Flip of a Coin if We Go 25 cents Higher or 40 cents Lower
Oct 09, 2009
Today the USDA Supply and Demand Report came out and this is when the USDA tells us what they believe is being produced and used. As always there are some surprises. First, in regards to beans, the USDA did not reflect the great yields that we’ve heard coming in on early beans. This allowed the bulls to push the market after a lower opening. We however strongly believe the beans yields will be adjusted up in the November report. This rally is an excellent opportunity for any clients who have cash beans to sell of the combine next week.
November beans, with Friday’s close 5 days up, is testing overhead resistance. The market will have to find solid fundamental support to move significantly higher Monday. Please note a close in November beans above $9.75 will trigger stops for a retest of the $10.25 price level. If this is going to happen we would expect it early rather than later in the week.
As for corn, the overall report was neutral. The bullish surprise was the fact harvested acreage was reduced by 700,000 acres. While USDA takes away, it also gave the bears something in that it push corn yields to a record 164.1 bu. per acre. There was some minor adjustment in demand with feed and residual usage being increased, go figure. Now I’m not saying USDA is trying to bias prices up in October but this report does help to reduce the government’s exposure on insurance payments. Carryover was increased slightly to 1.672 million bushels. The overall tone is the upcoming frost could take 150 million to 300 million bushels out of corn production. This coupled with the attitude that a wet fall could lead to crop loss or at least no significant harvest pressure has all lead to the belief that upside risk is still present.
The corn charts right now are suggesting the market is entering an overbought status. This implies the market is going to need daily positive fundamental reinforcement to move higher. If you are short, you don’t want the December 2009 market closing above $3.75. If it does, your immediate risk would be $4.05. Equally, if you are long, a market close below $3.55 is very dangerous and a close below $3.50 should trigger an adjustment of your position.
STRATEGY MODIFICATION FOR BROKERAGE CLIENTS.
The weather and dollar direction are short term very uncertain which makes this market very difficult to predict. Right now I would rather be long a November $3.70 corn put based upon the December 2009 corn futures rather than be short futures. The reason is if you do place stops to blow out of positions at $3.75 it will be very hard mentally, emotionally and operationally to get back short if the break is a bear trap and we start to close lower. Remember, you have to move back below $3.50 not get bearish, I don’t think waiting 20 cents for bear signal in this time period is a good operational plan. I would rather ante up now and convert my short positions to a long put and know I can handle anything that the market wants to throw at us. If it rallies my put goes worthless and my cash is worth more. If it breaks my put is only behind a December corn futures by 5 cents and has all the downside price protection. The big drawback is this position is only valid until October 23.
SUMMARY: The odds are just about a flip of a coin if we can go 25 cents higher or 40 cents lower. The weather and the dollar direction will determine the outcome. Now is the time to manage risk but maintain our focus as bear. Moving from an active short futures to long put we would suggest is the best for all concerned.
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