Yesterday, I suggested you to consider a conservative strategy of selling December $4.00 Corn puts which would net you around .40 per bushel. Thanks to the Brexit, the pot has been sweetened. You can see on the chart below that corn was pushed below the trend line. This is close enough to where a floor should be that I feel very comfortable being long.
I am recommending this morning that you sell $4.00 December Corn Puts at .40 cents on all the corn you expect to grow. Yep, all in at 100%. This WILL be a marginable position, so don't spend the credit you earn yet.
The downside to this position is VERY low. You receive the .40 credit and that is yours, but you are on the hook for every penny below $4.00 corn goes. Even if corn trades at the March yearly low @ $3.65, you will be a nickel ahead. It won't go that low this year.
Below is the Dec corn put chart. If you are having trouble putting in the order, have your spouse do it for you!
Daily corn cycles tend to run every 5-6 weeks bottom to bottom on average. I have posted the daily cycles on the chart below. The last daily cycle low was on May 10, which was 31 trading days ago, or 6 weeks. We are in the timing band for corn to begin the next daily cycle, just in time for pollination.
What this means is that this is not the time to hedge grain. If you followed my recommendation to lift your hedge at $4.05 which was a tad early, you essentially went long corn.
Cycle bottoms are the time to employ bullish strategies. A conservative strategy now would be to sell corn puts. I would like to see corn inch a bit lower here, but at this moment, you can sell $4.00 December corn put for around .33 cents. Corn would have to drop down to its March lows for this strategy to actually cost money, and that is not going to happen. Already, sentiment is in the area of past corn rallies over the past 10 years. Once sentiment reaches excessive optimism such as it did last week, it tends to stay there for months. Given past history, I think you would have cycles and sentiment in your favor for this strategy to work. You also have peak pollination ahead to serve as fuel for a rally.
Make no mistake in believing that corn is finished. After a historically high crop ratings report this week, corn m oved limit down and has since reached the 50% fib retracement. This move was a profit taking event by the big money speculators and not a weather event as you might think. I had warned on June 13 that money flows were at extreme levels as large money speculators had pretty much handed their longs over to the small guys.
I have contended all along that the rally in the grains was caused by massive money flows into the commodity space. Oil is up nearly 100% off the lows back in February, and money has leaked into all other commodities as well, including grains. Just as this run up in price which began before the crop was even planted was caused by "smart money" traders, so has this sell off. We are only 1 week into pollination season and we have a historically high crop rating? The only way the rating can go from here realistically is lower.... prices higher.
My recommendation, if you followed my earlier recommendation would be to lift your $4.45 hedge at $4.05, netting you .40 cents on the trade. If you have contracted a HTA at an elevator, you could buy the position back on the board. On a 25% position, this gives you an extra .10 cents on your entire crop. I believe volatility, weather, deteriorating crop conditions and a falling dollar will give us another shot at $4.45.
There has been a lot happen in the months since I began blogging again, and I wanted to summarize as best as I could how the market behaved, and what my recommendations produced. Except for the first soybean sale recommendation which was texted, all the recommendations are documented on this blog.
I never meant/z to blog so much about any one commodity, but soybeans have certainly provided the most material to write about. My first recommendation went out via text message on April 12 when I recommended selling 25% of your expected soybean production. A second 25% sale was recommended on April 18. No more recommendations were made until the parabola broke on June 10, when I recommended to sell the remaining 50% at $11.60.
In addition to the sales of the 2016 soybean crop, I also made a recommendation to step into the 2017 soybean crop with a 10% sale at $10.05 on June 8.
We did not make a corn sale until the market peaked on June 13 when the market reached $4.45. I recommended a 25% sale at the time. In the days that followed corn was horribly beaten up as you can see.
On June 8, I also made a swing for the fences recommendation to sell 10% of your expected corn production at $4.30. We got within 7.75 cents of that mark, but did not quite get there.
I was very bullish back in Jan, Feb, and March for the grains as people who know me can attest. This was based on cycles and sentiment, not on fundamentals. In the long term, fundamentals win, but never forget that the market is run on sentiment and not on fundamentals. This is why every agricultural marketing service I know of was bearish when I was bullish. They were all basing their forecasts on fundamentals.
