I made the case yesterday that corn should move higher over the next couple of weeks, if not months. I would not recommend making physical corn sales at the present time.... at least until the January WASDE report. I think the potential exists for a pretty strong rally should the dollar finally drop into a daily cycle low.
Oil on the other hand is at a level I feel comfortable selling. I wish to diagram a plan which is similar to the plan I recommended last summer with great success to take advantage of this extreme spread between oil and corn. What we want to do is to capture a spread as corn prices slowly rise and oil prices rapidly fall.
My recommendation is to place a synthetic hedge today on your corn using crude oil as a vehicle. I am expecting to keep this hedge in place for probably at least two weeks. The position size is interpolated to make the oil contract the same in size as the corn contract margin wise, so one oil position is roughly the same as 3.55 corn contracts, or 17,750 bushels. Below are the contract specs you need to know.
So, for every 17,750 bushels of corn you expect to grow, you would want to sell one oil contract. You would keep the stop at 57.50 (using December for this example). The stop would mean that for every contract, you are risking no more than $650, or .037 per bushel.
So the strategy is simply that you are hedging 17,750 bushels of corn per contract using oil as your vehicle, and you are limiting the risk using a stop at the previous contract high.
How far this hedge can go will largely depend on what happens in the stock market. If you had read yesterday's post, you would know that I believe there are too many factors working against the Dow breaking much above 20,000. If it does, it will probably carry oil along with it and you would get stopped out with a small loss. My expectation however is that we are at tops in stocks and oil. A reasonable retracement in oil with a major pull back in stocks would probably be $51 which is at the 200 day moving average. If this happens, your "hedge" would yield you a $5.85 gain per barrel, $5,850 per contract, or .33 per bushel of your corn. If this is an intermediate cycle low in oil looming, it would mean more than that.
To do this, you need a brokerage account. Feel free to borrow this strategy to use on your own. If you have any questions, feel free to email or call me at 270-234-6074. If you need a brokerage account, I can help with that also.
I made a bullish recommendation a couple of weeks ago selling wheat puts which is something you would do at extreme bearishness sentiment. While sentiment is a key component of what I call an actionable place, its not the only component. I also look for assets which are stretched well above or below a moving average, the commodity channel index (CCI) and cycles. Secondary tools are fibonacci's, trend lines, price patterns, etc.
There are a lot of asset groups which are at extremes now, and these will all influence grain prices to one degree or the next. I want to just run through these to see where it is most likely fund managers will be allocating their resources. I am going to start out with a sentiment chart overview. Right out of the gate, you can see that the dollar (upper left) is one of the most overly optimistic assets, and the euro (lower right) is one of the most overly pessimistic assets.
The 3 year cycle low is due next summer. Because the intermediate cycle has stretched 8 weeks beyond normal, I am expecting this to turn any day. When it does, it will help grains tremendously. I am expecting this to turn any day.
This, while sentiment is extremely bullish.
Really? You are in buying stocks here? Fund managers are interested in pouring money into this market now? I am sure big money is well aware that last years yearly cycle low occurred in early February. They happen near the same time every year. All the stock indexes look this way.
I don't believe oil has a lot of energy left (pardon the pun) to push much higher. Prices are stretched above the 200 day moving average, and we are nearing the timing bands for cycle lows to occur.
Those are but a sample of assets which seem overpriced. The following are my favorites to be long in....to own, at least for a couple months.
Pessimism in the bond market has not been this extreme since 2006.
The next two months will probably give us the best shot of locking in some decent prices (I hope), barring some sort of weather issues. One sure way to sell at below average prices is to sell when you are afraid, and when prices are below the green 200 day moving average line. Until we have higher than average grain prices, I won't be recommending to sell any.
On Friday, I am going to push out an "out of the box" recommendation for corn sales based on the premise I have made today.
The timing of the wheat put sale earlier this month had as much to do with cycles as anything else. Wheat was at a mid cycle low which was very near the contract low. Sentiment was excessively pessimistic, which typically occurs at major bottoms. Wheat was at a 6 year low.
