Tag Archives: grains

COT Report Shows Major Selling Ahead of USDA Reports

The grain markets finally got moving this year once the crops got in the ground. Since March, the soybean market has seen four moves of more than 7.5%, all of which were completed in three weeks or less. Soybeans have increased their volatility substantially while remaining range bound between $9.20 and $10.60 per bushel. With both the USDA’s Crop Production and the World Agriculture Supply and Demand report coming out Wednesday at noon, we’ll take a look at who is in control of the soybean futures market and how their actions in the market telegraph their expectations of tomorrow’s crucial reports.

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Commitment of Traders Report Ahead of USDA Acreage

The USDA releases its planted acreage estimates on Tuesday, June 30th. This report typically sets the tone for the coming marketing year. David Hightower’s analysis has been posted to our site and we defer to him in terms of the fundamental supply and demand numbers.  We’ll pick the individual markets apart through the actions of the commercial traders, the actual producers or end line users of these grain markets. Given the depressed levels many of the grain markets have been experiencing can this report actually do further damage?

Continue reading Commitment of Traders Report Ahead of USDA Acreage

Finding a Bottom in the Corn Market

The 2013 United States’ corn crop started off with predictions of being the largest ever. This was primarily due to the USDA acreage report issued on June 28th that showed 97.4 million acres planted for corn. This was the highest acreage allotted to corn since 1936 and also marked the fifth consecutive year of acreage gains for corn. This caused December corn futures (this year’s crop) to fall 9% in the next few trading sessions. Even though the market is now trading even lower than it was then, I think there are signs pointing to a bottom in this market. End line users should take advantage of the lowest prices we’ve seen in over a year.

Record planted acreage along with trend line yields would produce the largest corn crop in history. However, the University of Illinois pointed out as recently as last week that the USDA’s planting intentions report of June 28th won’t materialize the way the market initially reacted. The Fighting Illini pointed towards the prevented plantings number to support their argument that corn acreage may be more than 8 million acres less than originally forecasted. This is primarily due to the lateness of this year’s plantings. Furthermore, they comment on the currently declining characteristics of the corn crop condition, which may impact yields if pollination doesn’t get the weather it needs.

We often talk about a market’s, “fear premium.” Fear premium is the market participants’ disproportional concern of the market moving one direction instead of the other. Fear premium in the grain markets is always on the high side. Call options, which make money when the market goes up are always more expensive than put options in the grain markets. The difference between the current market price and the price of a put and a call option equally distant from the current price is 0 in an unbiased market. However, call options currently have a built in fear premium of approximately 30%. Therefore, the markets’ participants are 30% more concerned about prices moving higher by $.50 per bushel than the market falling by another $.50 per bushel.

End line users of corn have been stocking up on futures contracts with abandon. This is another good way of determining the underlying value of a market. The Commodity Futures Trading Commission issues it Commitment of Traders Report every week. The report tracks the market’s largest traders and categorizes them according their type of trading. Primarily, we look at three groups of traders – speculators, index funds and finally, commercial traders. We focus on the commercial trader category. It is our belief that those who produce the good and those who sell the good have the best understanding of a market’s value. Farmers, as a collective, ought to know what a fair price is for the corn they’re growing just as cereal producers or, cattle feeders should know what a fair price to pay is. End line commercial traders have built up a record position on the market’s decline. Clearly, they are willing to lock in as much of their future input needs as they’re bank accounts and storage facilities will afford them.

End line users of corn understand that even if we do end up with record acreage and good yields, we’ll still barely budge the global ending stocks number. The world currently stands at about 70 day’s worth of grain supplies. This is not just corn but an index tracked by AgriMoney that includes rice and wheat. The point of the chart published by AgriMoney is that peak production relative consumption has shifted to a deficit trend over the last 20 years. It has dwindled from 130 day’s supply in the mid 1980’s to our current level of 70 days. All things considered, this year’s US harvest could add about four days to the world’s supplies. This is hardly a drop in the bucket.

