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Confirmation lows are in?

Agriculture.com Staff 02/07/2016 @ 11:26am

Tuesday's USDA acreage and stocks report may have confirmed the lows are established in the market for the time being, as the acreage/stocks report had plenty of friendly news for grains. Contrary to all the negative talk all winter (while Pro Ag proclaimed we were establishing a bottom in grain markets), the news today is anything but negative. Yes, Chicken Little, the sky isn't falling for grain markets, despite the media and marketing pretenders who have been crying this all winter long (stock traders - does this sound familiar?).

Projected planted acreage for all crops was down 7+ million acres from last year - a shock to those that ridiculed USDA's early 5 million acre decline! That also was a shock to grain buyers worldwide, who had concluded that farmers were still getting plenty of money for grains compared to past years. What they didn't seem to realize was how much costs (fertilizer gougers beware!) have also risen for farmers. The bloom is off the boom production forecasters! With a cut of over 7 million acres, farmers gave a resounding "No thanks" to current price offerings. While last year's prices ramped up acres, this year's prices actually discouraged production to the point of LOSING >7 million acres - too much in Pro Ag's eyes.

Now the US economy may also be on the way to leading the world economy out of the recession, and all of a sudden the 2009 crop price outlook has improved dramatically from just a month or two ago. Extremely wet weather patterns which started two weeks ago show no signs of weakening (in fact they may be strengthening!). Charts of corn and soybeans arguably have turned higher, with bottoms already nicely formed on most charts.

Wheat prices are dangerously close yet to recent bottoms, as winter wheat prospects have improved with the return of wetter weather to the US. However, does this make wheat just a great speculative buy today??? Buying wheat with a small stop below recent lows might be a great risk/reward market today, with $1- $1.50 upside objectives opened up and minimal downside risk. With corn markets rallying strongly, the traditional corn/wheat price relationship looks severely out of whack, with Dec corn trading at $4.35 and July wheat at only $5.45. Once the improving crop conditions are factored into the market, wheat might in fact be the best "value" buy on the board.

That won't hurt soybean or corn's feelings much, either, as both seem to have a solid foundation. Actually, upside monthly reversals in December perhaps indicated these were the lows, and the last chance to buy at this bottom may have occurred on March 30 - before the report (or at 10 am after the report for corn at 4c lower). March formed another upside monthly reversal, and may indicate a more aggressive bull market in the near future.

For producers who sold a good share of corn and soybeans recently, perhaps this is a good time to start thinking about ways to re-own grain for a spring bull market. Pro Ag likes selling put options for now, with option premiums still somewhat high and the odds of losing on these now declining. This is also a great alternative to owning cash soybeans and spring wheat, which have a strongly inverted market spread situation which strongly favors selling cash and buying paper. Even call options might work for the next few months in spite of the high cost of options persisting today after the recent 2 year price explosion and last fall's implosion. By selling put options, you might actually get paid to take risk rather than storing grain in the elevator (and paying to take price risk in the form of interest and storage costs). This especially makes sense for soybeans and HRS wheat (except low protein spring wheat).

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