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Rich Nelson: Massive corn rally

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. 

Closing Cattle Commentary

Live Cattle: This afternoon’s Cattle on Feed report was slightly a bearish surprise. Feedlots added 7.1% more calves and feeders into feedlots during the month of August. The average guess was for a 0.6% decline. This bigger placement was made even though margins on outgoing fat cattle were getting tight and corn was rallying. The bottom line here is cattle feeders are getting bulled up. We can certainly agree with that mindset for 2011 marketings. Today’s report could set back the December and April contract on Monday but should not break them. The report indicated Marketings of finished cattle was 7.1% larger than last year. The trade was expecting a 6.2% increase. After taking out 3% due to the calendar days in this year’s August, it is clear feedlots moved more cattle than expected. Also keep in mind we all know that big wall of finished cattle, from those March through June big placements, are starting to hit the market. It will really hit during October. They should not have been that much of an issue for August marketings though. The net increase of 4% more marketings in August would indicate a smaller than expected ready supply right now. This news will keep October futures supported.

Overall: There is a strong amount of bullish enthusiasm hitting this cattle market. That is also shown by feeders. Feeder prices should have been clobbered by this corn rally. Instead they are only moderately lower. We are bullish in a clear way on future demand. The thing we note right now is beef has fallen this week. What about “right now” demand? Our long term target is $105 on the April…Rich Nelson

Trade Recommendation: 

·      (09/17) Buy December 101.00, risk 98.80, objective 103.10. 

Working Trade: 

·      (08/19) Sold December 95 put 1.35, risk 2.80, objective 0. Closed .75. 

·       (08/26) Sold December 102 call 2.50, risk to 3.30, objective 0. Closed 2.90. 

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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