I just wanted to recap the grain sales we have made up to this point.
We completed all soybean sales in June which I re-capped on June 21. We averaged $10.61 for our efforts. No further sales have been made.
On June 8, I recommended selling 10% of the 2017 soybean crop at $10.05.
The corn marketing has been much more challenging. Although I was anticipating a powerful move to the upside, I did not anticipate a crop size as was being predicted which sent corn into a death spiral. There were several mistakes I made which made the task of marketing the corn more difficult. This is why a brokerage account is important. I like using brokerage primarily as a means to cover mistakes on the cash side.
Back on June 10, I recommended placing an order to sell 25% of your corn at $4.45. This order was hit. Mistake #1 was that I did not recommend selling 100% of the corn. Mistake #2 happened on June 23 when I recommended lifting the hedge. The hedge did net .10 per bushel, but could have yielded so much more.
On June 23, I recommended selling $4.00 corn puts as a way to add some premium to your pocket. Again, this would be a mistake. I believe corn will continue grinding higher as I have contended all along, but by the time the puts expire, I doubt they generate much in the way of revenue. We have to wait until November 18 before we will know for sure.
On August 30, I called the bottom in corn and recommended re-ownership on paper. This would pan out to be a day early, but within a penny of the bottom. Rather than claim re-ownership however, we took a long position in oil to mimic what would need to be done to gain .84 in corn..... enough to get the cash price back to $4.00. This would mean that oil would need to reach $50.50 which happened on October 10. I recommended this because the fundamentals of corn were extremely bearish, while the fundamentals in oil were bullish. To a greater or lesser degree, oil and corn tend to trend together.
We still have physical bushels to sell, and we still have puts which we sold before making any final tally's on price. What we do know is that my recommendations gained .10 from the June hedge, plus another .84 from the synthetic long, meaning we have .94 to add to the final corn price. My target is at $3.65, which if hit means the total net price for corn would 3.65 + .10 + .84 + .05(remaining credit from the puts we sold) = $4.64. That would be a great price despite the mistakes which were made along the way.
Unfortunately, we did not get any 2017 corn sold so far this year.
I don't wish to use this as a forum for patting myself on the back, but I wish to pat myself on the back. I first wrote about the opportunity for a commodity rally back in December. As I visited farm after farm this winter on crop insurance visits, my message was the same..... that we were going to have a powerful rally in the grains which would be fueled by massive short covering by the funds, meaning speculators would have to buy.
Just to recap, back in March as I was making the farm visits, I gave everybody this chart of the CRB index which showed that commodity prices had not been this depressed since 1973. Professional traders love these extremes to reverse positions. I told everybody that despite poor fundamentals, grains would rise with all commodities because of the short covering which would have to happen. This is why I was recommending price flex so strongly on crop insurance policies so that the price discovery window would be opened back up, rather than crop insurance guarantees being set at the lows of the market.
So in the 6 weeks since this first CRB chart was printed, oil is marginally higher than it was but now the grains and precious metals have rallied. Yet, the CRB has still only bounced another 10 points since March. The point is, all commodities still have a lot of room to rally.
Corn nearly reached a 50% retracement yesterday from the July high but pulled back today to the 200 day moving average. Still, that is a 50% retracement in just 3 weeks time.
Soybeans have also rallied to a 50% retracement of their July high. My recommendation to sell at the $9.75 level was because beans had moved into the 38.2% retracement. The magnitude of this move surprised me, and I was probably the most bullish person I knew. You would think that the drought of 2016 had been underway for a month, and very few have even planted soybeans yet.
Sentiment on corn and soybeans would indicate that they still have room to run higher so don't fall into the trap yet of thinking they are as high as they are going to get. My expectations for the new crop have actually become even more bullish when you factor in strong fund buying with the possibility of weather problems. The charts below are not a forecast, but more or less an idea of the time frames and price levels I am speaking of.
First, we get a bounce of the dollar through early June taking the dollar to this downward sloping trend line. (This is a wild guess because the currency markets are so heavily influenced by central bank tinkering.)
