http://www.insidefutures.com/articles/article.php?id=725448Can Grains Cool Off Before The Temperatures Drop?
By Chris Lehner, Archer Financial Services
Of course there is no career comparison to a doctor, lawyer or commodity broker, except when something major happens and people seek advice. With the drought on everyone's mind, commodity brokers and agricultural analysts are being sought out like a doctor during an epidemic. Before somebody says "Hello," out comes, "How much higher will grains go?"
If the person is a speculator and they have never traded, they also want to know how fast they can open an account. If it is a grain producer, because they are so bullish, price protection isn't a concern. The majority of grain farmers want to know what the average price will be in October when corn and soybean federal crop insurance average prices will be set. Is corn going over $10.00/bushel? Are soybeans headed for $20.00?
The drought in many states has become so serious that irrigation has been cut off. Nebraska has shut down irrigation and I expect as soon any pollination is over more states will follow. It is only natural that a farmer is concerned about weather and what commodity prices are doing, but now producers feel there is a constant need to know what the weather will do from one hour to the next and what commodity futures are doing during the day and throughout the night.
There is one thing for certain, commodity brokers are benefiting. If new speculative traders were rain, it would take care of the drought, because money is flowing into commodities firms. Television, radio, and internet coverage of the drought is better than any advertisement.
How Much Higher Can Grains Rally?
Honestly, I don't see how anyone can predict a price top with the current situation. Often I am asked and I am not trying to sidestep the answer. There are simply too many unknown factors taking place now that will be combined with the unknowns over the next few months that will need realistic answers to come up with any degree of accuracy. I would like to be convinced otherwise. The fundamentals of grain marketing are up in the air ... way up.
Demand Will Change
Because of the drought, it is easy to focus on supply, but the demand structure is changing and will drastically change. The drought last year in the Plains and Southwest caused liquidation of close to 47 percent of the cattle breeding herd. Presently, what the total drop will be in the cattle herd from the Rocky Mountains to the northern Plains could be as large, if not larger.
Cow liquidation doesn't all have to do with weather. Cow prices are strong. Cows are being sold from $90.00/cwt to a $100.00/cwt and more depending on the condition of the cow. Bulls are $110/cwt, or more. Even if a farm has hay and/or available feed in pastures, with the price of feeder cattle dropping and not knowing what feeder cattle will bring nine, ten or more months in the future, the strong price offered for cows and bulls is bringing cows and bulls to sale barns. It is as simple as knowing cows will be putting a lot of money in the bank versus waiting to see if fewer cattle will push prices higher, or will high priced grain and fewer available feeders lower prices. It is also knowing that land prices for grain, or for pastures are bringing extraordinarily high rents or purchase prices. Liquidating cow herds and selling, or leasing the land is more than tempting for many cow/calf producers that are tired of fighting weather and the extreme volatility in the markets.
Over the past month or so, ethanol distilleries have been cutting production for the summer, waiting on new crop supplies. Also, there have been distilleries that have closed the door for good. More slowdowns and closings will take place, as the corn yields drop, if corn prices rally or stay near current prices and as energy prices remain down. Distilling corn is no longer about mandates, but has become the survivor of the fittest.
This doesn't all have to do with the amount of available corn, or about the price of energy. It is a natural function in any new or newer industry. The cell phone industry is a great example. In the 1990s, dozens of companies offered services or phones. Today, the strongest and best not only survived, but have in some cases combined and I feel offer more and better services. But like the cell phone industry after a brief contraction, the industry will survive and I feel get better and stronger.
Comparing Droughts
The drought of 2012 has been compared to 1988, the 1950s, the 1930s and times to the late 1800s. Actually, comparing anything in agriculture now, or in the past five to ten years is just a way to fill space. There is really no sense to do it if you want to estimate a possible price target. I can't see how a comparison to the past can help, unless the past can tell us when this drought will end. For instance, in 1988 the US planted about 57 million acres of corn compared to 2012, where over 96 million acres were planted. In 1988, who would have believed China would be such an important worldwide trading partner. In the 1930's who dreamed of commodity funds, exchange traded funds, or using algorithmic formulas. In the 1930's and through the early 1970s, very few farmers in the US knew of or planted soybeans. Soybeans grew as a major planted crop almost overnight because the El Niño of 1973 off the coast of South America devastated the fish meal trade and without the fish used mainly as a protein source, it pushed all protein prices through the roof. US farmers, the following year, grew soybeans like never before. Prior to this, farmers barely considered growing soybeans.
What's Ahead?
