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Will Stock Market Uncertainties Mean Money Flows For Ag Markets?
At the end of August, corn, beans, and wheat began to signal that prices may be reaching near-term lows (if not longer-term lows) after trending downward for months.
In particular, corn futures posted a bullish key-reversal on August 31 (new lows, a larger trading range than the day before, and a higher finish), exactly one year to the day when prices last bottomed. The stock market, however, has had a terrific year with double-digit returns. As of late, it is looking somewhat tired.
The stock market doesn’t like uncertainties, and we’re seeing them domestically and worldwide, particularly with increased tension between the U.S. and Korea. This may be creating an environment where money will flow out of the stock market and into what may be termed hard assets, such as row crops, which are near their lowest price level in twelve months.
Managed money has recently established net short positions in grains as reported on the Commodity Futures Trading Commission Commitment of Traders report. This leaves these markets vulnerable to a turnaround, should investment managers begin to exit or reverse their sold/short positions. Exiting short positions is called short covering.
Last week's bullish key reversal in corn, as well as a strong upturn in soybean and wheat prices, suggest traders are interested in owning value commodities (priced below the cost of production). In addition, there is a tendency for grain prices to bottom in the fall months. With a price downturn since mid-July, it's likely that grain markets are searching for their low (or it may already be in place). If the stock market has seen its high for the year, don’t be surprised if there is a shift in investment perspective as traders move out of stocks.
End users should be heeding last week's technical signals and buy long-term supplies. If able to take physical delivery, do so, as prices are likely in the lower one third of their range for the year. To re-own or cover feed needs through the use of paper tools, consider purchasing futures and buying puts. The puts will provide a flooring mechanism so that risk with the position is quantified. You could also purchase calls which have a fixed risk component.
If you're currently short the market, expect to exit soon. Lastly, if you forward-sold grain earlier in the year, retain ownership with the purchase of call options. Or, a more aggressive approach is to purchase calls and sell puts in what is termed a long fence strategy.
Whatever the tool you use, know and understand how it works, and prepare for the results. Also, remember that doing nothing is still a strategy. This may be the most risky of all strategies, as you could be all right or all wrong.
If you have questions or comments contact Top Farmer at 1-800-TOPFARM, ext. 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Carol Tillmann Front Desk Administrative Assistant | Stewart-Peterson Office: 800.334.9779 | Fax: 262.334.6225 firstname.lastname@example.org
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.