Price on Rallies

February 4, 2010 07:09 AM

Marketing advisers are in agreement that the upside potential for corn, soybeans and wheat is limited. Large U.S. and world supplies mean that buyers don't need to worry and the market doesn't need to "buy” acres.

The Linn Group projects 92.5 million acres of corn, 79.9 million acres of soybeans and 10.7 million acres of cotton, Jerry Gulke told Top Producer Seminar attendees last week. "Even if national yields drop to 154 bu./acre, we could have a 1.5-billion carryover.”
"If you aren't already covered, I would sell corn on 10¢ to 15¢ rallies above $3.60,” Gulke advises. "If you knock the 2008 bubble off the chart, corn's valuation is $3 to $4.30 in today's world economic environment. Downside support appears at $3.20 because ethanol burns 4.4 billion bushels. But at some stock level, the connection between corn and crude oil breaks because you can't use enough corn for ethanol to matter.

"I'd also look at selling out-of-the-money calls on rallies,” he says. "You collect the premium and if prices don't rise, you simply keep it. If prices do rise and the option is exercised, you have to supply a short futures position, which places you in a hedge.

"On the commodity charts I track, 16 of 17 are short,” he says. "This means I'll buy energy hand-to-mouth unless the trend turns.” Only the dollar appears to be headed higher -- not good news for U.S. exports.

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