Rain makes grain

Published on: 14:04PM Aug 05, 2008
Got a nice rain here today in Indiana. Overall looking out my back door, the crops look about as strong as one can expect. I know the holes are out in the field but I can’t see them. It’s really hard to be bullish. I then talk to producers down in the Southeast. Their crops are a disaster this year. They started out good and simply stopped raining.  What crop is out there could have a lot of problems with toxins and may have to be destroyed.  This continues to illustrate the difficulty in getting a handle on the size of the crop.  The crop conditions report now has the crop bigger than the 10 year average size and well above last year. This would all suggest the risk is growing every day that USDA could increase the crop above 152 bu. in the August report and many believe it could be as high as 154 bu.  As for the loss of acres, they should adjust down a little more the harvested acreage figure. So the supply side of the equation is not getting bullish but bearish. As for the demand side of the equation, I fear they will reflect demand based on the assumption of $7 corn and moving higher rather than $5.50 corn and moving lower. 

When I put this all together, I have to suggest one has to be prepared for a bearish report. The issue will be how much of the bearish fundamentals have been factored into the market? I have to say the psychology of fear is now about as intense as it gets. You can almost cut the tension of producers I talk to on the phone with a knife. Everybody is kicking themselves about not selling.  Traders who said they wanted to be strong buyers below $6 are still on the sidelines waiting for confirmation of a bottom. 
I have to say the bears got everything going their way right now. This is when bears better watch out. I'm looking at moving entirely to the sidelines with all 2008 through 2010 corn hedges between August 8th and August 20th.  Please note: I don’t see a violent price rebound, I simply believe the logic of being aggressively short 2009 corn below $6 is very limited now when seed costs are going to rise $75 per bag to $125 per bag and fertilizer overall is going to increase $250 per ton to $350 per ton for pre-buy this fall. With this type of increasing cost structure, it will be difficult for producers to aggressively increase corn acres next spring. I’m trying to prepare all sellers of futures or long puts to be looking to move to the sidelines. If you have been a seller of cash via the elevator I would be focused on rolling hedges forward to capture the big carry incentives that currently exist and focus on buying the market for at least 75 cents and perhaps a $1.50 bounce off the bottom as we move into the Jan to March time period next year.
Another issue I had just come up is what about wheat?  A lot of spring wheat producers are getting ready to plant and winter wheat producers are going to be looking at fall seeding.  As we all know this year has been a real roller coaster for wheat. It’s been a very tough year to be a forward seller and great for the producer who stored and left it in the bin.  Currently July 2009 wheat is trading in the $8.40 region which is high by historical standards but far under the winter highs. We all want the $10 to $12 range back to sell but the reality of the situation is with input costs going up for corn and beans, we could see increased wheat plantings as an alternative crop. This, plus the fact wheat plantings are increasing globally, all suggest we need to be very careful in waiting too long on selling next year’s wheat. I have to say one must now wait to see if there is any September frost scare for corn and beans but after that you need to be getting a floor in place.  More on this later but this is an alert to start bringing your bullish prospective back to reality on wheat.
Finally, I will be at Corn College in Illinois for the next two days. If you are there, look me up.
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