Tuesday, December 4, 2012

Closing Comments 12-4-12

Markets closed mixed today in a rather choppy quiet session.

Corn closed down 3- to up 2 with the deferred months gaining on the nearby, beans closed up 2 nearly 20 cents off of the lows, KC wheat was off 4, MPLS wheat was off 3, CBOT wheat was off 4, DOW was off 13, crude was down 80 cents, Gold was off over 20.00 an ounce, and the dollar was weaker.

Not bad price action at all for beans and even wheat and corn bounced a little bit off of the lows; but still disappointing compared to where the markets where at one time.  Not much to really blame the weakness on today; but it was negative to see spreads work wider; mainly in corn.  As spreads work wider it isn’t exactly strong demand sign.

A little weakness came from Taiwan buying Brazilian corn; from what I heard 60 cents a bushel cheaper then US corn.  Basis is defensive a little bit today as it just seems like there is a hair too much corn north of us that is flowing down to our typical buyers cheaper then what local guys are willing to sell for.  Ethanol profitability probably doesn’t help this at all.  Tomorrow we should have the weekly ethanol numbers out; we really need to stay above what we need on a per week basis to meet current USDA forecast because seasonally we usually see a nice slow down in the summer as plants due maintenance and there just isn’t enough corn to source cheap enough.  That in itself is bullish but it also can turn bearish in a hurry when you end up curbing demand.

Not a lot of new news for direction this time of year.  We should focus on weather in South America, demand, and the funds.

 Presently weather isn’t perfect in South America but I don’t think it is a bull story either.  Only potential thing I have heard about is too much water leading to weak stand’s that could cause yield drop should we get hot and dry.  Weather is supportive prices in the US as it remains dry everywhere but that is and has been old news for some time.

Demand side of things is mixed; corn demand isn’t anything special as end user profitability struggles and we just are not in the export market.  Wheat you could say demand has picked up; but not really for milling quality wheat as we simply are not getting any HRW export business to speak of.  Soybeans have had strong demand; but enough to push us back to the previous highs?  It doesn’t seem like it right now.

The funds don’t seem to be playing our game right now; more are worried about possible tax implications and the fiscal cliff then anything so it seems like money is an outflow from investments and grains in particular.  I have said many times if we are going to rally we need the funds involved and for them to get involve we need good headline story. 

The headline story isn’t here today; could it be in the next few weeks or months?  Sure; but today it isn’t here.  I think we all can think of plenty of possibilities that could be that headline such as a bullish Jan USDA report, strong demand, continued wheat production problems, or continued dry weather.  Plus a hundred other things.  But there is also another hundred negative things that could happen.

One thing that has stuck out to me the past couple of weeks is volatility in options in our market place.  Volatility is extremely low; meaning options are fairly cheap.  So perhaps now isn’t the worst time to consider getting some protection.  Volatility for some of the grains has dropped as much as 20%; which means options are cheap.  So perhaps now isn’t the worst time to consider protection some of bad possibilities that are out there while yet looking for higher prices.

If we seen volatility jump 10% most options would increase in value dramatically.  As example an at the money put option would cost nearly 14 cents more for March Corn, 15 cents more for March wheat, and 26 cents more for March soybeans.  While puts 50 cents below the money would be double the cost for both corn and wheat while a March 14 bean put would increase by 25 cents.  Bottom line is I think the market is providing an opportunity to make a good business decision and that is getting some rather cheap protection.  Most ag options are seeing volatility as low as they have for nearly 10 years. 

If you need help looking at what protection might fit best for you and your operation give us a call; keep in mind we do offer CHS Hedging services.  Keep in mind that the above option talk might not be the right move for everyone; buying a put option would be a good move for someone that is nervous of the fiscal cliff, nervous on corn prices because of the lack of ethanol profitability, or nervous for prices in general; yet they really don’t want to sell.  In the case where one doesn’t want to sell yet wants protection buying a put option can be a way to help lock in a good min price level; another option is the simple min price contract.  To see which tool might make most sense for you check out presentation from 2012 Ag Horizon’s at http://grainmarketingplans.blogspot.com/2012/11/tools-and-considerations-in-grain.html

A couple of announcements don’t forget we will have our weekly MWC Marketing Hour Round Table meeting in Onida on Wednesday’s at 3:30.  Also make sure to mark your calendars for Dec 19th and Dec 20th for our marketing meetings in Philip and Pierre where we will have Tregg Cronin and Kevin Van Trump speaking.

Jeremey Frost
Grain Merchandiser
Midwest Cooperatives

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