Market Outlook

July 28, 2010 11:35 AM

Early Hedges Pay Off

For those wondering how Progressive Ag logged sterling futures profits (for details, click here), the answer is simple, says Scott Harms of Archer Financial. They resulted from recommendations made at 2008 market highs.

Recommendation 1: On 6/19/08 sold 50% of Dec. ‘10 corn at $6.61; on 10/7/10 bought back at $4.55.

Recommendation 2:
On 6/19/08 sold 50% of Nov. ‘10 beans at $14.70; on 10/3/08 bought back at $10.57.

Averaging these across 100% of the crop yields a profit of $1.0275 on corn and $2.065 on beans. Subsequent hedges boosted the futures value more modestly.

"Unfortunately, when Progressive Ag recommended 2010 and 2011 crop sales, I doubt many producers were of a mind to sell that far out," Harms says. "They were having a difficult time accessing margin money for 2007, 2008 and 2009 crops. At the same time, most merchants were not offering pricing beyond the 2008 crop." This highlights the issues farmers faced in that extremely volatile time frame.

As the table below shows, few services have made any cash sales yet for 2010 corn, though half have some sales on the books for soybeans. And most have used futures profitably for this year’s production. —Linda H. Smith
July1 Adviser Track Record

Bigger Ocean Freight Fleet

Ocean freight rates declined going into summer as more vessels—mainly dry bulk carriers—entered the fleet, USDA reports. Running approximately $56 per ton from the Gulf and $30 per ton from the Pacific Northwest, rates to Japan were the lowest since this past October. For USDA’s full report on the status of exports and freight, click here.

Global Economic Malaise Dampens Demand

No sooner did we see signs that the recession was over than the European debt crisis again dampened commodity markets (except for gold).

"While global recovery continues, sentiment has turned negative and the impacts of the European debt crisis span virtually all markets," notes Wayne Gordon, Rabobank senior analyst for commodities and economics. "Investor sentiment has pushed global wheat prices to their lowest levels in a year; beef prices remain flat, dairy prices somewhat firm."

The outlook for Asian economies remains strong, as Indian gross domestic product grew by 8.6% year-over-year in the first quarter.

Meanwhile, the U.S. outlook is still positive, even though jobs data are disappointing.

"Rabobank stands by its call that the overall growth impact of the debt crisis will be limited, and we put low odds on the occurrence of a double-dip recession," Gordon says.

A downturn in gold would indicate investor sentiment has swung up again, according to Kevin Klombies, a private market analyst.

"If gold is the offset to financial markets, it means we are going to be mired in a series of crises until we see gold prices finally turn lower," he says. "To be negative on gold at current levels is another way of arguing in favor of a positive outcome for the current European sovereign debt crisis." —Linda H. Smith

Better Wheat Convergence

For the past year and a half, wheat farmers were frustrated by cash bids $1 or more below futures prices. Now, despite ample supplies, good cash wheat is hard to find and people are paying 20¢ to 30¢ in the same town they were paying $1.20 under before, says Jerry Gulke of the Gulke Group.

Kevin McNew of Cash Grain Bids points out: "The new CME [Chicago Mercantile Exchange] storage rates were part of the fix, but the strong basis is also a result of grain elevators vying to get early access to bushels from a better-quality new crop to blend off with last year’s remaining old crop that had vomitoxin problems."

Traders anticipated the start of CME’s new variable storage rates, which went into effect with the expiration of the July contract, says Fred Seamon, associate director of CME group research and product development. The July-to-September contract price spread went to more than 130% of full financial carry (the September contract rose relative to July) as maximum storage rates were about to increase from 5¢ per bushel per month to 8¢ per bushel per month beginning July 18—the expiration date for July options.

The current maximum storage charge of 8¢ per bushel per month will remain until at least Sept. 17. Changes to this charge will be determined on Aug. 27, based on the formula for calculating variable storage rates and the September-to-December spread. Click here to learn more. —Linda H. Smith

Top Producer, Summer 2010

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