Thursday in the Grain Markets
Feb 02, 2012
China may start to be the topic of more conversation as a severe drought is starting to gain a little more attention, and is something you should definitely throw on your radar screen. From what I am hearing a lingering drought has caused a severe water shortage in East China's Jiangxi Province, affecting the lives of over one million people, and leaving China's largest fresh-water lake bone dry. The fact of the matter is rainfall amounts have been limited in several crop producing areas and could start to garner more attention from the press as we move forward. If you recall it was the Chinese drought reports that started circulating last year around this time that added a little extra fuel to the wheat fire. Also if you look back to the big run in 2008, it was during the month of February that we made our big run to over $13.30. Point is February can produce some terrific gains in wheat, but also understand it can be the last hurrah before heading back south.
With thoughts that Russia may once again be limiting their wheat exports and a Ukraine crop that is experiencing some significant setbacks in production, other wheat importing nations may become extremely nervous about the Chinese situation. Trust me when I tell you NO one wants to be behind China in the "food" line. If countries know they are going to be needing wheat, we may see them step up as bidders now on the breaks rather than waiting until later. Everyone knows IF China where to come to the table prices will jump.
Extremely cold temps may also be more severe than I have been giving credit. I heard yesterday the "cold snap" has claimed 43 lives in Ukraine, five in Bulgaria and 13 in Romania, as temps fell to a 65-year low in many of these areas. I realize wheat has the tendency to be viewed as "indestructible," but at what point do we acknowledge damage has been done? How severe does the drought have to become or how low do temps need to fall?
Wheat has had one heck of a run these past couple of weeks, and it may be due for some profit taking, but I have a hunch we haven't seen the highs from this weather rally just yet. Producers should continue to remain patient, and look of done last push in February. Understand that I do NOT believe wheat can sustain a long-term rally in our current environment. I believe it will take some additional production failures from around the world to keep this ball rolling. I do however believe some additional premium may be priced into the trade over the next couple of weeks giving you a better opportunity to make some additional sales, before the market heads back down to compete once again with corn. In summary, despite the recent weather concerns I doubt wheat will travel far from corn for any extended period of time. Therefore I continue to like being a seller of the deferred Wheat contracts against long deferred Corn contracts. Below is an example and a couple of ways you could play the trade:
Buy (1) Dec 12 $6.50 corn call and Sell (1) Dec 12 $8.00 wheat call - collecting $0.20 cents of premium on the trade. You are simply selling the deferred carry in wheat and buying the deferred inverse in corn. If both markets tank you collect the $0.20 cents in premium. You could also Buy (1) Dec 12 $6.00 corn call and Sell (1) Dec 12 $8.00 wheat call for even money. I like both plays longer-term. You should take a closer look at these.
Many traders are aggressively touting "Long July vs Short Dec" corn. Obviously there is fear in the marketplace that the US could ultimately run out of "Old" crop corn right before the US harvest. You can defend the position by arguing that the USDA has miscounted the total number of bushels and the crop is simply not there, or you can argue that poor "quality" will ultimately become an issue and weigh of the available bushels, or you can take the stance that farmers simply are not willing to give up their grain. All of the above are certainly fair arguments, but I urge you to be extremely cautious betting on any of these horses to "come in." Obviously a "trifecta" of some sort would pay off in a big way, but more realistically all of the above mentioned horses may end up fading at the wire and finishing just out the money.
Several well respected traders in the industry are in fact now thinking this might end up being one of the biggest "sucker bets" on the board. There is no question that a bullish March stocks report could push the spread north of $1.20, but you have to believe buying in at these levels could be extremely dangerous. Be carefully getting talked into the "Old Crop / New Crop" spread! I agree it is a sexy story, but I am not sure this is the girl you want to take home to Mom.
Weekly ethanol production was reported up 4,000 barrels per day to 939,000. This is a big number and now stops the recent slide in ethanol production that followed the ending of the blenders tax-credit. You have to believe the USDA is currently too low on their ethanol usage numbers. My guess is by 50 to 100. It wouldn't surprise me to see a bump to 5.1 billion coming sooner rather than later.
Remember, Informa will have a world production update for us tomorrow morning, I am assuming at around 10:00am CST. The "outside" markets will be digesting the highly anticipated US jobs report that will be released at 7:30am CST. The expectations aren’t as high for this January report as they were back in December. From what I am hearing most of the traders are thinking we will add +170,000 private sector jobs (down from +212,000 in December), but still a move in the right direction. Do you realize we need add over 21 million net "NEW" jobs to get ourselves back to full-employment. Unbelievable!
Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO. You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more.
Click this link to find out more Grain Marketing Seminar 2012. Like this blog and want to read more, sign-up for our free trial of the daily report. Click here