Monday, December 13, 2010

Grain Market Comments 12-13-10

With these crazy markets and various duties many time over the past several months many times I have started opening or closing comments but not finished.  So I think I am going to try to do the comments in a different manner.

Markets are where called better this a.m. behind a stronger overnight session and firmer outside markets.

In the overnight session corn was up 3-5 cents, beans where up 12-13, KC wheat was up 7-9 cents, CBOT wheat was up 4-5 cents, and MPLS wheat was up 6-7 cents. At 9:10 outside markets are supportive with the dollar showing some weakness down 456 points on the December at 79.610, crude is up about 1.30 a barrel, and equity markets are slightly firmer with the DOW up 20 points.  European wheat markets are near unchanged not really helping to give much market direction.

The market did open strong across the board but also seen wheat give up most of the strength it had in the first 5 minutes.  Around noon we see the wheat markets about a dime off of their highs trading in the middle of the trading range we have had so far today.  Corn and beans are near their highs of the day while the US dollar is under tremendous pressure.  So far not seeing wheat show much strength is disappointing given the price action of the US dollar.

We did have a USDA report out last Friday and it was rather a non event; we did close out the week a little on the disappointing side with particularly on CBOT wheat which closed Friday a quarter or so from it’s highs.  It looks like our markets are generically setting up to trade sideways until new information moves us one direction or another; as most charts look to be consolidated in that they are not making new highs or new lows but trading in between those ranges.  The wheat markets are close to their highs especially in MPLS as quality wheat has been gaining against the soft wheat for some time now.  

With the way the MPLS – KC – CBOT wheat spreads have gone lately I want to remind everyone to watch how one is selling and know what risk and rewards are out there based on where you hedge or how you sell.  As example if you would have hedged your spring wheat in CBOT Dec wheat back in August; versus the Dec futures.  Then rolled them to the CBOT March towards the end of Nov and then today moved hedge to MPLS March; you could have gained over 1.30 a bushel versus just simply selling MPLS today.  As MPLS was a 20 cent discount in the Dec contract and went out towards a 95 cent premium and since we have been on the March has gained another 25-40 cents; plus the carry of 15 cents or so in MPLS and 40 cents or so in CBOT. 

Just as dramatic as the above would be the opposite if you had hedged soft wheat in MPLS (basis same mentioned time frame as above); but only you would have had a huge loss instead of a gain.  Also if one would have previously had MPLS or KC hedged in CBOT and then took off and made a sale you would be 1.30 or so less then you would be if you waited until now to turn hedge into a sale.

Some of the things to watch out for right now are the value difference between MPLS – KC – CBOT wheat because of the above for one; but because of how those spreads can effect basis.  Over the last year or two it seems like anytime winter wheat basis is really under pressure it is when the MPLS-KC is narrow and what that creates is more competition between winter wheat and low spring wheat.  Many times I have had buyers pass on winter wheat offers with a response something along the lines of being able to buy low pro spring wheat cheaper.

The other big thing one needs to really watch out for or at least realize what it can do for you and your marketing plan is the carry and inverses in the markets.  I.E. if we see the markets go from big inverses to big carries having your short hedge in the nearby and then moving it up could add on ton’s to your price.  Just the opposite if one has hedge nearby but is intending the hedge to actually be new crop or deferred sale. 

As example last June you could have had old crop wheat that you hedged in July 2011 at a 60 plus cent carry to the Dec 2010 contract (CBOT); if one would have then pulled that hedge off and sold nearby in early August you could have picked up over a dollar in just the spread.  If then instead of selling new crop 2011 wheat one sold the Dec 2010 contract and rolled it back out to July in November you could have picked up around 1.30 and if done near the highs potentially over a 1.70 a bushel.  If you add a dollar or more to a contract you now have the potential to get pretty close to 10.00 futures based on where the board is at now.

If you look at the spreads just a little deeper and combine the CBOT-MPLS along with the old crop – new crop; you can see how one could accidentally do great or do just horrible on marketing their grain. 

In regards to the spread price action around noonish it is viewed as negative to wheat fundamentals and supportive to corn fundamentals.  Nearby wheat is lagging to the deferred wheat contracts; while nearby corn is firmer then the deferred corn contracts.  Nearby leading the front months is a sign of more nearby demand; while nearby lagging the front months is a sign of a lack of nearby demand or too much nearby supply; as when the market goes to a bigger carry it tells one that they don’t need it now; but they are willing to pay you to store it for them.

The overall point on the spread price action is not to say that one should always hedge or sell this way or that way but more to point out some of the risks and benefits.  Keep spreads in mind when you are deciding which grain to consider marketing and where/how you are places hedges/marketing grain. 

Markets ended up closing on the firm side with corn up 14 on the March, December corn was up 11 cents, beans where up 29-30, CBOT wheat was up 5, KC wheat was up 4, MPLS wheat was up 2, most deferred wheat contracts gained 2-10 cents more then the nearby, equity markets closed slightly firmer with the DOW up 18 points, crude was up over a dollar a barrel, and the US dollar was weaker presently at 5:00 it is down 714 at 79.740 on the March contract.

As mentioned above the grains opened very strong today; back off most of the session; but did close very strong in the last 30 mins or so of trading.  Technically we still look range but it might not take much good news for some of the markets to test some key resistance points.  For corn watch the high left from the Nov crop report; 6.05 on the front month or 6.17 on the March contract.

The next couple of weeks should be mainly about what the funds want to do.  If they want to own commodities we probably haven’t seen the highs for the year yet.  If they don’t or decide they want to liquidate some of the length we have some open charts to move lower.

Fundamentally we need to watch sale pace on exports, weather, and the USDA Jan crop report.  The other thing I keep an eye on is the fear factor; which spills over into fundamental development from the weather standpoint, fear of inflation and what it does to the US dollar gives a spill over effect to exports and fund money flow.

The one good thing that our markets do have going is the generic price action relationship between futures and basis.  Wheat as example has seen basis improve 25 cents or more despite the 1.00 plus rally it has had since the November lows.  Anytime we can see both the board and basis appreciate at the same time it typically is a good sign of some underlying fundamental demand.

The only thing I really didn’t like much today was the fact that wheat couldn’t continue to show the strength it has the past several weeks despite the firm outside markets and firmness seen by other grains.  Adding a little caution also comes from how the past 5-6 sessions wheat hasn’t shown quite the strength it has nor has it had a really good solid close at the highs.   I.E. some signs of some weakness and a fundamental picture that seen stocks in both the US and the world increase on Friday; not to mention that the main reason for this rally was weather in Russia, the US, and other parts of the world.  Fear driven or demand driven; appears to be signs of both.

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