The green arrows on the chart below indicate cycle bottoms. These occur regularly every 25-30 days. We were at day 27 Friday, which means you should have anticipated a bounce at the very least. That would be the worst time to sell grain but a reasonable time to employ bullish strategies such as selling puts. When prices are near major cycle bottoms or well below major moving averages, or at excessive bearish sentiment, you employ bullish strategies. You could have used the same strategy Friday that we used back on December 7 and still collected a nice premium.
Remember, we used wheat as the vehicle for corn because wheat was a lot more bearish than corn was at the time, and wheat sentiment had reached bearish extremes. The sentiment levels for corn were not that extreme. Corn cycles are nearly the same as the wheat cycles. Friday should have marked the bottom to the corn cycle. I expect corn to continue grinding higher which means the timing of the next peak of this cycle will be near the January 12 WASDE report. If prices can move significantly higher....lets say near the $4.00 range, I hope to get some corn sales made. That is only 17 cents from where prices are chopping around today.
As with corn and wheat, soybeans are also beginning a new daily cycle, but also a new intermediate cycle. The slide in bean prices the past couple weeks have re-set sentiment to extreme bearish levels, which as you know, is the fuel major rallies need. Soybeans did not make a new low durring the past cycle, so I believe the bull market is still in tact. My soybean sales presently stand at 20%, but I will be recommending more sales once prices reach the $10.40 level again.
There are probably 3 big movers that will drive this market. Burdomsome inventories, lower oil prices (more on that in the next post), and the strongest dollar we have had in 15 years. I know I have been forecasting a lower dollar for months now. Despite the dollars strength, grain prices have moved higher. This dollar bull market is growing very tired. In the chart below, I only used two of the oscilators I follow to show that the dollar is growing tired, but many other oscilators show divergences as well. If prices can pull back to their average around 96-96, it will be very bullish for grain prices, at least near term.
The chart above also shows how extremely stretched above the 200 day moving average the dollar is. The more extreme prices move in one direction, the more severe the move will be in the other direction. This will have a positive effect on grain prices.
I know what the sentiment out there is. I know most farmers are scratching their heads right now about how they are going to make any money this year. I know we have large inventories, and I know they are getting a lot of rain in South America. These things have already been baked into the price, yet prices are still well off their lows. There will be some opportunities to get some prices locked in at levels which are profitable. Don't allow your personal sentiment to drive you into making a bad decision. Fear and greed will do that.
I do not make wheat recommendations often, but wheat prices have not been at this level since 2006. That said, I believe wheat has found a bottom, at least for a few months. I don't know how much higher wheat can go, but I see wheat doing no worse than moving sideways. If you are a wheat grower, and you are buying protection here with options, you are probably wasting your money. In a sideways to higher trending market, a better strategy would be selling wheat puts.
Had you used this strategy to sell December wheat puts the last time we had this set up in early September, you could have collected around 35 cents. Because they would have expired last month, you would have kept all the premium. I think we face a similar scenario today. March wheat puts are 35 cents a bushel.
Fundamentals do not favor corn this year. Entering the 2017 marketing year, I have yet to make a corn sell recommendation. Getting above average prices may be challenging. I am recommending selling $4.30 March wheat puts here against 100% of your corn marketings that you expect to grow and collecting .35 per bushel. This is a fairly low risk strategy which can add revenue to this years marketings.
The worst case scenario would be if wheat drops below $3.95 at expiration. At that point, you would be on the hook penny for penny below $3.95, so the strategy is not without risk. I do believe however that wheat is at an actionable point here, and will benefit from a weaker dollar as well as the usual seasonal strength in the market durring the crop insurance price discovery period.
I don't post much about wheat, but wheat is about to send out a buy signal. If you are growing wheat, I would recommend bullish strategies now, whether it be re-ownership or selling puts. Its time to consider accumulation, not distribution.
I presently have no signals to base any sort of decisions pertaining to corn, but the recent weakness in corn could be related to the wheat. If that is the case, we could see the corn market firm up here at the very least.