Implications of market volatility in the grains

Published on: 14:26PM Aug 19, 2008
All participants now are now getting a strong dose of market volatility or wide daily trading ranges. This is increasing the cost of the calls and puts and could potentially increase the Chicago Board of Trade margin requirements to hold positions. What’s behind all the increased volatility?
Well the trade is saying it has more unknown factors in the future than known but traders' opinions are becoming very polarized on which way the market is going, therefore the big price swings.
The recent ProFarmer crop tour has suggested USDA crop potential of 155 bu. or higher could be seen which gives some support to the August crop production report which is decisively bearish. The opposite of this bearish argument is the crop is late and a ProFarmer survey also suggested significant damage to the crop “will” be seen if we have a frost in the northern Corn Belt before Sept. 15 [which is the normal frost dates]. Bottom line: The weather over the next 30 days is going to have major impact on the corn market for the next several months. If we see the crop get bigger, don’t be surprised to see a major selloff in September into early October as the current crop of bottom pickers gets destroyed as we move below $5.05 December lows. Equally, if a significant frost occurs before Oct. 1 don’t be surprised to hear a lot of talk about below 151 bu. corn yields and even a little talk of 148 bu. This would ignite the corn market as producers with unpriced grain would store and the bin doors would have major padlocks put on them to early spring.
Implication on marketing plan: More than ever this is not the time to be hitting for the bleachers. Essentially, we want to first get on base and get the trend moving in our favor before going for the win.  This implies to me one should be looking at buying serial in the money calls versus buying futures for aggressive players. For clients wanting to get call protection in place before they sell this winter, I still believe you need time. This means you are going to have to pay for it.  My suggestion is to be long the July 2009 and even consider buying the December 2009 futures. The only concern I have heard is your buying carry.
Conclusion: Remember the market is many times about expectation, not reality.  The pattern seems to me that most of the risk of frost will be factored into the market before the event and only move higher after the event if the damage is actually worse than anticipated.
Special note: I appreciate all the letters I’ve been getting from clients. I’m a little behind right now but I try to answer all questions.  The overall tone right now is clients want to buy the market. We are going to discuss this in our seminar (here at New Richmond, Ind.) this weekend. I realize a lot of you can’t get here but if you want the handouts you can call Laura for the seminar packet ($15 plus postage).
If you want to go over details or would like to read more daily recommendations regarding reownership or marketing strategies, email me at [email protected] or [email protected].

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