If you are long the grain markets or still less than 50% sold for 2010 you may want to consider booking some sales. Yes I am long-term bullish, but you have to reward the market when it makes a nice move. I am also a little nervous that fact that we could see the Feds disappoint the market after their Nov 3rd meeting, simply by doing "nothing". If they elect not to go through with another round of "quantitative easing" this session, and opt for a "wait-and-see-approach", I feel the knee-jerk reaction by the funds will be to exit commodities across the board. The US Dollar will strengthen and the funds will essentially take their "chips" off-the-table so to speak. The main reason the Fed was proposing another round of easing was to encourage businesses and investors to "buy-now" rather than continuing to believe they can "buy-later" at a cheaper price. The Fed wanted to spark inflation just enough to jolt the market. They ultimately believe this will encourage growth and help improve the current job situation. The reason I am worried is because I fear they may now do nothing, or at least less than originally anticipated because the fire has already started. They may not need to stoke the inflationary flames. China certainly believes that inflation is on our their door-step. They have raised their interest rates 0.25% because they are fearful of inflation, they have issued harsh warnings about speculators driving up commodity prices and possibly triggering massive inflation across the board. Japan is worried about the valuation of the Yen now in relationship to the US Dollar, and claims they will continue to intervene if necessary to strengthen the US Dollar in comparison. For the first time in a long time the Durable Goods number was higher than expected, telling me that businesses as a whole are starting to buy more goods in fear of higher prices down the road. We are seeing new highs in Cotton, Sugar, Silver, Gold and Copper along with much higher prices in Corn, Soybean, Wheat, Cattle, Hogs, etc..The Fed knows they are playing with fire by trying to spark inflation. The last thing they want to see happen is runaway inflation that would ultimately force them to raise rates. With our government having so much new stimulus debt on the books, I can't imagine them wanting to see the rates go higher. Therefore if their original goal was to make the market, the businesses and the World be fearful of inflation and concerned about higher prices down the road, I believe they have done their job. A good friend of mine once told me "Perception is Everything..." I think the market and the consumers now perceive higher prices coming our direction, which is the ultimate goal of quantitative easing. With this said I simply can not see the Fed shocking the market by doing more than anticipated. I do not see them buying back more than $500 billion or $1 trillion in debt. I look for their actions to be anticlimactic, ultimately making traders "less" excited and less fearful about "hyper-inflation". The knee-jerk reaction of the funds will be to take some length out of the commodity markets, and this is where I will be looking to buy the grains. Particularly the deferred Corn contracts.
China Maybe In the Market For Wheat Now
I continue to like the March Chicago Wheat Contract. As you can see form the chart we continue to see increased open interest on price consolidation. It is believed by many technical guru's that a breakout from a trading range is much stronger if open interest rises during the price consolidation phase (just what we are seeing happen in wheat). This is because many traders will be caught on the wrong side of the market when the breakout finally takes place. When the price moves out of the trading range, these traders are forced to abandon their positions. Some technicians take this rule one step further and say the greater the rise in open interest during the consolidation, the greater the potential for the subsequent move. Look for major support in the March contract to be in the $6.75 range with longer-term resistance to be up around $7.85. I continue to advise playing this market to the upside.
What The Fund Money Was Doing Last Week
In the reports I had read, the funds increased their net long corn position by more than 2,000 contracts last week to just over 434,500 contracts. They also increased their net long position in soybeans by almost 18,000 contracts, and are now long about 194,000 contracts. Funds cut their net long position in Soy Oil futures by about 800 contracts and increased their net long position in Soy Meal futures by about a 1,000 contracts. I am glad we banked our profits in long Oil short Meal, I thought they would start unwinding some as we move towards year end. I did hear from some good sources that the Funds actually unloaded around 4,000 net long wheat positions last week, and are now net long only about 8,000 contracts. I am telling you now "IF" Wheat ever catches some bullish news and attention, there is certainly room for the funds to come pouring in...be cautious getting caught short this market.
Corn Usage For Ethanol Production Could Top 5 Billion Bushels
Secretary of Ag, during a speech on biofuels, said that Washington will allocate near $500 million for a 15 year payout to stimulate production in order to meet aggressive congressional ethanol mandate targets. Secretary sees ethanol plants dotting the rural landscape and providing a form of welfare for farms grossing less than $250,000 annually. At the moment, ethanol production seems unphased with high prices. October 15 weekly production report showed a new record of more than 880,000 barrels per day. If this pace continues you have to believe annual corn usage for ethanol will be near 5 billion bushels, well above USDA’s current 4.7 billion forecast.
If you are interested in playing the wheat market you should take a look at the March Chicago Wheat contract. For a bullish play consider Selling the March $6.50 Puts and Buying the March $8.50 calls @ even money or a slight credit. This position will require margin so make sure you consult with your broker prior to entering. Your downside exposure is wheat closing below the $6.50 strike. The options have 117 days left on them. I will be looking to exit the position once I have picked up 30 cents.