There’s no question that corn prices have been declining since the June 28th USDA acreage report and the next major report isn’t due out until August 12th. This leaves the market with time to trade its way through pollination and the trend to continue lower. However, the record net short position in managed money cannot continue to profit from corn’s decline for much longer. The market can only trade so low relative to its fundamental value. Commercial traders clearly see this market entering their value area. We’ll side with them and be on the lookout for a reversal in prices. Most importantly, we’re approaching prices that leave no more room for bearish surprises, therefore, the path of least resistance will soon turn higher.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Third Stage Growth in Agri-Business

The run up in food prices this year has, hopefully, shined a bright light on the oligopoly that controls the world’s grain markets. An oligopoly is a market that is controlled by a small number of producers, which allows them to collaborate and set prices for the market as a whole. OPEC is the most common textbook example. The U.S., Brazil, Argentina and Australia dominate the grain industry. There is grain production in every country but these four control the vast majority of the export market. That may be about to change and bring new, long-term investment possibilities with it.

When crude oil topped $145 per barrel in 2008 it was a painful, but simple adjustment to the world’s lifestyle. When the grain market soared to all time highs this summer, forcing food inflation on the world’s population, the adjustments weren’t so simple. The mechanization of the global grain production process places more and more of the world’s food production in the hands of fewer and fewer people.

The global grain stores are running at multi year lows, just as they were at the beginning of this U.S. growing season. This summer’s drought was the worst in 50 years here. The weather pattern also knocked 13% off of Australia’s wheat crop and they’re the world’s largest wheat exporter. This also led to a nearly 60% decline in their ending stocks over the last three years. The only thing keeping prices in check at the moment is South America’s increasing efficiency. Brazil’s soy production may surpass the U.S. this year and thanks to their long growing season, double crops of corn are becoming normal.

The global demand growth for coarse grain production has been fueled by the Pacific Rim’s meat production industry, rather than by population growth. China’s population growth is less than one percent per year, yet their hog market is growing by an average of 3.5% per year. The growth in their agricultural markets for both grains and meats has been astounding, as production of both have shifted from individual farmers on their own land to the mechanized version of agri-business that is the model of the industrial world. Their soybean imports, which are used for feed, have grown from 3 million metric tons in 1997 to approximately 56 million tons this year.

These wheels have been set in motion and will not be derailed by a collapse in the Eurozone or a surprise in our elections. The trends in population growth and the move towards global improvements in diet are really just beginning. The United Nations and the Food and Agriculture Organization (FAO) just reported that global wheat prices for 2012 were up 25%. They added further that source inputs have now caused the price of dairy to rise by 7% in just the last month.

The arguments over who gets their principal back on a Greek or Spanish Bond is far less important to Greeks and Italians than the ability to put food on the table. Food inflation, as a result of the commodity rallies of ’07 and ’12, was also a primary cause of the Arab Spring. It is far easier to control a population with a full belly than it is to placate a parent unable to stop the crying of a hungry child.

So, where’s the trade? The trade starts with slowing global growth and negative growth across Europe. Negative growth will increasingly put the pinch on Eastern European countries like Kazakhstan, Ukraine and Russia. This is the main breadbasket of Europe and North Africa. Bottom up analysis of these macro trends reveals very large growth potential in several African countries. The BRIC’s have received most of the attention over the last ten years and rightfully so. However, as more and more resources are pulled from African countries for global production, it becomes clear that these countries are also next on the open borders list to develop.

Therefore, using the pending global economic contraction as the setup, I’ll be using declines in the stock market to knock the valuations of agri-business stocks like ADM, Monsanto, Cargill, AgroSA, Bunge, Caterpillar, DeutzAG, down and for retail investors to get washed out. There are two important things to take away from this. First of all, I am not a stockbroker. These trades cannot be executed through me. I stand to gain nothing financially from anyone following this advice. Secondly, I believe that we will get an equity selloff similar to 2008 and I plan on being ready to put cash to work in companies that stand to profit the most from the commodity markets I know best in the coming decade.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Sugar Based Ethanol Boost

Many markets, both commodities and equities declined substantially during the month of May. Two weeks ago, we mentioned that we were nearing fundamental value areas in certain markets. This week, we’ll make the case for a bottoming sugar market as well as its effect on the coming corn crop’s prices.

