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Grains to Regain Darling Status With Funds, Analyst Says

The U.S. dollar wasted no time racing higher after the presidential election. Confidence that the U.S. will be a better place for foreign investors grew with expectations that the incoming administration will ultimately provide a place to deposit funds and earn a positive return. Beans and cattle raced higher as well, with neither commodity experiencing new, significant fundamental developments. This last month saw strong exports for soybeans and also an increase in projected carryout. The most recent Cold Storage report indicated plenty of beef in coolers.
 
One thought is that, with a new administration coming, there will be a more proactive business environment, in part due to the potential for tax breaks. This could imply that commodities may be viewed as a value (as more dollars seek investments), and you may also see a resurgence of the idea that fund managers will be purchasing commodities as a hedge against inflation. Recent talk by the Federal Reserve suggests an interest rate rise is all but imminent, likely in December. Despite a rally in the dollar, fund managers have flowed money into commodities as experienced in soybeans and cattle. Another factor that could be at force is soybean oil leading a surge higher, as world vegetable oils tighten. Palm oil prices continue to rally to new contract highs on a weekly basis. Yet, the recent recovery in prices suggests there may be more at hand, with higher prices and increasing opening interest. Cattle are finding support on winter weather and expectations for lighter inventories after the first of the year. Yet, from a long-term perspective, the cattle cycle suggests that the herd is still growing and that there should be ample beef supplies. In other words, money flowing into cattle may be more the story of support for prices.
 
Using beans and cattle as potential examples of how money may enter into a marketplace has some suggesting there have been many dollars on the sidelines waiting for an investment. With the stock market discovering new highs the past two weeks, it could be commodities that will now be the recipient of additional investment dollars.
 
As a producer, this suggests that in years of ample inventory (such as 2016/2017), price rallies should be sold to reduce inventory and cost of holding/storage. It also suggests covering these cash sales to retain ownership. We recommend using call or bull call spreads. Both have the caveat of a fixed risk strategy. By fixing your risk, you put yourself in a great positon to maintain a balanced approach. As demand grows in response to low prices, any adversity to production could send prices significantly higher than expected. This is especially likely if investment dollars flow into the marketplace as they have in past years when concerns of inflation surfaced.
 
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM, 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.

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