Market Commentary for 5/9/14
There was a small market run up early this week due to the technicals in the market. As I stated last Friday the market was down last week the last two days of the week on light trading. We failed to take out chart patterns and this lead to a small rally with funds dumping money into the market.
The report today at first glance was bullish old crop corn because the USDA reduced carryout for the old crop more than expected. We still have an adequate amount left but we are approaching the 1 billion mark which is the psychological point of perfect demand and supply ratio. However the world stocks level was increased 6% which was extremely high. 50% of these stocks were in China. This is why corn closed down at the end of the trading session. The only good news was that we didn’t take out points on the charts that would say we are back in a bearish trend. Next week we need to hold corn in the mid $4.90’s or risk a fall back to the 4.75 range. As always weather conditions will have the biggest effect on market conditions going forward on new crop corn. It’s still questionable if we can get 165/bushel per acre.
The report was mostly neutral soybean. Before the report it was rumored that ADM has bought beans out of Brazil bound for New Orleans where they will transfer them to barges and send them up the Mississippi River to their processing plants in the Midwest. If true this probably eliminates the threat of running out of beans in this country and it reduces the chance of old crop beans hitting $16. Good growing conditions (not perfect) in beans would cause a $2/bushel drop in new crop beans by fall.
Reasons to be bearish
-Planting paces is on track to catch the average next week
-El Nino typically creates good growing conditions in the corn belt
-New crop planting and yield forecasts show supply increases over last year
-PED virus may have reduced demand more than previously believed
-China is not importing the volume of corn originally estimated
-China’s economy is slowing down
-World grain stock levels are more than adequate
-Long term price forecasts are all much lower than prices today
Reasons to be bullish
-Talk of maybe a weak El Nino which usually cause dry conditions in the Midwest have been discussed
-Southwest drought is not shrinking and might expand
-EPA could raise the ethanol mandate
-Wheat market could push corn prices higher
-Livestock sector is profitable and growth is likely
-Planting pace is behind “normal” to this point and possibly causing reduced yields
-Subsoil moisture in the western corn belt is low, timely rains are needed
-Hedge funds are moving money into commodities
Ultimately thought it comes down to what kind of weather we have this summer.
In last week’s enewsletter I mentioned that corn prices in the last 24 years have declined in price from May to October 80% of the time (average price adjustment in either direction – 20%). Using these averages, we can assume October corn prices will likely range between $4 or $6. For the next 60 days, weather is the driving force, which no one can obviously predict. However, I see some opportunity available in the market today based upon historical trending. With Dec futures at $5.05, I placed 5% of my 2014 production in a potential sale by selling a $5.20 Dec corn call for $.35. In other words, I put a ceiling in on this corn at $5.20 (so that’s the maximum I can sell it for), plus, I get $.35….so $5.55 is the most I can get. I have a ceiling here, but no floor. There are the three possible scenarios that can happen:
-Normal growing condition – prices fall to $4/bu this fall. Since it didn’t stay above $5.20, the grain is unsold (the call goes away). I sell the grain for $4 or more likely I hold on to the grain waiting for prices to go up. Regardless, I make $.35/bu on this grain.
-Drought Conditions – Prices go to $6/bu this fall. The ceiling was $5.20. So, I sell the grain for $5.20 + the $.35/bu. Net price – $5.55/bu..
-Unexpected Conditions – Prices stay at $5.05 (today’s price) this fall. While I don’t have to sell, I could sell at $5.05 with the $.35/bu I could make $5.40. This is a price that was never even available to the market based on market conditions to this point.
By doing this trade, I believe corn prices could be between $4.70-$5.55 in Nov, and I want a trade that takes advantage of the potential of this price range happening. As I’m only putting 5% on I’m indifferent to market fluctuations going forward yet this year.
Again, because no one can predict the weather, I prefer to implement trades that spread my risk for many scenarios that I have no control over. BUT also I prefer to do trades based on historical trend information, where I predict prices are likely to go due to global impact and average weather condition patterns.
With this strategy, I feel comfortable knowing that I did all the research possible and aligned my goals in the best possible way. Consider embracing a more strategic approach that doesn’t leave you exposed to market fluctuations. You will be glad you did.
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