First, lets review the global ethanol market. The ethanol here in the U.S. is made from corn and the finished product is, “anhydrous ethanol.” Anhydrous ethanol is blended with gasoline. The end result is E85 at the pump. E85 is the maximum ethanol blend allowed. It consists of 85% ethanol and 15% gasoline. The typical ethanol blend here in the U.S. is up to 10% ethanol and 90% standard gasoline. The mixture of E15, which will boost ethanol content to 15% was just approved in 2010 for car models 2007 and newer.

The primary source of ethanol on the open market is made from sugar cane. Brazil is the world’s largest sugar producer and is responsible for about one third of global production. Brazil’s sugar cane derived ethanol is a much more efficient process both in terms of the finished ethanol and product cycle regeneration. Brazilian ethanol production also produces, “hydrous” ethanol. Hydrous ethanol is used in 100% ethanol fueled vehicles, which we see as E100 as well as any Flex-Fueled vehicle.

Ethanol production from sugar cane is much more efficient than production from corn. Ethanol production from sugar produces about 5,166 liters per acre while production from an acre of corn yields only 1,894 liters. The self-sufficient energy mandate that has been the guiding force here in the U.S. for the last 10 years or so has allocated nearly 35% of this year’s corn crop to the production of ethanol. So, why are we basing our future on such an unfeasible model? The answer lies in the government subsidies going to the farm and energy industries. This year marks the end of the $.45 per gallon ethanol subsidy as well as the end of the $.54 tariff we impose on ethanol imports. This combination fostered the proliferation of business entities whose primary profit center was the exploitation of a protected and subsidized market to the tune of $.99 per gallon.

Both of these policies expired at the end of 2012. The price swing of nearly $1 per gallon made U.S. subsidized ethanol inventories a bargain on the open market. Ironically, this led to Brazil being the number one importer of corn based, U.S. ethanol on the global market. Our subsidized production paid for by the taxpayers was sold at the discounted price to Brazil by the blending stations earning the tax credits.  It is important to note that further corn subsidies also exist here to the tune of $3.5 billion to corn farmers in the U.S. and $0 subsidies to U.S. sugar cane growers.

The loss of the ethanol subsidy combined with the remaining direct government subsidies for growing corn should shift total global production of ethanol from corn to sugar. The interesting point will be how many corn based ethanol plants here in the U.S. go the way of Solyndra as the poster children of a misdirected governmentally mandated and subsidized pipe dream. Meanwhile, excess sugar production over the current growing season should be digested, as it is shipped world wide for foodstuffs while Brazil works through their own domestic surplus. This shift will allow the largest corn crop ever planted to be diverted to traditional uses. Furthermore, we can track the huge imbalance in the sugar market between commercial trader and the small speculators through the Commitment of Traders Report. The net effect will be falling corn prices, perhaps under $5 per bushel and a sugar price base around $.185 per pound.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Diversification is not Immunization

Every market crash or bursting bubble is like the ice cream truck calling kids to the street. Portfolio managers and re-balancers know they get the opportunity to truly be heard only when something goes wrong.

Most people live their lives reacting to new stimulus. If something hurts, they don’t do it again. If something works, there’s no reason to change. Portfolio managers attempt to anticipate areas of pain and mitigate that pain wherever possible. However, there are times when efficient portfolio analysis, modern portfolio theory and just plain common-sense investing will still force one to endure periods of pain.

Portfolio composition is usually based on a collection of assets that tend to relate to each other in a predefined and expected way.

There are three basic relationships:

— Positive correlations: Two asset classes rise or fall together, predictably.

— Negative correlations: One class rises when the other falls and vice versa, predictably.

— Non-correlational: No predictable relationship.

The right balance of these relationships across multiple asset classes will smooth out returns and help to insure the predictable performance of one’s portfolio.

There’s an old saying from statistics 101: “Correlation does not equal causation.” We can measure how markets move relative to each other, but without understanding their relationships, we can’t say for certain what caused what. Sometimes, understanding “why” has a bigger impact on one’s portfolio than the actual mix of assets.

