Sunday, July 8, 2012

What's now in store for the grain prices?

What's next is the for the grain prices is the question.

The answer.

Well to be honest I don't know the answer; I can give you a lot of different theories or possiblities but at the end of the day I don't know for sure what our grain prices will do.  There so many factors that make out guessing our prices nearly impossible.

So with that I will just point out some of the good and bad things I am seeing for grain prices; both bullish things and bearish things.

First off we are coming off the strongest 3 week rally ever for corn.  Now that is saying something.  First that is rally is powerful and that there is something behind it; but also that we are very overdone and we likely have started the rationing process in a hurry.  Also opens the door for a massive correction.

Just a few weeks ago before this rally started we had some ethanol plants talking about and idling some plants; and since then we have rally the most ever in a 3 week period.  

I should note that when I looked at a monthly chart the move is very simliar to last year's July - August move; which was followed up by a Sept move that took out the whole gain.

I think everyone knows what is behind this rally; but to sum it up it is weather and row crop yield.  Crop conditions have been dropping very hard each week with many comparisons made to the 1988 drought.

Balance sheet projections on corn have quickly move from the 1.8 billion bushel carryout that the USDA had in their June S & D report down to some talking yield low enough to leave virtually no carryout.

Here in lies some of our biggest risk for prices.  Has the drought news been built into the prices already?  How much higher can this news carry us?  First off if we have demand; which is a big if; there is really no limit how high we could go as the last person needing it could pay a very high price.  But back to the carryout the latest estimates I have seen for the Wed USDA Supply and Demand report are calling for a 600 million bushel reduction down to about 1.2 billion bushels on average for 2012-2013 ending stocks.

Based on the previous USDA reports I think we have some risk come Wed that the USDA still doesn't acknowledge that their 166 bu yield is out of whack.  I don't think anyone believe that they will once again leave corn yield unchanged with the declining conditions; but there is the chance they don't lower it nearly as much as the market thinks or the markets.

There is also the risk that if they do lower the corn yields that they lower the demand nearly as much.

I guess you can see that i am leaning towards a bearish USDA report because of the fact that the market is expecting so much.

Does it mean you should be selling?  Yes and No......It means that you should be comfortable because these grain prices could pay out a couple different ways and those could be huge moves.  

I don't think 10.00 corn or 10.00 wheat is a super strech today; but then again the end users that are losing money today might not agree with me.  There in lies another risk that our high prices curve demand faster then the supply has dropped.  Is it possible?

That i don't know for sure; but I think it is possible that the USDA curves demand nearly as much as they curve supply.

Bottom line is our markets have plenty of risk either direction; look at the US dollar which at calendar year highs.  As is corn.  Can both of them hold?  History has told us no that we can't have super strong grain prices with a strong US dollar.  

So what happens if come Wed we start seeing some forecasts changing for cooler weather with rains and we get a USDA report with a 1.5-1.8 billion bushel carryout?  Will the rains be too late if they ever do come?  Will the market believe a bearish USDA report should it happen?  What about if one is in the drought them self and are wondering if they went from 50% sold to 100% sold; what do you do know?

You find a way to get yourself comfortable.  Whether corn rallies another couple of dollars or gives up a couple of dollars.  Find a way to feel comfortable on what you have or haven't sold.  Generic things like making small sales, using re-ownership strategies like min price contracts or buying call options, or buying puts should work for some. But getting comfortable in grain marketing isn't the same for everyone.  So do your homework and decide what it is that you need to do depending on the various possibly outcomes and keep in mind that even though things look bullish today one of those outcomes has to be a possible bearish out come.  

In other words don't get yourself comfortable via being bullish because you know prices will go up.  Get yourself comfortable by doing the right marketing that you know you should.  If you need help or want suggestions feel free to give me a call.

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