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.
The base price of wheat for crop insurance purposes has been set at $6.64. Have you considered making any wheat sales yet? There is still a lot of time before you will be pulling your combine into the field, but I have a couple targets on the horizon which would make nice points to sell some wheat.
The chart below shows two lines of significance to watch out for. The first is at $6.90, and the second is at $7.30.
The CCI oscilator at the bottom of the chart is really not one I am buying into. On the July wheat chart, it has yet to accurately predict any area from which to make a decision. That could change now that we are in the 2014 marketing year, but it will need to prove it to me.
Be ready for a pricing opportunity very soon!
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.
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.
Below is the chart I look at to find actionable places to make crucial marketing decisions for wheat. Keep in mind that this is just a tool and that there are a lot of things to consider. It is just that the behavior of the wheat market since September is nearly identical to the behavior of the wheat market from its bearish move that began in April of 2011.
I have referred to this chart a couple times. It is on the Tools page, and on the Preparation page from back in early January. The numbers correlate with marketing decisions you could make which I explained on the Tools page.
A couple days ago, I had made a colorful post on making sales in a waterfall decline market. The wheat chart was an attempt to show that the wheat pattern today was similar to that back in 2011. What I want to do on this post is to be more detailed with the explanation.
Right now, we are at #18 on the chart above. You would have to recognize that the price action today is eerily similar. Then, you had #3, 4, 5, 6 and 7 to the current pattern of 13, 14, 15, 16, 17 and 18. Prices then were able to rally modestly, but then they made a final plunge into #8. Wheat never exceeded that October 2011 level until June of 2012 when, carried by an intense drought, prices were lifted above those levels. Without that drought, we most likely would not have seen $8.00 wheat again.
If you look at the chart from the tools page, I said that #7 was " Useful. A buy signal on the CCI following a steep decline is a safer time to lift hedges. This signal would ultimately not work out." I wish I could find a tool that would give a sell signal between the 7 and 8 mark, but there is not one that I am aware of. Likewise, I wish we had something that would mark the next suitable place to sell.
You can see from the green and red rectangular boxes that the market usually sends multiple buy signals when it is in a bear market, and multiple sell signals in a bull market. Bear markets are much harder to sell grain in because the next signal to make a sale is lower than the previous signal. This is part of my reasoning to be an aggressive seller at the next modest bounce. I believe it could be a while before we receive the next sell signal. I will post some new targets keeping this in mind in the coming days.
Where does the expression "waterfall decline" come from? The chart below should quickly answer that question. These are the hardest markets to make meaningful sales in because the market never has a meaningful rally to sell into, and the next drop is looming.
The corn and wheat patterns are very similar. Elliot Wave (a method of charting) would point out that we are in a classic 5 wave decline. Notice how this worked out on the wheat chart below. Didn't this happen a year and a half ago?
I will be posting some corn targets this week on the Opportunity page.
That was quite the sell off. The market was due for a drop off, but the magnitude to which the new crop sold was surprising. While targets were met on the bean side, corn never could get any kind of pop to it.
I think the bottom of this daily cycle is in, and we should rally through the end of the month. Corn is certainly showing signs of buyers stepping in. These hammer doji's (which are circled) on the corn chart indicate buyers stepping in. This is Dec Corn.
Because price fell below the January 7 low, we have a failed daily cycle on new crop corn.....an overall bearish sign. Any bounce that occurs here should be met with selling.
Old crop corn, however, did not fall below its January 7 low, and should have a stronger rally. The higher low is bullish. Again, price is putting in a hammer today as of this writing.
Old crop soybeans likewise have room for a pretty nice rally.
November soybeans hit the $13.50 sell target and immediately retreated southward nearly triggering a buy signal on the CCI. Prices now are at a support level which was first established back in April of 2011, and is still significant today. I would expect this level to hold through the end of the month.
Wheat sales should not be made at this time, as we are very close now to floors set by crop insurance guarantees.
Now that a bottom appears to have been made, I have some ideas on new targets for future sales. I will post those ideas over the weekend on the opportunities page.
I feel confident that grain prices will move higher into a new intermediate cycle, even though we are yet to confirm it. I don't believe I am alone in this regard however. Friday was the third highest volume day in the past three years, and I mean buying volume on corn and for wheat. While not as stellar, bean volume was more than respectable. Apparently, the big boys agree.
The January WASDE report was favorable. We have a reduction on the corn and soybean balance sheet, and a modest bump in the wheat carryout.
Traders reacted by putting in a swing low on the weekly corn chart. If we can get a above the downward sloping trend line, I think we will have confirmation that a new intermediate corn cycle is beginning. When we get a break of that trend line, I will change my sentiment to bullish. This is a market that was waiting on something to trigger it to do what it wanted to do and the WASDE report should fit the bill. The market wants a new intermediate and yearly cycle.
Soybeans did manage a lower close, but they no trader wants to be short below 12.60 on the NOV it seems. I remain confident on the recommendation to sell puts on 11/16. A break of 12.55 would be very bearish, and would confirm a failed soybean cycle.