Last week we saw many markets fall. The stock market is lower, as are precious metals, bonds, grains, coffee, sugar, cocoa, crude oil and the energy markets. Many of the classic market relationships people use to balance their portfolios failed to behave in the anticipated manner and did not balance the risks associated with investing. Markets can and do, behave in unanticipated ways.

Commodity markets have been trending toward generally higher prices. The stock market has also had a nice rally and is up more than 9 percent since Labor Day. During this time, the Federal Reserve Board also announced a second round of quantitative easing to keep interest rates low and weaken the U.S. dollar. Consequently, bonds have rallied in price while the dollar has fallen.

The sudden about-face in many of the markets is twofold. First, the news regarding Ireland’s financial health has become increasingly pessimistic. Ireland was on the financial default radar, along with Greece, more than six months ago. Ireland has been very proactive in implementing domestic austerity measures to rein in spending. Furthermore, Ireland has also steadfastly maintained its financial issues are limited to a few banks that became overleveraged during their own housing bubble.

Unfortunately, the European Union has the same fears about Ireland and Greece we did in the U.S. with our own domestic banks and that is that every bank was more overextended than initially thought, requiring an even bigger lifeline to maintain solvency. Finally, Portugal and Spain are also on the verge of financial insolvency themselves.

The second fear to hit the markets was China’s announcement Wednesday its economy may be overheating again. Rumors are circulating China may follow several banks in Korea in raising its interest rates to slow down inflation and thus, economic growth. The data coming out of China certainly reinforces the idea it may constrict lending in the near future. China has a published cap on the amount of money its nationalized bank will lend in any calendar year and it is quickly approaching that ceiling.  The fears are also evident in China’s stock market, which has slid more than 5 percent in the last few sessions.

These two events combined to cause havoc in our domestic markets as they immediately unraveled the underpinnings of our market rallies. The Chinese news sucked the demand out of the commodity markets. China’s clampdown on inflation is pulling money out of the commodity markets and reducing overseas demand for raw materials. The news from Ireland and the European Union has the equity markets spooked. For many investors, the 50-percent correction in the equity markets from our own financial crisis is all too real and all too recent. Our domestic stock market’s rally and the quickly approaching year’s end makes it easy for many traders and investors to simply pull money out of the markets.

News events shock the markets and broadly sweeping economic forces create seismic shifts in market behavior. During these turbulent times, typical market relationships may fail to behave in the predicted manner.

As the Chinese economy becomes a first class consumer, we must accept our role as a supplier, rather than our historical position of end line consumer. As a supplier, we need to recognize the demand-needs of our trading partners. This is a broadly sweeping change that will affect the commodity markets for years to come.

News from Ireland and the European Union can shock the stock market, reawakening nightmares of 2008, but plans can be made to account for these events.

It does require proactive management of one’s portfolio. The old days of the passive hedge and allocation strategies may be gone.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Crude Oil vs. Natural Gas Ratio Spread

This week’s trade has been all about the spread between natural gas and crude oil. Using inter-market analysis allows us to compare the value of substitute goods. In this case, we can compare the price of crude oil to the price of natural gas to determine what price levels it becomes cost efficient for the markets’ participants to shift their energy needs from crude oil to natural gas and vice versa. The key to this type of analysis is using the proper pricing methodology. The calculation of the crude oil vs. natural gas spread is done using a ratio spread. Dividing the price of natural gas, currently around $4 per million metric BTU’s into the price of a barrel of crude oil at $77 gives us a ratio of 19.25. This ratio peaked at an all time high of 22.7 in April of this year.  A spread ratio closer to 12 would represent an average relationship over the last few years.

 

The trick to trading this ratio is to try and create equal dollar movement in both contracts. We want the trade’s profit or loss to be accurately reflected by the ratio’s movement. If we were to simply do a one to one spread, buying natural gas and selling crude oil, we would end up with an imbalance on the side of the trade that has the largest daily dollar movement.

 

This problem is solved by using the average daily range multiplied by the market’s point value to provide us with the average daily dollar fluctuation of the individual markets. Crude oil’s nine day average range is exactly $2 per barrel. There are two sizes of crude oil contracts, the full size and the half size. The full size is $1 per point, which means an average daily range of $2,000. The half size obviously yields an average daily cash fluctuation of $1,000. The natural gas market has an nine day average range of .1563. This market also has two contract sizes. The full size contract which, has a daily cash fluctuation of $1,563 and a quarter size mini contract which, fluctuates about $390 per day.

