Aggressive Sales on Rallies
Given ample supplies around the world and 4 to 5 million more acres of corn, soybeans and spring wheat coming, it is time to aggressively sell rallies, says Justin Kelly, president of EHedger. "We view $4 to $4.25 December corn futures and November beans at $9.50 to $9.75 as sales opportunities,” he says.
"The corn market will feel the effects of some 150,000 long contracts that were bought ahead of the index fund rebalancing and now need to be exited,” he adds. "When that many contracts head out the door at the same time, it can't help but be bearish.”
Soybeans face a challenge: China's insatiable demand for U.S. soybeans will shift to South America, Kelly says. "We have perhaps another 45 days until those crops begin loading onto ships headed for China. The market could feel different then—almost like demand has been completely shut off.”
Key Market Factors
> USDA January reports showed bigger crops than expected
> Fund rebalancing is over and others need to sell
> Cash crops will need to move
Click here for the Adviser Track Records table (Percent Sold and Market Value on Jan. 2, 2010)
—Linda H. Smith
Expect a rebound in cotton acres on somewhat better prices, says Larry Acker of 3FForecasts. His computer model suggests 8.8 million acres planted and a crop of 12.75 million bales. "It will be a little better year than 2009 to raise cotton, but it still will be a challenging year.” Acker expects summer in cotton country to be a little cooler and windier than normal. —Linda H. Smith
Regional Differences in March Precipitation
Forecasters are somewhat divided about how the 2010 growing season will shape up. Fred Gesser of Planalytics expects planting delays in the South because of rain but says the northern half of the country will be in better shape than this past year (see map).
"We'll kick off the 2010 spring season with cotton planting delays, due to cool temperatures combined with normal to wetter than normal weather. Texas has already lost most of its droughty areas,” he says. "However, unlike this past year, heavy snowpack in the Northern Plains will not be repeated this year. In fact, the concern during spring following a moderate El Niño winter like this one is that there has been too little winter moisture loading soils.”
This means spring planting should get off to a much earlier start this year in the Northern Plains. In addition, Gesser predicts, precipitation in March will be normal or below normal in most of the grain area.
Gesser expects below-normal temperatures in March through the Plains and the South, into Virginia, West Virginia, southern Ohio and across the "I” states.
Allen Motew of QT Weather sees another wet late start for the Corn Belt due to above-normal rains, as well as ample soil moisture. "May saves the day and is warm and dry enough in the Corn Belt and Northern Plains to allow for vigorous planting, catch-up and many days of field work,” he says.
June brings no heat stress or is cooler than normal in some areas, and rain is normal to above normal for much of the Corn Belt, Motew says. "July and August appear near normal or wetter than normal for most of the Corn Belt, with no sustained heat. Drying and some heat are possible for the Delta into southern Illinois.”
The punch line, he says: no significant growing season problems in 2010, with yields above trend for corn and near trend for beans.
Larry Acker of 3FForecasts is far more negative about planting and expects the most threats to 2010 crops. He predicts planting delays followed by cool weather that slows plant growth, similar to this past year (see "Major Factors to Watch in 2010"). —Linda H. Smith
Another Trading Tool
This past summer, the Chicago Mercantile Exchange (CME) began clearing over-the-counter grain swaps. These are private contracts between a buyer and seller to fix the price received over a period of time. "What's different from futures is that they can be written for any time period the two parties agree to,” says John Stotts, director of ag derivatives at Infinium Capital Management in Chicago. "They could enter into a series of swaps, called a strip, that expire each month for the next year or two, for example. They are cash settled, using an average price through the expiration month.”
The CME gives this example of how it might work: Suppose a farmer and an ethanol plant enter into a corn swap. The ethanol plant agrees to pay the farmer a fixed price of $5 per bushel and the farmer agrees to pay the ethanol producer a variable price for corn, such as the settlement price of the May corn futures, on the day the swap expires. Assume that on the settlement date, the May corn futures contract settles at $6 per bushel. The swap would be settled with the farmer paying the ethanol producer $1 per bushel ($6 – $5 = $1).
The farmer would then sell the physical corn to a grain elevator or the ethanol plant, receiving the current price. So the farmer has effectively locked in $5 per bushel—the initial objective when he entered the swap. The ethanol producer has similar results. He buys corn at $6 per bushel, but he receives $1 from the farmer, locking in $5.
Infinium offers markets on spreads for grains and ethanol prices so plants can lock in their margins. Biodiesel contracts will come later. —Linda H. Smith
Locking in Margins
Following the Jan. 12 crop reports, Joe Nichols of Cadiz, Ky., says: "Fortunately, I had already contracted all 2009 production and 50 bu. per acre of soybeans and 150 bu. per acre of corn for 2010. We have already bought and paid for all inputs for this coming crop except for fuel—I'm watching that like a hawk. So we have the dominoes all stacked up for profitability. The market gave me indications of a good profit, so I took it and ran.”
Now, if the futures markets drop enough that basis improves, Nichols will lock in the basis. "Then I'll be in good shape,” he says. "What I am also planning if the market falls back is to buy call options at the levels where my contracts are to capture upside movement this spring and summer.
"Using our storage and the marketing moves I've made are where we have been able to really get ahead in the past three years or so.” —Linda H. Smith
Top Producer, February 2010