Anyone in their right mind better realize every bit of available land that can be used to plant a seed in the Southern Hemisphere will be planted this year and next year. Currently over 50 percent more land is expected to be planted in the areas of Brazil that double crop. Seed companies and fertilizer companies prove the increase in sales. It isn't the largest yielding area of the globe, but doubling it and probably more than doubling it can alleviate tight conditions by end of February to March. Already the futures markets anticipate heavy growth in the area. As of today, 7/20/12, March 2013 soybeans are $1.00/bushel lower than January because of it.
Also, more grain of all kinds will be planted in South America, Australia and throughout all of Africa in the coming year. The growth of South America over the last 20 years will pale in comparison to growth of agriculture in Africa and parts of Asia. Weather will play a key factor but for now, it should be expected to be at least normal.
For producers who have not priced soybeans, holding soybeans through winter and spring is a pure gamble that presently costs $1.00/bushel to play holding from January to March. Looking back 15 years, I did not see a time the January/March spread was anywhere near as wide with the January over July at $1.90/bushel. It is a bull spread. A producer holding grains should consider taking advantage of the front month's powerful price and sell soybeans for November instead of retaining cash ownership. After selling cash November soybeans, buy March or July futures or options on futures.
This is one of the simplest and the most basic principles of commodity marketing and hedging. Unless there is no convergence, March or July futures will rally, if cash markets remain strong, or cash markets will fall to meet March or July futures.
More To Consider
We have absolutely no idea what is being planted in China and what they have in reserves. Last year is a perfect example of not knowing planted acres. Month after month in 2011, the SDA moved up yields of China's corn production. For some reason, US analysts seem to low ball most countries yields. Maybe it is the desire to believe the US is the bread basket to the world, but now that the US is three or four slices in the loaf, assumption should be on larger amounts for both planted acres and yearly yield increases.
China built the largest dam project for power needs and for agriculture. It is now felt they have planted three percent more corn acres over 2011, but how do we really know it isn't four, five or six more? Like modern agricultural countries, yield improvement in China, as well as other countries grows because of genetics and management. If the US expects three bushel yield improvement year to year, with increase in corporate production and genetics, Chinese production could possibly be the same on the average yearly increase.
Largest Consideration
On Wednesday, July 18th rumors floated early in the day traded session that China had cancelled corn and soybeans. It didn't take place but the rumors were enough to push prices lower, most likely on long liquidation and profit taking. As I pointed out in previous reports, I expect cancellations to happen.
Throughout April and for the first week of May, China bought corn and soybeans day after day. At times the amounts purchased broke records. During April through the first week of May, December corn prices bounced around the $5.20 to $5.50/bushel range. November soybeans traded around $13.60 to $13.95/bushel for most of April and the first week of May. With December corn now around at $7.75 to $7.87 and November soybeans at $16.25 to $16.75 over the past couple of days, cancellations could show a $2.50 to $2.75/bushel profit on corn contracts and $3.00/bushel on soybeans.
Also in April and May, the US Dollar was at its lowest level, but now it recently made a high. The Brazilian Real has been losing to the Dollar during this time frame.
As they say, it isn't brain science to figure out, cancelling US purchases equates to putting big profits to purchases where grain is readily available and where the exchange rate favors the purchase. With trade agreements made between Brazil and Argentina with China, it is also a simple deduction that points the way to picking up grain in Brazil over paper profits in the US.
As I pointed out several times, in no way shape or form am I predicting where a top will be in corn and soybeans. However, there are enough concerns to tell me, if I produced corn, soybeans or wheat, I would use current prices to my benefit. I would not be putting all the eggs in the basket on the possibility of collecting higher prices for federal crop insurance averages in October.
Over the past few days, as I read commentaries, I almost felt as though I was having a Déjà vu experience. Last January and February you had to lift a lot of rocks to find a broker or analyst that suggested selling cattle, feeder cattle or hogs. A few even said it was a waste of money to hedge or contract. (You may recall, I got pretty steamed up when I read or heard it). A few commentaries suggested doing nothing for 2012, but hedging a small percentage of livestock in 2013. (As you may recall, I was at a full boil by then).
Right now, trying to find an analyst or broker suggesting to sell is not turning over a rock, but turning over boulders. It doesn't steam me up, but I am concerned out and out greed is taking over for too many producers. Using crop insurance as the total hedge is simply the wrong thing to do. There are much better alternatives.
The inverted market for 2013 and 2014 is screaming to be used for the hedger and speculator. As a speculator, selling January 2013 and buying the inverted carry for July 2013, or soybeans for 2013 and 2014 could be considered.
For a few weeks, I have been more than happy to stay out of the markets. Now, opportunities are presenting themselves. I won't try to pick a top, but I will pick away at opportunities.
For those of you that requested strategies and my recommendations, I do appreciate hearing from you. You should expect to get recommendations very soon. For anyone that wants recommendations or strategies, please email me at chris.lehner@archerfinancials.com or call 1.816.931.4512.
