May 14, 2009 07:00 PM
They say if you live long enough every thing eventually cycles around. For much of the 1970s through the late 1990s, the feed demand for corn and beans was stable, with exports being the biggest uncertainty. Then we moved into the recent go-go years, when demand exploded due to increased domestic demand for biofuels at the same time China became a major importer. Unfortunately, go-go demand has now come to a screeching halt with the global economic slow down. It's going to take time to pick up again.

Worse yet, the agriculture complex is increasingly taking its price action cues from the direction of the dollar, stock market and energy markets. A strong leading indicator of trend direction for corn, beans and wheat can be derived from watching the following index: Take the lead month S/P chart + Lead Crude Oil and divide it by the U.S. dollar (as shown by the black line in the chart).

During the past several months, it has been difficult to maintain and extend a bullish corn and bean price pattern unless the underlining index was positive. Here's why. A bearish S/P chart reflects a negative outlook about the economy. Crude oil plays into the index on the assumption that if it goes up or down, it will influence the price of ethanol. The less completive ethanol is, the less demand for corn. I divided the equation by the value of the dollar because when the dollar rallies it is negative to corn because it makes our exports more expensive.

So if this indicator moves sideways to lower into the fall, it's going to take an extremely aggressive bullish fundamental situation in corn or beans to go higher.


Old Crop 12345678910

New Crop
Old-crop beans continue to be strongly supported by Chinese demand, leading to better prices than I expected. Global end users are aggressively moving to dilute the impact of a repeat squeeze if possible. It's politically destabilizing and just down right expensive. Eventually, we'll see competition from the Argentine beans producers are holding. I hope our producers have new-crop beans sold before that event occurs!

It appears some delay in corn plantings is occurring. If many producers have not put down fertilizer for corn and we get past May 20 without planting, I think they will give extremely strong consideration to switching from corn to beans. This all implies that the market is going to be very fluid over the next 30 to 45 days for both corn and beans. I strongly believe by the June report we will see planted acres for beans grow from the 76 million (March report) to closer to 78 million.

If you have held onto old beans, congratulations--I didn't. However, I now that July is more than $10.05, I'd suggest you not allow prices to drop before selling.
The greatest risk is with new-crop beans. If acres grow and carryover expands more than 300 million bushels, we could see November beans well below $7.50 this fall. The only concern I have is with an August dry weather event. For this reason I like the buying at-the-money November put options and selling deep out-of-money November calls to create an artificial short futures position rather than selling futures. If November beans were to close above $9.80, adjust the risk with the short calls and be net long the puts, which should be rolled up if the market were to spike higher.

Corn 12345678910
The December 2009 corn market has seen a real rollercoaster during its trading life. In January of 2008, it was at $4.75, exploded to $7.02 on June 16 of last year, then crashed to the December lows ($3.49) and has recovered back to $4.37. Looking back, we all know we should have sold multiple years but at the time it was difficult for most. The elevators were not taking our hedges and the hedge line of credit needed to manage a futures account was staggering.
The violence we saw this past year will not resurface this year or maybe even next year but it's a strong possibility that within three to five years, the foundation is being laid for massive inflationary price swings producers will have to navigate.

However, entering the May-to-July period, the market is most concerned with supply variability. The trade will be asking itself: Has the wet spring for the Midwest changed acreage mix between corn and beans? What will be the impact on yields? When will producers elect to sell rather big stocks of corn stored on farm? Add to this the uncertainty over what the EPA is going to rule in regards to ethanol and renewable fuels , the global economy, the value of the dollar and impact on exports, and it all adds up to more questions than it's easy to answer.

I've been professionally involved in the market since about 1980. If there was ever a year to not push the game plan for a home run, I believe this would be one of the years at the top of my list. I've been a seller between $4.20 to $4.50 basis the December contract. I see no change in this basic plan. In fact, the closer one gets to mid-June to early July, the greater the risk becomes. I strongly suggest once the uncertainty about planted acres and potential risk to corn at pollination is taken out of this market, I fear there could be an exceptional price decline into harvest. End users know producers have the corn stored on farm and they know it has to come to market before harvest. If we have a solid yield of 158 bu. or better, the risk for December corn below $3.20 is better than 50/50 in my opinion.

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