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Rich Nelson: Buy rumor, sell fact

Fundamental Support: Buy the rumor sell the fact was the main issue facing the corn today. After the hard slide lower last week, rumors circulated that China bought over a million tonnes of corn. This was one of the main factors for this week’s quick rebound. This morning, a confirmed sale of 1.25 million tonnes of corn was made to “unknown”. Trade had no problem assuming that purchase was indeed China. There is little surprise that buyers from last week buying the rumor were more than happy to sell the fact today. Add in the fact that today is the last Friday of the month/quarter and there was room for profit taking. Today’s close does not paint a bearish picture with 182,000 contracts traded in the May corn with a final trade of only 12 lower. That shows sellers were plentiful today while buyers were almost completely up to taking the other side. Many more contracts changed hands than longs liquidated. There was already hints to talk that some may look for China to buy even more now thanks to this sale today. Rumors of China buying corn had circulated for months with one confirmation. A question on everyone’s mind is if speculators will want to put themselves long again for another rumor. For the week, May corn ended up 4 3/4 cents which is still technically up trending. Looking forward to next week, the May corn has opened the door for a push to contract highs of 744 1/4 as long as the acreage report allows it. Bulls will look for a lower than expected acres on Thursday’s report, bears will obviously look for the February numbers to stay the same or be higher. Hedgers were given a second shot at December contract highs this week and may get a third look at it before the report next week. Hedgers who have still held off to this point should, in the least, have a plan ready to put in place as the acreage report could cause high volatility next week.

Direction: Profit taking could have been expected to end the week. Technically these grains have opened the door to higher trading. Volume may also be down ahead of an unsure report so look for nervous trade unless the funds come back in with more buying.

Grain Stocks: Last night we covered our estimates of demand from December to February. That estimate was used to make our March 1 quarterly stocks estimate. We indicated that Feed, Seed, & Industrial (includes ethanol) and the export categories are relatively easy to guess. The hardest category to estimate is feed use. Tonight’s chart shows how erratic USDA feed numbers were last year. Did feed use really go from 14% under the previous year level in Dec-Feb then jump to 36% over the previous year level in Mar – May? Will USDA keep the same lack of reason this year? This is the category that concerns every grain economist right now…Rich Nelson

Trade recommendations: 

(3/22) Sell December corn 592 stop, risk 13 cents from entry, objective 15 from entry. 

Working trades: 

 (3/21) Bought May corn 710 call for 20 1/4, risk to 3, objective 40. Closed 24 1/4. 

Closed trades: 

(3/25) Bought May corn 700 call for 21, objective 40 filled 03/25 for +$950. 

 (3/25) Bought May/Sold December corn spread at 77 1/4, objective 90 filled 03/25 for +$637.50. 

 There is a risk of loss when trading futures and options contracts. 

Lean Hogs Commentary

Lean Hogs: April futures are less than $3 away from its contract high. May and June futures are less than $1 away! Today’s morning Iowa/Minnesota report showed a tremendous $7.37 gain from yesterday! While that may be an extreme, based on only 1,200 head of free market hogs, it is clear this market wants to be bullish. Also of interest, this market made today’s moves without the benefit of corn.

Short Term: Fundamentals during the trading session are really not changed. The trade believes Japan, our number one export buyer, is actively buying pork as their domestic food supply is threatened. While that is good, just how much of an increase could be seen? You could argue the stronger cattle market is also an influence.

Hogs and Pigs: More hogs than expected for were found on today’s report. The hog herd was seen at 0.6% larger than last year. The trade was expecting the herd to be even with last year. Back on December 1, the breeding herd was 1.8% lower than last year. Now, on March 1, the breeding herd is 0.5% higher. That is a large increase and quite a surprise. With that increase in mind you would expect farrowings to run higher, right? Given higher pigs per litter and finishing weights that would mean a good jump in pork production, right? The answer is no. Though the breeding herd was seen 0.5% higher than last year, farrowing intentions for March – May and June – August are both 1.6% smaller than last year. This tells us producers were holding onto sows for one last little then planning on selling them. Believe it or not but we have tightened our 4th quarter and 1st quarter pork production numbers. For the next three quarters in 2011 and first quarter in 2012 we see production +2.1%, +3.0%, -1.9%, and +0.4% compared with last year respectively. We have added more hogs to our third quarter forecast but lower then for the periods after.

Direction: We did not think futures would reach these prices in March. We have been bullish but thought the real rally would start in April and last into summer. For the short term, traders were excited about prospects for pork exports today. “If Japan bought beef then they were surely buying our pork.” That is the mindset for today. While this is all good news, we have to wonder how much upside is left this month. We are bulls here, too. We just think April is a better month for it. By that time we will have a little more of this chicken supply problem cleaned up…Rich Nelson

Trade Recommendation: 

·       (03/24) Sell May 96 put 1.80, risk 2.70, objective 0. 

Working Trade: 

·       (12/30) Sold June 86 put 2.25, risk 1.75, objective 0. Closed .35. 

Rich Nelson 

Director of Research 

Allendale, Inc 

4506 Prime Parkway 

McHenry, IL 60050 


Hypothetical performance results have many inherent limitations, some of which are described below.  No representation is being made that any account will achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.  One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.  In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading.  For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results.  There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

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