 

Now, we have the pieces to construct a trade that is dollar value neutral and will accurately reflect our natural gas to crude oil ratio spread. Ideally, we would sell one full size crude oil contract with a daily fluctuation of $2,000 and buy one full size natural gas contract with a fluctuation of $1,563 plus an additional purchase of one mini natural gas with a daily fluctuation of $390. This gives us an average of $2,000 daily movement in the crude oil and $1,953 daily fluctuation in the natural gas.

More information on crude oil and natural gas can be found at NY Energy Futures.com

 

This type of ratio spread can also be used in grain markets when trying to spread corn or wheat against beans or even the corn to cattle spread. Please call with any questions regarding this trade or, spread trading in general.

 

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

Short Selling the Futures Market

Since the stock market’s dramatic sell off on May 6th, it has traded sideways to lower. The market has made new lows twice since then while each rally attempt has been capped by resistance roughly half way back to the top. Technically speaking, this is called consolidation and consolidation usually means continuation. The idea of an object in motion remaining in motion goes back as far as Isaac Newton and it still holds true to this day. This motion is what trends are made of and that is why consolidation is viewed as a pause in the existing trend’s general direction and in this case, the trend is down.

Over the last two months of consolidation we’ve also seen volatility increase to the downside. There have been twice as many big down days as there have been big up days. The largest down day came as the result of June’s monthly unemployment report, which resulted in a sell off of 4.5% to nearly 6%, depending on the stock index. Additionally, this month’s unemployment report comes out Friday, July 2nd. The national rate currently stands at 9.7% while Ohio is full a percent higher at 10.7%. Furthermore, several leading economists feel that our unemployment situation has yet to peak. Finally, July through October is typically, the seasonally weakest period of the year for the stock markets.

Clearly, there are no guarantees as to the future direction of any market. However, it is unwise not to take into account the current weighting of pros and cons when making financial decisions. That being said, what actions are available to someone who has owned a stock like General Electric for so long that the dividends and splits of the stock have left them with a cost basis of virtually nothing? Therefore, any sales of the stock would be subjected to substantial capital gains taxation. The typical response in this situation is one of helplessness. Just ride it out. The stock market comes and the stock market goes.

There is an active alternative to this feeling of habitual helplessness. That alternative is the calculated use of the futures markets. The construction of a futures contract is based on the agreement to either make or, take delivery of a given contract by the contract’s future delivery date. This is the basis of the old cliché, “Where do you want your load of pigs?” The reality is that less than one percent of the futures contracts traded are ever delivered and those delivered, are by design. Every trade in the futures market requires a buyer and a seller. The usefulness of futures is that it doesn’t matter how you initiate the trade. You can create a new position as either the buyer or, the seller and exit the trade prior to the delivery date thus, eliminating delivery issues.

Lets walk through a real world scenario using the General Electric example above. The owner of the General Electric stock wishes to protect their investment without having to pay the capital gains taxes on a lifetime or, generations of accumulation. Assuming the expectation of the stock market is lower, an appropriate amount of stock index futures can be sold to create a new position. This is called a short position and it makes money if the market declines in value. The portfolio has been protected by, “selling high.” If the market does decline or, the perspective on the market changes, the futures trade is offset by buying back what has been sold. This is, “buying low.” The cash difference between what has first been sold high and then covered by, buying low, is the profit accrued on the trade. This profit can be used to offset the loss in Cedar Fair on the broad market’s decline.

This same strategy can be used to generate protection or, profit in any market that is expected to fall. These include agricultural contracts like corn, soybeans or, cattle and also include things like the U.S. Dollar or gold and silver. The commodity markets were designed from the beginning to be used as a tool to hedge risk. This tool is available and applicable to a wide range of individuals and their respective needs. Furthermore, we can track the professional’s trading positions through the Commitment of Traders Report and use it as guide to time the entr4y of a short position. The next time a market is expected to decline don’t just sit there helplessly and watch the market value of your holdings – stocks, cash, precious metals, grains, etc. decline with it. Once educated, ignorance is no longer an excuse.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

Is the Commodity Pullback Over?

