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Bearish report, favorable reaction

Agriculture.com Staff 08/15/2008 @ 12:06pm

Tuesday's much anticipated Supply and Demand report had bearish figures for corn, yet prices posted a bullish key reversal, followed by a limit higher close on Wednesday. In essence, the market took negative news and used this as a buy opportunity. "Sell the rumor, buy the fact" may be the mantra that traders will use to describe recent price action.

What are the driving forces that may have had traders quickly shifting gears despite a negative corn report? The answer is probably two-fold. First, an argument for oversold conditions. The market peaked on a very emotional top due to 100-year type flooding that engulfed large portions of the Midwest, especially Iowa. At the same time, the crude oil market peaked at a record $147. Both markets have been sliding through July and early August. Traders who were holding long positions but unable to meet margin calls were liquidating contracts, which accelerated the collapse. December corn futures moved from nearly $8.00 per bushel down to just above $5.00. Simply put, the market was oversold, and buyers/speculators were quick to jump on board.

Second, the problem with being too bearish corn (even at the historically high price of $5.00 per bushel) is that the input structure to produce corn has risen so dramatically. There is little incentive for farmers to either sell corn at sub-$5.00 levels or to consider planting corn for next year. The flow of corn sales had nearly ground to a halt.

Where from here? Weather is still the dominant factor. If crude oil prices rally back toward their highs and weather conditions become a concern, corn prices could quickly return to $7.00 or higher. An early frost or some other supply shock could create a rationing effect. We are not forecasting early frost, but the last few weeks of below normal temperatures are not helping to push this year's already late crop to a quicker maturity. In the northern Midwest where rain has been less plentiful, dry and cool conditions are stretching out maturity for crops already two to three weeks late. On the other hand, ideal weather and a steady-to-lower crude oil market could have corn prices testing $5.00 on December futures.

Expect high volatility. Use strategy. Do not be afraid to sell corn and buy CALL options, or use PUTS to get a price floor. Make sure you understand your marketing tools and implement strategy that takes care of the "what if" questions. A $4 range in corn prices was nearly unheard of before this year, but may be more normal in the year ahead.

If you have questions, comments or would like help developing a strategy for your operation, contact Bryan Doherty at Top Farmer at 1-800-TOP-FARM ext. 129.

Tuesday's much anticipated Supply and Demand report had bearish figures for corn, yet prices posted a bullish key reversal, followed by a limit higher close on Wednesday. In essence, the market took negative news and used this as a buy opportunity. "Sell the rumor, buy the fact" may be the mantra that traders will use to describe recent price action.

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