Now you have multiple things which can fuel a summer rally in June. A falling dollar, unfavorable weather, reset sentiment, and more short covering from the funds.
I wish to point out that picking the bottom a couple months ago was easy because of the extremes. There was really only one place for commodity prices to move which was higher. Now they have moved higher even faster than I could have ever imagined. Picking tops is just impossible to do so I am going to be wrong.... I already have been. Past performance is not an indicator of future results.
Today, prices are somewhere between where the low of the market was and where the high in the market will be. Moving forward, my plan is just to point out actionable places where making a decision to step on the gas or tap the brake will be prudent.
Some of these recommendations will require a brokerage account. If you do not have a brokerage account, I can help you with that.
Bean prices broke lower as I expected them to. Already, the option I had explained on the opportunities page which was worth .20 at the time is now worth .292 cents. That is the nature of options and why orders need to be placed ahead of big moves. Once the train leaves the station, it becomes extremely difficult to find a safe place to jump on.
You can see from the chart below that we had a breakdown of support. I am anticipating that this will end with prices in the $12.00 area, based on fibonacci extensions which prices seem magically drawn to. At that time, I would expect the CCI will then be saying it is time to sell the puts, or to then adapt a bullish options strategy (Selling Puts) to collect more premium. My position would then become more bullish for the reasons I explained earlier this week.
The bear flag that I showed on the 26th post seems to be happening. The coiling effect that I explained typically creates moves that are powerful once they begin moving.
To remind you, the catalyst for this move is not fundamental agricultural related news, but news from the FOMC meeting this week which triggered a huge dollar rally. I wrote that this would happen back on Saturday. Despite all the fundamental news coming from the agricultural news services, it was just a massive money flow from commodities back into the dollar. When this rally is over, we should have a nice rally into next year as the dollar falls into its 3 year cycle low. This will provide the bulk of our opportunities for contracting grain.
Yesterday, I outlined an option strategy on the opportunities page to provide some protection against a potential leg lower the market could make. I wanted to discuss the option strategy a bit further to attempt to better explain some things about taking that position. Here is why this position makes sense to me.
This position could be used as a cross hedge. By this, I am saying that you could hedge corn and wheat using soybean contracts. With the charts below, I am attempting to diagram that corn for the most part is grinding lower. In addition, it is .63 below its 200 day moving average. It has traded that wide 4 previous times which was followed by a counter move. Any move lower would be very limited. In addition, this contract has never traded lower. I also believe wheat looks more like it could have a small bounce.
Soybeans are at their 200 day moving average and an area of support. This is an actionable place professional traders would look at to take a position because there is room for it to move.....higher or lower. There is a lot of room lower this position could go. If that makes you uncomfortable, then buy the option. My outlook improves a lot after one more move lower.
If prices move lower, we would leg into a bear put spread reducing cost. I am more bullish in the longer term, so capping the downside on the beans at .80 - $1.00 does not add much risk to the position. This will NOT make the position marginable.
If prices rally higher, we will sell the put we bought to collect back unearned premium. I am never married to a position. The purpose of this trade is to provide protection against a rising dollar pressuring commodities should they announce some tapering of the quantitative easing program. Should they expand the program, you could see further declines in the dollar and commodity prices rise.
I did not realize that I had last mentioned the carryout spreadsheet back in February. Allow me to demonstrate a few things that could be revealed upon the June WASDE report coming out on June 12. This is how the spreadsheet looked following the March planting intentions report. The current crop year is in the section in the middle of the spreadsheet, with last years numbers on top, and next years projected numbers on the bottom. You can see that there is a huge build up of the carry-out in both corn and soybeans from this year to next year.
On Monday, the USDA said in a weekly report that planting progress was the slowest for corn and soybeans at this point in the year since 1996. That would be 17 years. Reuters polled 14 analysts for revised projections and found that on average, they expect acreage to be reduced from 97.3 million acres to 95.1 million. The analyst also projected the U.S. Soybean planted area to be 78.2 million acres, up 1.1 million acres.
