales index:

10 = Excellent sales opportunity

1 = Excellent buying opportunity

Corn: 8

The corn market is a tale of two different trends. The old crop is extremely firm due to tight stocks.

If anyone has unpriced inventory to sell, it’s in their favor to hold all the way into June and July.

The opposite attitude is slated for new-crop corn. Aggressive spring plantings will assure that September corn will eventually drop below December corn, so all hedges should be placed in the September at 20¢ or better premium. As for flat price, it will be extremely difficult for September corn to get back above $6. Start buying $1 deep-in-the-money September puts at $5.75 and be done by $5.95.

I understand concerns about expected 2013 sales. Buy up to 50% of expected 2013 production via a long put strategy. Buy the $5.50 put and sell the $4.20 put and $7 call when nearby September 2012 corn trades between $5.75 and $5.95. Hold the position to the fall, then reevaluate.


Beans: 9

The March Prospective Plantings report had a shockingly low planted acres number. The soybean market wants at least 2 million more, and seed sales are rumored to be strong. We’ll get at least 1 million more acres, if producers aggressively harvest wheat and attempt to double-crop.

Until the trade gets a solid handle on this, the downside pressure on November 2012 soybeans below $13.75 will be limited. This doesn’t excuse farmers from action—values are exceptional and they should be close to 75% priced. Add flexibility by buying deep-in-the-money November puts that have a time value premium less than 30¢. The objective is to improve the selling price if there is a summer event. If China does not slow down its purchases, that may happen.


Wheat: 5

Chicago wheat is heading toward its seasonal lows. Anyone who is a trader should consider buying Minneapolis wheat and selling Chicago.

Lower spring acres and the expectation that wheat feeding will increase  by 150 million to 200 million bushels will help ease seasonal pressure. There will be interest in the seasonal long wheat/short corn spreads after July.

This market is range-bound—it will be difficult to get above $7 or below $5.50. With big carry anticipated, the market tries to motivate producers to store product and capture carry. Look to roll forward in June to capture the carry and sell futures or hedge-to-arrive cash sales to fix the price.

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