Insiders Look At The Corn, Beans & Wheat Markets

Published on: 23:57PM Oct 22, 2010


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Latest Developments 10/22
  • I have heard from sources close to US exporters that another 2-4 cargoes of soybeans were sold to China.
  • Today is option expiration for the November Corn, Bean & Wheat option contracts. Floor traders are reporting large open interest at $5.60  in Corn and $12.00 in soybeans.
  • The major growing areas of Brazil are expected to continue receiving rain. 
  • Open interest in corn is up almost 80k contracts, and Soybeans 35k contracts during the week.
  • Funds now long 384k Corn contracts, 164k Bean contracts, 77k KC Wheat contracts, and Short 12k Chicago Wheat 
  • A meeting of G20 finance ministers begins today in South Korea. Look for the "Outside Markets" to be somewhat mixed ahead of this meeting. 
  • Ireland is considering 15 billion in austerity budget cuts over the next 4 years, showpng us just how serious the situation has become for some of the EU nations. 
I Still Believe Wheat Could Be The Sleeper
Just take a look inside the numbers for each respective crop and their exports on a year to date basis.  We have made export sales of just over 755 million bushels of corn, up about 13% from last year.  We have sold 931 million bushels of soybeans, up about 34% on the year. Wheat has exploded, showing export sales of 693 million bushels, up almost 50% over last year. As more countries restrict wheat exports I am confident the US will continue to see large export wheat numbers in the months ahead. 
South American Update
I have heard that most of the planting in western Paraná will finish this week (10-15 days ahead of last year).  Because of threats and fear of La Nina very little corn has been planted. The problem being reported is that when the farmers where purchasing and locking in their inputs beans were simply more profitable. In Brazil once you have the inputs locked in and purchased it is very tough to change crops. I am told the moisture looks to be ok, but the temps are a little cool for beans making the plants grow and germinate more slowly. 
China Bean Demand Is Amazing
As of right now the Chinese have taken a record large 19 million metric tons of US soybeans, and we are just 6 weeks into the new crop year. I believe we only exported a total of 23 million metric tons to China in all of last year.  At this pace you could certainly argue that China will purchase over 1 billion bushels of US soybeans this year alone. If this happens the USDA would have to raise the export numbers by at least 100 million bushels and in turn drop the total US soybean stocks by 100 million bushels. 
***NEW*** Cattle Trade
From what I am told cash cattle registered their highest cash sale since 2003 out in the southern plains at $102.75. Even though I have been and continue to be extremely bullish, I think we may be getting a little ahead of ourselves and approaching "over-bought" territory, especially from a seasonal perspective. To me it just seems like a very strange time of year to be rallying this much knowing that the retail beef business and wholesale demand here in the US most always slow down some in November. Certainly exports could remain strong, and they have been the past few weeks. I think we once again raised the bar and lifted the trading zone.  I am going to do something a little different and Sell the Dec 104 calls and Sell the Dec 98 puts collecting a total premium of 180.  Essentially agreeing to get long cattle form the 96 range and or short from the upper 105 range. Theses options have less than 45 days until expiration.    
Corn Prices In China Trade Above $8 Per Bushel This Week
Corn prices in China set a new record high this week trading up to $8.35 per bushel. I continue to hear all kinds of rumors that China is looking to buy a large chunk of US corn. Some of the floor guys are even telling me that a large quantity of the $5.50 Dec puts being sold are actually coming from the Chinese. I have not been able to verify that information, but I do know for a fact JP Morgan was a huge seller of the puts, and they have been known to have substantial Chinese backing.  
My Thoughts Regarding Lower Corn Exports
Logistically speaking how much more corn could we have exported during the past few weeks on top of the record setting bean sales? I reported a couple of weeks ago that sources in China where fearful that US transportation and logistics could not handle much more in light of the massive bean exports and sales they had throw their direction. I think China may have done their homework on this subject, and decided to hold off on any major corn purchases knowing that it would have thrown the US grain market upside down, causing massive delays in shipments and panic type speculation.  I personally believe China will import at least 5 million metric tons of corn (could be much higher). I also believe they know their crop is going to be less than they had anticipated. As I always say "Timing is everything..." China is simply waiting for the right time to begin purchasing US corn. I am thinking once their Bean purchases begin to subside they will look to start purchasing Corn. I have heard reports that this could happen as soon as November or late into March.  Personally I am leaning towards after the first of the year.  I think you will need to see their domestic production tighten.  Right now they have access to a substantial quantity of domestic corn, and the import margin simply doesn't pencil. If they do step in as buyers early in the game it will be because of political reasons, and the government wanting to refill their certainly won't be for economic reasons.
Monday The USDA Will Release Condition Report on US Winter Wheat
Remember that on Monday the USDA will release their first crop condition report for US winter wheat.  I am not anticipating anything earth shattering, but I think it could certainly be lower than last years good-excellent rating of 64% 
USDA Promises More Funds To Increase Bio Fuel Production
The USDA Secretary today told members attending a speech today, that the US was committed to allocating more money to help increase the production, distribution and storage of bio fuels.  He also said that he was encouraging congress to extend the Ethanol tax credits and reinstate the tax credits for Bio Diesel. I doubt it will happen, but wouldn't that help push prices even higher if it did... 

US Treasuries May Suffer A Little Set-Back
Most of the market has been anticipating a new policy by the Fed in which they would buy a large portion of notes and bonds if the data warranted ongoing action. In a speech yesterday by the Fed's Bullard, he said he would back a plan that would entail buying just $100 billion of government securities on a meeting-by-meeting basis. This is a far cry from their initial statement that proposed $500 billion in purchases with much more available if needed. This statement is certainly less aggressive than traders had been anticipating, so you have to assume it may move a few players to the sideline. I also anticipate some liquidation ahead of the G20 meeting, the upcoming elections, and the November Fed meeting. 
Trade Strategy
End Users & Producers Who Are Oversold should be looking at strategies that involve being short puts and long calls in this market. I continue to like selling the Dec 2011 $4.50 puts and buying the July $7.00 calls @ even money. We have done this trade a few times this week for a slight credit.  In essence you are agreeing to re-own the Dec 2011 corn at $4.50 on the board.  The July calls allow you to participate in the market in the event of an explosive move higher.