The analysts also gave the corn conditions ratings the lowest rating since 2002. There was not a yield forecast given, but for comparison purposed, lets make the assumption that yields will be reduced 5% on corn and soybeans. That would have the corn yield at 142.5 bu and the bean yield at 39.9.
These numbers would result in the change to the spreadsheet as reflected below.
Nobody knows where these numbers will ultimately land. The yield number could change just as much as the planted acres number over the next month. There is still a buildup on the corn, but this would not result in a devastating buildup in the carryout. I cannot foresee such a scenario giving us $4.50 corn on its own without some help from a surging dollar.
One final note....Morgan Stanly estimated the 2013 corn planting at 93.5 acres. If that number holds true, the corn carry-out would drop to 910.
Here are a few quick thoughts.
1. The CCI is not giving a buy signal on corn, but given the overall weakness of corn, especially with what happened yesterday, I would not consider selling corn. We did have a hammer doji yesterday which I think means we are at the bottom of a daily cycle and should have some price strength for a week to 10 days at least.
2. Notice how true to the fibonacci's corn (soybeans also) have traded.
3. The 200 day moving average has turned lower. Longer term, I expect weakness to continue.
4. The CCI is giving a buy signal on the bean chart, right at fibonacci support.
5. Looking at the bigger picture, the JJG grain ETF which follows the basket of corn, soybeans, and wheat is at support.
6. The entire commodity complex looks similar for that matter. Notice how well the CCI works to spot trend reversals? Also, we are in the timing band for a bottom in the commodity cycle. I will have more on that later. Large fund traders look at that.
7. The speculative money does not want to be in any commodities period. That said, there is no denying that the grain markets are over sold by any metric you use. The coldest spring in 24 years..... the latest start to planting in 17 years...... At some point, they will trade the weather.
Yesterday, I posted where some support is holding underneath commodities as a group. Today, I wish to continue that theme, but zero it in on the commodities which are of most interest to farmers, specifically corn, soybeans, and wheat.
Most of this post will focus on the technicals, but keep in mind, on the bullish side, there is massive flooding through out the heart of the corn belt delaying planting. Freezing rain is predicted tonight in some places......snow in others. Weather premium should be coming back into the market soon. On the bearish side, the stocks number continues to grow. At the heart of the weakness in all commodities is the "get me out" mentality from the funds. At some point, there will be commercial buyers enter the market to lend support, but it is the funds that drive the market.
Starting out, the same pattern is showing up on this three year July corn chart. On the bullish side, we have a CCI Buy signal, trend line support, and a gap to fill at $6.76. This, along with planting concerns should be enough to provide a bounce. On the bearish side, the shorter term trend is certainly lower, and the 200 day moving average (green line) has turned lower. Once the 200 day MA changes direction, it normally takes about 6 months to change direction.
The December corn is where we really want to focus on getting sales made. Clearly, there is a trend line break. There are no CCI buy signals. The 200 day SMA is now pointed lower. Lower highs and lower lows. We are still .53 cents above the 85% RP crop insurance floor. With some sort of small rally, we can still get a reasonable price locked in. The next stop lower will be the $5.12 area, which were the lows of 2012.
May soybeans are still holding onto its trend line. I am not expecting to see any sort of rally back to $15. The 200 day simple moving average is now flat.
November soybeans prices have moved between two trend lines now. Depending on how you chose to look at it, prices are nearing support or have broken support. Unlike December corn November beans show signs of being oversold from the CCI. That is good enough to me to not bite on any further declines for a while. I am not bullish beans, but do not believe this is a place to make sales.
July wheat is still stuck in the $7.00 price range between the 80% and 85% price floor guarantees. The CCI is not giving me any sort of encouragement for anything more than sideways trading. Buying options in a market like this is not a good idea. That said, should prices will probably plunge further should corn make further declines. Wheat sales here could still be prudent if you have not yet made cash sales, but you should make plans for re-ownership should something unthinkable happen.
To summarize, I would suggest aggressive corn and soybean sales on a rally. Wheat should be sold with a plan for re-ownership.
