Grains Gapped Higher; Stayed Firm into Close
Jul 30, 2010
Today’s sharply higher price action in wheat, corn and beans has now given the green light to the bulls. The gap higher price action reflects the end users desire to get coverage in place and sellers liquidation of positions due to margin call pressure.
The wheat complex has gone from $5.80 level seen in early June to the current $7.19 level. The two main factors was a reduced crop due to excessive rains in the U.S. crop in May and June and the fear that Russia could be experiencing the worst drought in 150 years. It should be noted that even with Russia and U.S. yield drop, world stocks are still adequate. This however has not precluded end users to start looking more aggressively at locking up inventory just in case a 2008 event repeats. I have to suggest that with July 2011 above $7 and if one is able to store the incentive to planting wheat is increasing. The market however will not start to drop until we have a firm handle on how bad the Russian crop has been hurt and how good of a fall we have to plant wheat. So at this time producers of next year’s wheat should be watching very carefully to start selling but not pulling the trigger yet. If you are inclined to get short this type of a market is an excellent time to be a buyer of puts rather than a seller of cash or short futures because it simply gives you more flexibility to take advantage of a upside price strength if seen.
We have been discussing for some time November beans has been trading at overhead resistance. Today’s gap higher action in beans must be given respect in that we have now opened up the potential of beans to test last fall’s high. With the cash basis levels still very much a premium to the futures, cash is pushing up the crop. With uncertainty still quite high about the upcoming crop yield potential the function of the market right now is to put enough weather premium in the market to ration usage and eventually stimulate more production. As for how high we can go the $10.50 target must now be given at least a 50/50 chance. It will be critical that Friday’s gaps hold and follow through buying develops early week. In regards to producers with unpriced inventory I would have to suggest no action unless November 2010 beans close below $9.85.
I would suggest right now the corn market is being pulled up by the wheat and bean market rather than being a leader. The higher wheat goes, the higher 2011 corn must go to buy acres. As it’s going up, it’s difficult to know where the tops will occur. This is the nature of a weather market. However, once it is in the market will go down as quickly as it goes up so you must be developing a game plan now on what price level you want from the market and when.
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