CFGAG News and Views    vol 16    October 1, 2010
"There is a risk of loss when trading futures and options. The thoughts and opinions expressed in this article are those of the author, and while believed to be correct, are not guaranteed as the accuracy or content. Past performance is not indicative of future results, and each individual should examine his or her own risk capital before trading."
"Another Surprise, or a Devious Plot?"
With the release of the September 30 Quarterly Grain Stocks report, once again many traders were surprised by the "find" of 300 million bushels of corn. It was interesting to this author that the days preceeding the report contained much discussion about how new crop bushels could impact the numbers and make it appear bearish because of the early start to harvest, almost trying to "spin" the results before they were even released. There is also much discussion about the government having a desire to "manipulate the nimbers" to make crop insurance payments less, and on and on. Lets be really clear on this one from our perspective: the numbers are what they are. When ever human beings are involved, there are error possibilities, and the market is simply too big and too complex to have any one entity able to control any outcome. Millions of people "vote" every day with their wallets begining at 9:30 am central time, and controling 50.1% of that vote is a very difficult proposition to say the least. We often get caught up in the hype, rhetoric, and spin of the "talking heads", searching for the Holy Grail of market news, only to find that the "spin" turned out to be the clockwise swirling of the toilet bowl.
We have for weeks been concerned about the seeming large amount of old crop corn around, as many clients in many states were reporting that elevators were jammed up with corn in August, and many farmers were hauling old corn even as harvest began. There were warning signs six weeks ago, but with the drought in Russia, emotion was high and fund money was piling in. We look back at the list of "red flags":
1) Basis steady to weak the entire year.
2) Elevators with plenty of corn on hand in August, more coming in than expected
3) Export shipments behind pace needed to meet USDA targets
4) Reports from local elevators of weak demand, no freight available, and no shortage of grain.
5) Even with last years quality problems, no shortage of grain.
It was hard for me to believe that if in fact the carry out on September 1 was just over 1.3 billion, that somewhere in the midwest we should have seen some "hot" basis bids, or a real shortage somewhere. Add the quality issue, and it just doesnt make any logical sense. If demand is as good as some believe, there should have been some narrowing of the spreads, but for corn and wheat, the spreads remained at "bearish" levels. Fact is, there is plenty of wheat in the world, and now we know there was plenty of corn as well. This is the main point of this article. We have found over and over that the cash market is where to look when in doubt, or when emotion gets kicked into high gear. We look at basis, and if it is not keeping pace with the futures, then we dont have underlying strength of demand to add fuel to the rally. Thats why the old rules of marketing come in to play and we review them below:
1) Futures high, basis wide, sell futures only, or HTA contract, set basis later
2) Futures low, basis narrow, sell cash and reown with futures or options
3) Watch spreads for "rolling"  opportunities of futures or HTA's
As for the next week, as we prepare for the monthly supply demand report on the 8th, watch the reaction to the report yesterday. Funds have a very long postion, and we have until the end of November to move out of those longs, either rolling or liquidating. I have never seen a crop rationed in the fall so if yields are going down, and demand is very strong, we should see some strength in July 2011 verses the December 2010. We also look to December 2011, and wonder what it will take for farmers like you and I to plant more corn acres. My guess is the relationship between December 2011 corn, November 2011 beans, and July 2011 wheat will have to change somewhat, as we are already hearing about higher nitrogen prices, and the disappointing yields on some corn on corn this year will have to be offset with price incentives. Keep that in mind when making plans for next year, and as always, call us for some ideas or discussion on those ideas.
In conclusion, it has been a great start to the harvest, actually some folks have finished up and are getting ready for next spring. As I look back to last year, we didnt start corn harvest until the first of November, and never picked an ear under 25% moisture. We need to look at the opportunities and blessings of the day, and do our best to keep the spin doctors, emotion players, and overall negative factors out of our heads when making decisions. What is profitable for you farm may be very different for another, so making decisions based on what someone else is doing doesnt always work. Do what you want, when you want is the great gift given us by previous generations sacrifice, and here we are very grateful for that chance. Keep it safe, and postive, and call us when you get a break.
Mike Daube    888-391-6330
Allen Gard     800-205-1700
Ron Reed      877-304-2460