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Rich Nelson: Massive corn rally

09/17/2010 @ 4:36pm

Corn: We are not interested in picking apart why exactly today’s big move was seen. It is simply another day in a massive rally. The primary driver of price remains perceptions of yield falling to 160. Today’s secondary stories were simply like throwing matches on a burning fire. There was a rumor that Credit Suisse devoted $1 billion to grain commodities overnight. The Chinese are saying they will have a frost in key growing areas. Canada was also highlighted with frost concern.

Direction: As we have stated before, our models show if corn yield falls to 160, as the trade is currently thinking, then we have a minimum upside target of $5.20 December futures. That is not a stopping point but a target. A 158 yield gives you a $5.60 target. We continue to suggest speculative trading be done following the uptrend. Producers can hold from current sales. Those holding three way option discussions may look to take off the top sold call for now. There has been a lot of interest in bringing up the base hedge position (the purchased put). For now, keep your bullish hat on your head.

Basis and Cash Sales: We all know basis is wide. Even if you felt the flat futures price was good enough to sell you are looking at some wider than normal basis levels. Central Illinois in the past 10 years has averaged a 27 cent basis during the month of September. Current levels are 13 cents wider (48%) at around 40. Though an Illinois location near the river is not the best basis barometer it still tells the story. One thing about the chart below has surprised us. Though basis is wide it is not getting wider as prices have moved farther north. 

Selling cash, with a wide basis, is not the best idea if you have storage. A better bet for you to do is sell futures. We generally advised against HTA’s (Hedge To Arrive). The elevator is selling futures for you. The upside is they pay any margin calls if prices arrive. However…1) the vast majority of local elevators are not Series 3 licensed. There is little recourse against mistaken orders. 2) In 2008, it seemed like every elevator blew out of their HTA contracts. What if prices fall after the initial rally like they did in 2008?  3) Costs are dramatically higher. In normal years you are looking at a 10 cent charge. This year we are hearing 15 to 20 cents is common. Doing it yourself, with a registered brokerage firm gets you a 1 1/2 per bushel cost. If futures rally a full $1 from your sale, and you have a good lender who understands marketing, you are looking at 6 cents payable to the bank for interest. 7 1/2 cents doing it yourself or 15 to 20 cents. Another thing to point out is which contract to sell. The March gives you 4.2 cents per month. The May gives you 3.5…Rich Nelson

Trading Recommendations: 

·      (09/17) Buy December 509, risk 496, objective 522. 

Working Trades: 

·      (09/15) Bought December 492, risk 484, objective 512 filled for +$1,000. 

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