Grain prices keep working lower. When will this end? When will we get some sort of bounce? Back on the 25th of February, I posted a chart which correlated the recent rapid decline of corn with the dollar. This is still in play. While it is painful to sit through, keep in mind that it is dangerous to chase any run away move once the train has left the station. Just ask the folks that bought Apple Computer stock when it was trading at 700.
All run away moves eventually pull back into a reasonable area because the market will simply run out of buyers. When people stop buying the dollar, the big boys will sell their positions, leaving the rest of us who bought the dollar or sold our commodities holding the bag. That is the way it has always worked in the past and it is the way it always will work in the future. Look at how oil, gold, silver and most any other commodity have traded recently. This is the same dollar chart I posted last week with the corn against the entire commodity complex.
We can credit all the bad news you have read to price action you want, but the bottom line is that this is about money flows.
The fundamentals on wheat however continue to deteriorate. USDA Chief Economist Glauber is forecasting a record 13/14 global wheat crop. Despite the poor wheat crop out west, you cannot deny that world wide, there appears to be plenty of wheat.
Just this week, wheat began trading at a lower price than corn. I have never seen this happen. Today, wheat touched the price floor for those who took 80% RP insurance. The chart below shows the wheat chart with corn in magenta laid over the top. Notice how wheat traded right to the $6.86 80% crop crop insurance floor.
My suggestion at this point is to let somebody else get creamed by the big boys and sit on your hands for the time being. If you have an 80% revenue crop insurance policy or better, allow the insurance to carry the risk for you and do what you meant for it to do when you bought it.
For those with old crop beans.....this could be your final chance to get $15.00 beans sold. Prices have touched this level 4 times now since prices broke lower on November 1 and have not yet been able to close above that price.
There has not yet been the first kernel of corn planted, nor has there been a planting intentions report, nor has there been sufficient rain to ease the strain of extreme drought in the mid west, yet the corn market continues to bleed based on forecasts of an extreme buildup in the carryout. Could there be something else here at play?
I believe the shorter term bearishness is explained by the strong rally in the dollar, and as far as the dollar goes, it is in the timing band for a move back into its daily cycle low. I think this will provide the fuel the corn market will need to hit some minor objectives (I believe minor is all we are going to get) to finish selling old crop futures and to get substantial new crop corn sales made.
Some other tools in my tool box are also pointing to key support areas being lost with corn. Below are what are called point and figure charts. In a nut shell, they plot day to day price movements without the consideration of time. The X's show price increases, and the O's show price decreases. Only price movements of significance are plotted. Small daily scribbles are filtered out. This creates a chart which is a lot clearer with much of the clutter removed. What you wind up with are pure support and resistance levels. If you are interested, you can see how the price objectives are calculated here.
The December Corn chart shows a bearish price objective. of $5.10 and the March shows a bearish price objective of $6.30. Keep in mind, we will most likely run out of time on the March for this objective to be met.
There will not be a great opportunity to sell, only a minor opportunity when the dollar stalls. I suggest you get your plan ready.
Bear markets are trickier for people to trade than bull markets. Higher prices from riding a bull market can make up for miss-timed sells, as you might even get a better opportunity to sell later. If you miss a selling opportunity in a bear market, it just involves more pain. We need to be ready to pull the trigger, and fast in a bear market as there simply may not be another opportunity.
The degree to which prices are falling so early point to the belief and comfort the market has that we have plenty of grain. Not only are exports sliding, but we could possibly grow the largest crop of corn that we ever have this year.
The 2013 balance sheet below shows increasing inventories of grain on the corn side, but some smaller decreases on the soybean and wheat side. To get the real scope of what the trade is looking at however, look at the 2014 numbers at the bottom of the work sheet. The numbers used are conservative estimates, but there is simply no way to make the corn or soybean numbers look frighting.
Going forward, I think it is prudent to sell grain as you are in a bear market. I have updated targets on the opportunities page, and have also updated the corn and soybean charts on the crop insurance page.