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

The last two weeks have brought considerable pullbacks in major trends including, the stock indexes, metals, grains and energies. We’ve also seen the most convincing U.S. Dollar rally in a year. This seems like a good place to take a step back and assess our positions on the broader markets.First, let’s break down the numbers and the correlations. The march of the commodity rally has been timed by the Dollar’s decline for nearly a year. Over the last month, we’ve seen the Dollar rally about 4% off of its lows. The rally became news over the last three weeks. Looking at a weekly chart, one can see that this is the first time the Dollar has taken out a previous week’s high and not immediately, closed lower the following week. Fortunately, we were able to see that the commercial trader’s momentum by using the Commitment of Traders Report had turned bullish on the Dollar beginning around Christmas time and we finally published a buy signal on January 19th’s COT Signals.The issues facing the commodity markets are twofold. First, the Dollar’s decline made our raw materials cheaper to purchase on the world markets. Secondly, as the commodity markets rallied, Commodity Index Traders, (CIT’s), are forced to buy more futures contracts as the value of their index rises. They are required to maintain a certain percentage of their indexes value allocated to the markets as stated in their prospectus. Consequently, as the commodity markets have declined, they’ve been forced shed contracts to maintain their waiting. Their influence on the markets can be seen in the disproportionate moves in the commodity markets – both on the way up, and on the way down. This is one of the reasons why the Dollar’s 4% rally has created the following declines:6.5% – 8% in the stock market15% give or take, in the grain markets15% in silver10% in platinum5% in gold14% in crude oil13% in unleadedOak, so where do we stand? Throughout this decline, the Commitment of Traders Report has seen commercial traders increasing their rate of buying in the raw materials markets and increased their selling in the stock indexes to correspond with their buying of the Dollar. We have watched the momentum of their purchases increase in the raw materials just as the Commodity Index Traders positions have declined and watched the opposite hold true in the negatively correlated U.S. Dollar vs. stock indexes. This is the classic example of why we follow the momentum of buying or selling within the commercial trader category. We’ve been patiently waiting and waiting with relatively few trading opportunities. As of Friday, we reached oversold levels in many of the markets that still maintained bullish momentum. Beginning on Tuesday’s trade, our proprietary indicator began ticking out buy signals in the energies and metals. This was followed immediately with buy signals 9 other markets. This means that our methodology has kicked out 16 buy signals in the last two days. That’s 16 buy signals out of 36 markets tracked. Finally, I would like to briefly note the background themes over the last month as this has built. We have the Dollar devaluing concerns of the health care bill which were mitigated by Brown’s victory. The equity market concerns over earnings realized through labor market cost savings and finally, the governmental budget issues which are beginning to kick out inflationary signals in our own programs. Our end of January position leaves us with reasonable demand for raw materials and inflationary concerns over the bond market leading to weakness in the stock indexes.

 

Corn Crop Deterioration

The fundamentals f the corn market continue to point towards higher and higher prices. I understand that many people had a hard time forcing themselves to buy new crop corn $6 a bushel. Unfortunately, $7 is here and $7.50 is not far off. The corn market is experiencing a “perfet storm.” The short list of contributing factors are:1) Tight ending stocks leave us very dependent on this year’s crop.2) Increasing global (Asian) demand for red meat funnels more corn to feed.3) Declining Dollar increases global demand for our exports.4) The late start to this year’s crop will have a material effect on yields.5) Growing position of index trader positions in the Commitment of Traders Report.

The following article on Bloomberg goes into more detail without having to source each piece of the puzzle individually. If anyone wants more detail than it provides, please contact me directly.

Corn Deluged by Iowa, Illinois Rain Cuts Yields, Boosts Prices

By Jeff Wilson

Enlarge Image/Details

June 10 (Bloomberg) — Rainstorms sweeping the biggest corn states in the U.S. are damaging a crop that’s already failing to keep pace with global demand for food, fuel and cattle feed.