Back in the winter while the fundamentalists were selling any sort of bounce they could get, your large speculators and hedgers were busy accumulating massive long positions. In some of the contracts, these were record net long positions in contracts like corn, wheat, soybeans, coffee, and hogs. Because every supply and demand report coming out would show a buildup of stocks, it only made sense that prices would move lower. The selling was so intense that the market simply ran out of sellers. There were no players left who were willing or able to short. The longs were set up for the kill.
The chart below shows the DBC exchange traded fund, and the total net positions held by the smart money traders, aka large hedgers and speculators. The Commodity Futures Trading Commission tracks these numbers. You can see that the smart money is not buying into this rally..... they are methodically selling into it and are now net short by one of the largest amounts in history. The last time they held this many shorts was in Jan/Feb of 2011 when there was a much larger parabola. If smart money is selling into the rally, who do you suppose is buying into it? Yep, dumb money.
This pattern has repeated multiple times over the past 30 years, but not to this degree. Hedgers build up a net long position, ag contracts take off, the public rushes in and the contracts go parabolic while hedgers are unloading their longs, then the market collapses.
None of us really have the insight on crop conditions, supply/demand imbalances, import/export data, etc. The one thing I can tell you is that according to sentiment trader, money flows are now at an extreme on soybeans, and nearing those levels on corn. In fact, corn is nearing a level of optimism not seen since corn was over $7.00 back in 2012. If corn optix (optimism index) can stretch above 70, it would mark a very good time to make your first corn sales.
WASDE numbers will be released at noon EST today. I am recommending you to move to 100% sold on your soybeans for 2016. I have no idea what this report will do to price, but is it really worth risking $1.00 to $1.50 for the opportunity to gain a few more cents? Already, price is $2-$3 higher than most "experts" predicted, yet you planted any way. Now is not a good time to get greedy.
Here is one more reason to consider that the soybean move is almost complete....oil. I don't necessarily subscribe that grain prices follow oil, but many farmers do. Daily oil cycles typically last 40 to 60 days. Oil is on day 48 of the present oil cycle which means oil is in the timing band for a pull back in price. The chart below shows that oil has marginally broken its daily trend line this morning. A 38.2% retracement of this move would reset sentiment near $45. Eventually, I see higher prices for oil but this could be yet again a catalyst for soybeans to end this move.
I am comfortable making this call, even though I could be wrong. If you follow this recommendation yet prices move higher, I highly doubt you are going out of business. Sell $11.60 November Beans.
On the corn side of things, there is still a lot of time for it to move with weather issues. I would not be surprised to see at least some sort of volatility spike at the report time which could allow you to get $4.45 per bushel, matching last summers high. My recommendation would be to get an order in place to sell 25% of your crop at $4.45 this morning.
With soybeans now in a parabolic race to the mean, the optimism index which is tracked by Sentiment Trader is now showing levels are at "Excessive Optimism". As doom and gloom as most farmers were back in February, one would believe that they are optimistic now.
When public opinion reaches a consensus, it is usually wrong. Farmers get too bullish after prices have risen, and too bearish after they have already fallen. Because of that tendency, Sentiment Trader can see the extremes in opinion right before major changes in trend. When the public reaches a bullish extreme, a great majority thinks prices will keep rising, but we most often see prices decline going forward instead.
Farmers who met with me back in February and March may recall that I said that there has never been a major rally occur without excessive pessimism. Look where the index shows where we were back at the end of February, first of March!
Now, back to today's excessive optimism. There is a lot of farmer buying now, but I would suspect that most of the buying is farmers exiting their short positions. To do so, they must buy. Eventually, through all the buying will end as the market will simply run out of buyers and the bears will again regain control. This could happen very soon.
On Monday, I suggested rather strongly that we were in the throws of a parabolic move. If you look at the small picture, it certainly is behaving as such. I had a few things to consider while studying how this phenomenon behaves that I wanted to share with you, and then follow that up with a larger picture view to show how I believe this will play out.
