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Corn prices to struggle until spring

Corn closed unchanged on the day and 23-cents higher on the week. Soybeans closed 3-cents lower on the day and 32-cents higher on the week. Wheat closed 7-cents higher on the day and 42-cents higher on the week. Since the report, fears over vomitoxin in the corn crop (esp. DDG's) and good export sales helped rally soybean meal and soybean prices late in the week. Although there have likely been issues with vomitoxin in some of the Eastern Corn Belt, we do not feel that this is a major concern.

Tuesday's report came with little surprises. The national corn yield was lowered slightly to 162.9 bu./acre. This helped lower the ending stocks estimate to 1.625 billion bushels. With only 25% of the national crop harvested on Nov.1 (when the estimates were made) and the next production estimates not until January, there are worries that the next estimate could be smaller. These concerns combined with "new money" have helped boost corn Open Interest by 200,000 contracts in the past 2 months! This incredible buying combined with a very slow harvest pace is the MAIN driver of corn prices at this time. Going forward, we will need to see how the second half of the corn crop yields. So far, yields have been better than expected in many areas and disappointing in others. Many producers west of the Mississippi have report record average yields while many in the east have seen yields below average. This uncertainty has kept many speculators from selling the market. The high moisture and slow harvest has kept many producers from selling the market. With 200,000 new longs entering the market, it has been hard to find enough selling to accommodate them. So now what? So far, all of the attention has been on the supply side of the equation (and rightfully so). With most farmers concentrating on soybean harvest, soon most farmers will be focusing on corn. Unless the crop declines sharply, the market will start to focus on demand. In our opinion, the USDA has already written down the largest demand estimates for the year. Ethanol demand being the exception, demand for all sectors looks overestimated at least at current price levels. Exports have slowed considerably as South American corn and Black Sea feed wheat have priced themselves for business. Good (wheat) grazing conditions in the Plains will delay corn feeding until next spring in many areas. Strong ethanol production has also increased the amount of DDG production. Cheap DDG prices and high corn and soybean meal prices have caused many feeders to increase their DDG rations. There are some real positives (strong ethanol margins in the U.S., Relatively tight global stocks, declining acres in South America and increased investment money) and some real negatives (decreasing feed and export demand, increased harvest pace, and additional acres in U.S. next spring) for the corn market. We believe these factors will keep corn prices in a wide trading range until next spring. We expect corn prices to struggle over $4.20 and under $3.20 until next spring. Low production costs and an increase in available acres (an estimated 3 million out of CRP, and up to 3 million less winter wheat) makes $4.40 2010 corn look expensive. Our next selling recommendation is $4.49 December 2010 futures and this will put us up to 40% sold and in a strong position heading into the new season.

The USDA raised the national soybean yield to 43.3 bu./acre. This helped raise the ending stocks level to 270 million bushels. We expect the USDA to increase their production estimate in the January report as yield reports from the later harvest soybeans continue to come in above expectations. As with corn, we believe that the USDA has already written down the largest demand estimates of the year.

An early start to the Brazilian growing season will likely take away export business much sooner than normal. We should see export out of Brazil as early as Feb.1 and nearly all exports originating from South America by March 1. Global protein demand continues to be a concern due to a decrease in animal numbers and an increased use of alternative feed ingredients. If South America has normal growing conditions, global stock look to climb to record levels this spring. Things can change quickly, but right now we expect soybean meal and soybeans to be the "weak links" as we head into the spring. Eventually, growing Biodiesel demand throughout the globe looks interesting especially if energy prices continue to rise. Right now, soybean oil stocks are huge and cash prices are very weak. We could still be months away from any "tightness" in world vegetable oil stocks, but with rising energy prices and weak protein demand we could see some interesting opportunities ahead for soybean oil. These factors make 2010 soybean look very expensive. Make sure you are caught up on sales.

Wheat ending stocks were raised by 20 million to 885 million bushels. This was mainly due to a decrease in wheat exports of 25 million. Currently, wheat looks pretty dismal. U.S. and global supplies are very large and U.S. demand is weak. However, I believe the worst is behind us. Lower production and South America and a potential sharp reduction in U.S. acres could help wheat prices stabilize here. However, I think it is very important to look at the different classes of wheat. Right now, HRW and HRS supplies look very large and production of HRW looks ample for next year. SRW wheat could be a different story in our opinion. We could see SRW acres decline by 2 million acres this winter. Although current stocks are ample at 167 million bushels, we could see things change very quickly. Normal growing conditions could quickly draw down stocks to the 75 million bushel level and a crop problem would quickly turn this "specialty wheat" from burdensome to bullish. This far from true today, but with plantings far behind in the Southern Midwest and Delta and with strong corn and soybean prices, this is quickly becoming a reality. This is why we believe that the bullishness in wheat (if it happens) will likely come from SRW and not the other classes. Because the contract has been changed and delivery points have been added in an attempt to help convergence, we believe we will see basis levels improve greatly. If there is a small crop, the cash market will likely be the leader. Because other classes of wheat can be delivered against the SRW futures contract, we believe any tightness will be seen in the cash markets rather than the futures. Again, maybe this doesn't happen but it is a light at the end of the tunnel. We recommended selling puts and buying calls against your sold production and we like this strategy. Please give us a call if you have any questions.

Hedge Recommendations

New Crop Corn ('09): You should be 85% protected, including cash sales, puts, and put/call spread strategies. Call if you have any questions.

New Crop Corn (10): You should be 30% sold. In addition, put orders in to sell another 10% at $4.49 Dec 2010 futures.

New Crop Soybeans ('09): You should be 85% protected, including cash sales, puts, and put/call spread strategies. Call if you have any questions.

New Crop Soybeans (10): You should be 20% sold. In addition, put orders in to sell another 10% at $10.29 Nov 2010 futures. Also leave orders to sell a further 10% at $10.59 Nov 2010 futures.

Also, on 25% of your projected 2010 bean production, you should buy Nov 2010 $8 puts then sell $6 puts and $14 calls. Pay 5 cents or better. Call us if you have questions.

New Crop Wheat ('09): You should be 70% sold in your 2009 wheat crop. Re-own cash sales by selling March $4.40 puts and buying March $6 calls.

New Crop Wheat (10): You should be 10% sold. In addition, put orders in to sell an additional 10% at $6.79 Dec 2010 futures, and another 10% at $6.99 Dec 2010 futures.

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Gavin Maguire is director of E Hedger, a commodity trading and marketing firm based in Chicago.

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