Published on:
15:29PM Sep 24, 2010
Bulls regain control of the market in a decisive way today! The buying started first as the Chinese markets opened quite firm and technical buy stops were hit across the board for corn, beans and wheat.
This week’s exports suggest corn is slowing down but soybeans are still full steam ahead. As I’ve reported several times, it’s all about getting equilibrium between U.S. and Chinese markets. With domestic prices more than $7.50 for corn and close to $16 for beans, incentive has existed to buy U.S. product. The estimated shipping cost from the Midwest to China is estimated around $3 a bushel. This implies $5 U.S. corn is going to start rationing China’s future export need but $11 beans still is unpriced by $2.
This is where it gets tough for me. The bean crop seems to be out there to support the USDA bean yield. In fact it could creep up a little. The problem is China’s concern of stockpiling beans is trumping supply right now. The end game however is if South America does get the crop planted, we could see China stop buying very quickly after the first of the year.
Implication: If you are in a margin position in beans and cash flow is getting tight you really need to consider moving into a put position for old crop inventory. My suggestion would be to roll futures position into a January bean sale and buy as much July call protection, in the form of a vertical call, as close to 50 to 60 cents as possible. I come up with this number by assuming storage would cost you 6 cents for 6 months or 36 cents. Plus a risk premium of 20 cents puts you right at 56 cents cost if you were to store in the bin at these price levels.
In conclusion: it’s time to think about cash flow exposure so you can stay in position and still have cash flow available to really sell the market in the first part of 2011 if the market starts to develop some of the price excitement of 2008.
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