Cycle theory dictates that commodities and grains in particular run on 3 year cycles. The chart below shows that there have been what I would consider 6 parabolas since 2003. Two of the parabolas occurred at basically the same time back in 2008. That anomaly is rare, so I would consider for this arguments sake that they were both part of the same parabola. This would mean that out of a 3 year cycle low, you should expect to see a very strong rally. This has happened pretty much every three years.
The daily soybean chart below shows the various parabolas which occurred during that time. What I want you to see is that a typical move for a parabola in soybeans is 30% above the 200 day moving average. Today, we are at 30% above the average.
The next thing I want to do is to step back and see if there is something the larger picture can tell us. In looking at the weekly soybean chart with the 200 week moving average, the one thing which is very different is that price has traded significantly below average now since early 2014. This is the first time in the past 15 years that this has happened. With some significance, the 200 week moving average is only one days trade away from being touched for the first time in two years.
You have probably heard me say this before and I will say it again. The bread and butter of all professional traders is the regression to the mean trade. It is a principal. Just like a rubber band, the more the price gets stretched, the more powerful the counter trend move will be. This is what has happened. It has not so much been the creation of a parabola as it has been price finally moving back to its average.
Now today, the November Soybean contract touched its June 2014 peak. (see below chart) That is probably the last significant point of resistance on the bean chart. It does not mean beans cannot go higher, but I believe we should be safe to sell enough soybeans to get to 100% of what you expect to grow. When this move is complete, expect to see a sell off just as brutal as the rally has been. I believe Friday's WASDE report will probably trigger an end to this rally. Mark your calendar....noon Friday.
"But Mr. Wade, can't prices move even higher if we get weather that hurts the crop?" The answer could be yes. If we have genuine weather scare like we did back in 2008 (see above chart), you could get one more run at these prices. If not, this could be your last chance. A 50% retracement of this rally would bring prices back down to the $10 area. Are you that greedy to risk $1.50?
Corn today did not look so bullish. After gapping higher at the open and trading to just within a penny of the $4.45 target I mentioned Monday, corn fell back and closed at the lows.
Check back late tonight or tomorrow for an additional post about the 2017 crop.
If I gave you a crop insurance presentation this spring, the following chart may look familiar. It showed that back in February and March, commodity values were at their lowest since 1973. Since then, prices have rallied significantly off of their lows. Prices have blown through their first level of resistance and are very close to their second.
265 would be a major area of resistance, showing numerous touches through the years. Just below that would be the 200 week moving average around 255. This range is what I would call average.
That said, commodity prices are nearing a level of significant resistance near 200. I can see prices reaching this level over the next couple of weeks, either by the FOMC Meeting on June 14-15, or on the June 23 Brexit vote. It is amazing how these price levels always have major turning points around these dates. You can see from the chart below that it is entirely possible that commodities could reach the 203 level which in turn could form the neck line of a major head and shoulders bottom. The measuring distance for a rally out of this formation happens to be at the 255-260 level which is where I consider the average range for the CRB.
I want you to think about selling some 2017 grain. The first sale would be some soybeans before this parabola breaks today or tomorrow. November 2017 soybeans are presently trading at $10.05. I don't think it would be a bad idea to sell 10% at this level today or tomorrow morning. This would be but a nibble off the top of a very strong rally.
Corn and wheat both have more room to run than do the soybeans. The optimism index on corn is getting close to being considered excessively optimistic. If 2017 corn can push to $4.30, I will recommend a 10% sale.
OK, there it is, I said it. When the November bean contract broke through the 1080 level with 0 fundamentals supporting this move, I felt comfortable calling this move what it is. Parabolic. I knew we would have a fierce rally out of the February lows, but this move has exceeded anything which I could have imagined. Eventually this move is going to catch most farmers on the wrong side which parabolic moves always do. At some point, you have to close your eyes and pull the trigger.
Likewise, December corn is now making its move. There is no resistance between where we are now and $4.45, last summers high. I expect we will get that far this week. We are only 20 cents away now. My suggestion would be to pull the trigger on 25% of your corn when we reach that level.