Farms in Iowa were drenched with 5.78 inches of rain last month, or 37 percent more than normal, according to :S:d1″>Harry Hillaker, the climatologist for the biggest corn-growing state. The 22.23 inches that fell on Illinois from January through May was 45 percent above normal and the third-wettest on record, according to data compiled by the state.

Corn rose to a record $6.73 a bushel yesterday in Chicago, extending this year’s gain to 44 percent. Yields in the U.S. may fall 10 percent short of government forecasts, the biggest drop in 13 years, and send prices up another 34 percent as storms delay planting, stunt growth and leech fertilizer from the soil, said :S:d1″>Terry Jones, who farms more than 6,000 acres near Williamsburg, Iowa.

“It’s already a disaster,” said :S:d1″>Palle Pedersen, an agronomist at Iowa State University in Ames.

About 60 percent of the crop in the U.S., the world’s largest grower and exporter, was in good or excellent condition as of June 8, down from 63 percent the previous week, the Department of Agriculture said yesterday in a report. A year earlier, 77 percent got the highest rating. Iowa, Illinois, Nebraska, Minnesota and Indiana, the five top-producing states, reported declines.

`Midwest Flooding’

Check USDA Grain Reports

Rainfall across the Midwest was as much as four times normal over the past 60 days, according to National Weather Service data. In some places, storms dumped 15 inches more than average, the data show. The increase is equal to the typical rainfall some fields receive in a year, said :S:d1″>Roger Elmore, who is also an agronomist at Iowa State.

“The Midwest flooding is widespread and that has already hurt the crop,” delaying development and drowning some immature plants, said Jones, who is vice president of Russell Consulting Group in Panora, Iowa. “We could see national yields fall at least 10 percent, even with normal growing conditions the remainder of the year.”

Spring planting was delayed by rain and unusually cool weather that left fields too muddy for tractors and limited growth. U.S. corn planting was 51 percent completed by May 11, less than 71 percent the previous year, USDA data show.

The yield potential for corn drops unless plants emerge from the ground before the end of May in the Midwest, according to a University of Illinois study. The USDA estimated 78 percent had emerged as of June 1, compared with 92 percent a year earlier. To produce the best yields, corn needs to pollinate before the arrival of summer weather.

$8 a Bushel

“The crop is in serious trouble,” said :S:d1″>Jim Stephens, president of Farmers National Commodities Inc. in Omaha, Nebraska, who helps manage more than 3,600 farms across the Midwest. He said corn will top $8 a bushel this year.

The weather is endangering a U.S. crop already expected by the USDA to decline from last year’s record harvest after farmers planted 8.1 percent fewer acres. Global inventories may fall to the lowest levels in 24 years by Aug. 31, the USDA said.

U.S. farmers shifted to soybeans and wheat because the costs of corn is high relative to other crops. The USDA will update its yield and inventory estimates today in Washington and its estimate of U.S. planted acreage on June 30.

Demand for corn to feed livestock jumped 24 percent in the past decade as economic growth boosted incomes and meat consumption in developing countries. The prices of corn, soybeans, rice and wheat surged to recor
ds this year as food demand outpaced production. In the U.S., the cost of corn was increased by government subsidies and mandates for ethanol.

Rising Prices

In the top eight producing states, which grew 75 percent of last year’s crop, there is more acreage at risk than in 1993, when yields plunged 23 percent, said :S:d1″>Chip Flory, editor of the Professional Farmers of American advisory in Cedar Falls, Iowa.

Corn futures for July delivery rose 6.5 cents, or 1 percent, to $6.5725 a bushel yesterday on the Chicago Board of Trade, after touching a record high for a third straight session.

The saturation of soil moisture is in the 98th percentile of the highest levels in the past 40 years from South Dakota to Ohio, according to government data, increasing the risk of reduced yields from the loss of nitrogen fertilizer, Iowa State University’s Elmore said. The saturated soils are depleting fertilizer at a rate of as much as 4 percent a day, he said.

Farmers were expected to produce about 153.9 bushels an acre on average, up from 151.1 bushels last year, the USDA said May 9. Instead, yields probably will drop below 139 bushels and may fall even more, said Jones, the Iowa farmer.

To contact the reporter on this story: :S:d1″>Jeff Wilsonjwilson29@bloomberg.net