CBOT markets were mixed on Monday with March wheat and soybeans closing with double digit losses. March corn was able to close 3 ¼ cents higher at $6.93 despite march wheat closing 15 ¾ cents lower. This daily change puts the premium in wheat at only 5 ¾ cents over the price of corn!
With wheat comparatively cheap to corn we are back in that scenario where should start to see more wheat fed in the US and around the world. We have started to see some decent export interest as well with February sales especially strong after US prices were low enough to compete in the world market. Even with the stronger demand wheat continues to make new lows for the move. Granted the drought conditions have eased a bit after the most recent storms brought decent amounts of moisture to the winter wheat areas. We will have to watch wheat conditions as it comes out of dormancy as well as any changes to demand for direction.
New crop corn also made a new low for the move at $5.50. Many are worried that this is a major level which we could see some stops triggered below. Oddly enough we were making a similar move at this exact time last year while at almost the exact same spring price for Federal Crop Insurance. Looking at a chart of December corn on February 24th of 2012, we made our short term low at $5.49 ¼ before going back to test $5.75 a few more times. By May 11th, we were trading all the way down to $4.99. What would price have done if we did not have the drought of 2012? Flash forward to today’s situation but take into account the strong Brazilian corn crop soon available on the world market and the potential for 98 million acres or more of corn in the US. It takes a long time to restore feed demand and with many ethanol plants idle we have to wonder how quick they will be to start operations again once ethanol becomes widely profitable again?
We know there is still a long way to go in the growing season with obstacles to overcome such as the dry conditions and tight old crop supply. The point is to illustrate how corn traded last year before we had any real weather problems and how that may relate to this year’s situation.
DECEMBER 2012 CORN
First notice for March Corn, Soybeans, Wheat, Meal, and Soyoil is on Thursday. With strong bullspreading and interior basis levels for nearby corn and soybeans it could be an interesting delivery period. Last year the May-July spread skyrocketed to +45 cents over with similar basis levels. If there are any surprises that give us a rally it may be a good opportunity to price some more grain. Have a great week!
Currently our official recommendations call for 30% protection in cash sales, HTAs, or futures (average price of $6.40) and 20% protection in long $5.50 December puts and short $7.00 December calls. We would like to BUY BACK those $7.00 calls and SELL December $4.50 puts for EVEN MONEY. What this does is remove the marginal risk of the trade (the short $7.00 calls) without spending additional premium. It does however limit the amount of protection you will get on those $5.50 puts capping their protection to not below $4.50. It is important to note that this trade is for those who already have the spread on AND have a healthy level of sales and insurance coverage. To go over this strategy in AgYield, please contact us today.
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