CFGAG News and Views vol. 57 April 1, 2014 

"Funds And Weather"

Yesterday, USDA released the Quarterly Grain Stocks as of March 1, and also the Prospective Plantings for the 2014 crops of corn, beans, and wheat. With the exception of 2014 corn acres and corn stocks which were both a little friendly, the numbers were very close to the average trade guesses, basically a neutral report. So why did the market prices in all 3 grains whip around in relatively large ranges and finish very strong in corn and beans? Watching the screen after 11:00 am was like watching a swarm of lightning bugs, and many are asking how this can happen. The answer is High Frequency/Algorithm trade, sometimes referred to as "black box" trading. At our last conference, it was reported that in an average day, 40-70 percent of Ag commodity trading volume comes from this sector.

What does this mean to us as producers? Opportunity. Now before you take a ball bat to the screen, think about this: would we have $5.00 corn and $12.00 new crop corn and beans without them? Last year, $47 billion came out of the commodities markets, and funds were short an estimated 100,000 contracts of corn. Today, they are long an estimated 250,000 contracts of corn, and also have turned a big short position in wheat into a big long as well. In fact, when looking at the fund long in corn, beans, and wheat, they are not that far from the long position totals of 2012! At that time corn was over $8.00 and beans $17.00. Bottom line is without these folks pouring over $17 billion into our markets since the first of the year, we would not be at these price levels.

So what do we do now? Obviously the funds are in the drivers seat, and how far they want to push before cashing in is the unknown. We know that the bean supply is tight, how tight is still a function of China and whether they cancel or default on purchases here or from South America.

We know that there are big crops in Brazil and Argentina, but logistics and politics are still a problem. Canada has large supplies of grain they want to move, but rail lines are tied up with crude oil and grain wont compete well there. Fundamentally, we have plenty of grain and oilseeds in the world supply chain, it is just not where it needs to be yet. We feel strongly that incremental sales and maybe some sell "stops" under the market may work well at this point, as no one really knows if and when the money flow reverses. Some factors to watch may be:

1) Weather: Planting here, harvesting and shipping in South America

2) Cash markets: watch basis to see if enough grain is moving

3) Monthly Supply/Demand Report on April 9th

4) Chinese cancelations or rolls from both the US or S.A.

5) Export demand and from what source

6) Weekly CFTC reports for the size of managed fund long position.

With these thoughts in mind, we don't want to let profitable opportunity leave us wishing we had sold more down the road. Even with the smaller than expected corn stocks, we still have a comfortable supply. Brazil has a large supply of corn to move after they wrap up bean loading, and Argentina is just cranking up harvest, and will have a large amount of grain to sell if the politics don't get in the way. This tells us that we have a window here to move our grain while the uncertainty of planting weather is in our favor, and if we do get our crops planted in a timely manner, it may be enough for the funds to back off the buy button. Our question is, if they do sell, will there be enough buyers there to hold prices up here? We doubt that.

For these reasons, we would not advise lifting put protection, but would look seriously at increasing sales on rallies, raising our average, and shifting downside risk to end users or funds. These are individual considerations that depend on your comfort level of production potential, local basis, and profit goals. If you are bullish and think you have sold too much, own some calls or call spreads. If you are reluctant to sell more cash, but want to protect more, own some puts or put sell stops under the market. We would strongly suggest watching or marking yesterday's lows of $4.75 in corn and $11.65 in November beans. If these lows are taken out, it might not be a pretty picture from the bulls side.

From  the technical side, we have the following numbers from our computer to consider:

July  Corn                Support                 Resistance

                                 4.80                       5.30                                                                                                            

                                 4.57                       5.49

                                 4.38                       5.75

                                
July  Beans          13.57                      14.60

                              13.00                      15.30                              

                              12.55                      16.30                

In conclusion, we know personally how frustrating marketing can be, and how USDA numbers can be so confusing. Questions yesterday were centered on how USDA can only project a few more acres planted than last year when we had over 8 million in prevented plant, and how could less animals consume 34% more feed than a year ago? We don't know either, but we file those and other questions in our minds when approaching future reports, and assessing the risks on those days. We got nothing wildly bullish or bearish yesterday, and no reason for funds to stop buying. As producers, we got no reason to "not plant" either. Our job as producers is not dwell on what might be, but on what we have on the table, and how to take some level of profitability off.  Only you can make that decision, according to your comfort level. Call us for some ideas or to update your plan, before we start making the dust fly!

Important dates to remember:

April 9th: Monthly Supply/Demand Report.

Weekly Export Sales every Thursday at 7:30 am

Export Inspections every Monday at !0:00 am

April 25th  Cattle on Feed

March 31st Planting Intentions, Quarterly Grain Stocks

Planting Progress and Crop Conditions every Monday at 3:00 pm


Mike   Daube      888-391-6330
Allen   Gard       800-205-1700

 

 

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There is a substantial risk of loss when trading futures and options. The thoughts and opinions in this article are those of the author, and while believed to be correct, are not guaranteed as the the accuracy or timing of the content. Past performance is not indicativeof future results, and each individual should examine their own risk capital carefully before trading.