Published on: 14:56PM May 19, 2010
The market continues to yo-yo between bull and bear. The European situation is going to turn positive, China’s going to continue to expand, the U.S. economy is expanding and an El Nino is going into a La Nino which is going to produce a corn yield below 157 and a bean yield closer to 39. This causes the bears to run for cover and bulls to buy and we push against overhead resistance.
Just as one gets comfortable being bullish the European situation trouble continues and talk persists that it may go on for some time. Traders are getting worried China may have to pull down their economy even more which hurts demand. As for the U.S. economy, while some jobs are being created they are not enough to offset the natural growth in population. We still have many people laid off in this recession which are long term unemployed and are having trouble getting new jobs because of their age and training. As for the weather except for parts of the southern Corn Belt the crop is off to a good start. What happens if the seed genetics are really that good and the dry weather really does not show up until late August to September. Under this pattern the demand is not as good as expected and yield increase for both corn and beans to 165 plus and 43 plus to see carryover closer to 2 billion and 400 million respectively. With farmers still holding big supplies of unpriced grain which is going out of conditions, we are setting up a situation where inventory will have to be dumped in July and August.
So which of these fundamental outlooks are correct? Since February the corn market has been stuck between $3.96 on the upside and $3.70 on the downside. Both arguments are powerful which has not allowed either bulls or bears to dominate. Seasonally, from Memorial Day to the 4th of July, you have to give the edge to the bulls for a weather related bounce. However, if they can’t get something going, our bias is the cash markets are going to crash under the weight of big corn supplies that must be dumped.
So what should you do? I have to suggest the clock is ticking. You much sell Dec corn between $3.90 to $4. If we move above $4.05 I would defend ½ of positions, if we move above $4.15 I would defend 100% of position.
In regards to beans, the horse is well out of the barn. We are now nearing major support levels. If they don’t hold the downside risk is easily $8.25. Equally, a July to early August dry weather event would really hurt bean yields. Therefore, I believe you need to be more cautious in your selling. I like getting a floor below the market if we crash but no margin call exposure if we rally. The strategy we recommending in our internet copy is selling at the money puts and buying 4 out of money puts. If you want more details call us at 1-800-832-1488.
Bottom line: Unless we have a major weather event or a major demand event, we believe there is real downside price pressure ahead for us. The problem is with last year’s high cost selling corn and beans for remaining old crop corn and beans is a losing situation. In regards to new crop the loss of profit incentive since early December has frozen producers into in action. Our fear now is producers are not going to do anything until the last moment. They will put in the bin and hope for a white knight to save them. Unfortunately, many times this only happens in the movies, this is real lift. Financial risk is now a fact we have to live with.
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