Hopes for a corn rebound
Unchanged Corn Prices: For the week, last week, March corn closed unchanged. This market has been supported on dryness from the world's number four and six producers (Brazil and Argentina), a rebound in crude oil, and a need for corn to get acres. On the bearish end, we have very legitimate concerns over demand. The export picture is a disaster (see below). There is little chance we will hit USDA's export target. The other issue is guessing how much ethanol will be produced.
Friday, the Dept of Energy noted October ethanol production was just the second largest at 20 million gallons. If we were to go on just the Sep and Oct numbers that we have in hand ethanol production would easily beat USDA's 3.7 billion estimate. However, we have more questions than answers on the Nov, Dec, and this month's Jan ethanol production levels now that many plants are down or at reduced levels. Just today we heard talk that Husker Ag out of Plainview, Nebraska stopped taking corn and will be making some type of announcement on Monday. For the long term we must remain bullish. We need more corn acres and we need a big 157 bu per acre trend yield. For the short term this market ran up on hopes rather than reality. We sold the March today and look for corn to retrace around 50% of its recent rally.
Day of Reckoning Coming?: One day we will have to deal with the significant problem of corn exports. Just some of the reasons why are 1) higher US dollar 2) other countries substituting wheat for corn on the feed end. 2008 world wheat production jumped from 611 to 684 million metric tonnes (2.7 billion more wheat bushels worldwide). One news wire this morning quoted US corn at $180 per tonne versus Black Sea origin feed wheat at $120 per tonne. 3) credit issues. The facts...USDA expects 08/09 corn sales to be 26% smaller than last year at 1.800 billion bushels. The problem...actual year to date corn sales are 47% less than last year at this time! If the pace from the last four weeks continues we will only hit 1.435 billion. There are hopes for a rebound in corn sales though. Argentina and Brazil are the world's number two and three corn exporters. We may get some of their sales in the coming weeks. We will not get back to USDA's expectation though. We should expect a trend of continued export cuts in the next few months.
Trade Idea(s): (01/02) Sold 1 414, risk 426, obj and reverse to long at 365. Closed 412 1/4. Option Strategy(s): (12/16) Buy 1 Dec09 390 call, sell 1 590 call, sell 1 330 put for 24 cents. Risk 12 cents, Objective 56 cents. This is a bullish 3-way option position and does require margin deposit.
Corn Technical Commentary: The trend is up and support continues to hold. Chart-only traders would be buying. Vital Technical Indicator: the next projected major turn day is forecast for January 7.
Hogs Seeing Reality: While we have been bullish on hogs for some time we have noted the short term fundamentals of cash hog and cash pork price declines were still weighing on this market. Heck, it was just last Friday the February contract made new lows. This morning the electronic futures, which started at 5 am, made some raging gains for the first day of the year. We heard everything from funds re-balancing their portfolios, to Russia buying, to China buying, to the upcoming Goldman roll as bullish reasons. Chart traders will note Wednesday saw good volume on the gap filling move. Whatever the reason, it validates our bullish stance we have made. Though Tuesday's Hogs and Pigs report had a bigger up-front supply of hogs hitting than expected we need to remember in September they overestimated the front end supply. Take a few of those out and you clear the way for a good reduction in hogs, and higher prices, going into summer. We are a little concerned that cash hogs at 52.00 may not hit the 63.85 price February futures are implying by February 14. We certainly like the summer contracts much better. Today the objective on the long February trade was filled. We remain long via the June/December spread.