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A rotten day-Rich Nelson

Fundamental Support: Nothing short of a tough day here thanks to a surprisingly bearish corn stocks report. USDA’s last estimate was for 920 million bushels of stocks, trade had looked for 962, and our actual number turned out to be 1.128 billion bushels. 

Following that news we saw a first trade of the day down 28 ¾ which quickly triggered more fund sell stops resulting in a quick move down the new 40 cent limit. Some might think that the USDA fabricated these numbers and they are not real. Others might say that it will get revised again later. As hard as it is to hear, our trading will benefit greatly from taking the following mindset: This USDA number is LAW and chiseled in stone. Yes, there is always some slight chance that revisions can be made but for now we have to take these numbers for what they are. 

You will be hearing that this number is far off and there will be many reasons for it.  Look at it as J walking. It might be a dumb law but if you don’t follow it, your wallet gets hit. What do we need to turn this corn around? We need bullish facts! We don’t need to hear more Chinese rumors. We need Chinese purchases. In fact, forget China for a moment. Mexico could buy any time and help out. Or maybe Japan or South Korea could buy on a larger than expected scale. Any Greece bailout will help but that does not offer lasting and true fundamental reasons why corn should rally. 

What will be the most likely factor to turn this market? To be honest, probably something we are not expecting or predicting. That is what always causes the most violent market reactions anyway, something we didn’t see coming. 

Today is a good example of that to the bearish side. We need facts and we need to avoid rumors. Many are shocked to hear this but before the opening today, funds were still long an estimated 211,000 contracts. They started this slide long around 318,000 contracts. Put this in perspective. Their buying of 318,000 contracts (1,590,000,000 bushels!) helped to get corn to our 780 high so it makes sense that selling back out of those longs breaks this market hard. They likely sold a large amount today but even if we assume they sold 40,000 contracts, they would still hold 171,000. That is not “flat” and not even close. That is the answer to the question “how much more can they sell?” Use that number, 171,000 and there is your answer. 

We agree that a buy order can be well rewarded in this market. Right now the only consideration is when to place it. For now we will look for new sales over the weekend or any other bullish sign but still look at covering ourselves with short positions until that turn occurs…Ryan Ettner

Feed and Residual: Assuming our estimates of exports, feed, seed, and industrial (including ethanol), to make USDA’s stock numbers work we have to had a terrible quarter for “Feed and Residual”. The chart here shows “Feed and Residual” was the smallest in our records. Whole corn feeding, not including DDG’s, wheat, and other feeds was down 36% from two years ago? For price direction, if you add these extra ending stocks into the new crop balance sheet, it would imply stocks/use increasing from 5.3% to 6.9%. That gives a “potential” low in October of 530 and a projected ending price in October of 580. We look for a similar trade pattern as the June Grain Stocks fiasco. Two days of losses totaling 11.5% would imply a 560 target for Monday. Value buyers are very interested right now…Rich Nelson


Trade recommendations:

  • (9/30) Buy December corn 606 stop, risk 10 from entry, objective 646.
  • Active cash cattle trade at $120 and $121 was seen through the Plains today. This was better than our hopes and even surpassed the floor’s bullish $120 expectations. It is interesting that this market has been able to completely shake off any concern about the US economy/debt/recession or EU economy/debt/recession that has plagued the grain and energy complexes. This market is trading as though there will be no shaky demand prospects through 2012. We agree with that perspective…Rich Nelson
  • Working Trade:
  • (08/30) Sold October 118 call/sold April 118 put 3.90, risk 6.25 filled 9/30 for -$940.
  • (09/07) Sold 2 April 118 puts 2.57, risk 3.90, objective 0. Closed 2.27.
  • (09/26) Bought 1 February 124 call/sold 2 116 puts +.72, risk -1.92, objective +8.22. Closed +1.50.
  • Rich Nelson
  • Director of Research
  • Allendale Inc.
  • 4506 Prime Parkway
  • McHenry, IL 60050
  • 815-578-6161
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