CFGAG News and Views           vol. 21        April 1, 2011

"There is a risk of loss when trading futures and options. The thoughts and opionions in this article are those of the author, and while believed to be correct, are not guaranteed as to the accuracy or content. Past performance is not indicative of future results, and each individual should examine their own risk capital carefully before trading."
 Another Big Surprise!

Yes, the March 31 report was a big surprise for those who were looking for higher corn stocks, as USDA came in about 170 million bushels below trade expectations in the quarterly grain stocks report. For those of us who had been watching spec longs liquidate corn positions, open interest in corn contracts falling, and nearby futures prices losing 50-60 cents per bushel in the week preceeding the report, it felt like the market was definitely "leaning" toward a bearish report, but got caught leaning hard the wrong way, as corn markets locked limit up on the open, and stayed that way through the close. Soybean stocks were also lowered 50 million bushels below expectations, but beans had rallied while corn was being sold off last week, and closed up about 38 cents in the nearby. Planting intentions were well anticipated by the trade, as corn came in about 400,000 acres higher, and beans just slightly lower than the average guess, while wheat acres were 800,000 higher than expected led by spring acres. Now that the ink is dry on these reports, we all want to know what to look for, and how to take advantage of these higher prices.

The bullish sentiment we spoke of in corn is alive and well, with some analysts looking for at least a test of the previous highs in old crop corn, which would be about 7.40 in May futures. We certainly can see that possibility, as short covering from margin pressure and possible fund buying back postions liquidated earlier this month could easily go onward and upward from there. As we always try to show both sides of the market, lets look at some things that might temper that move a bit:

1) Contacts throughout the midwest report ample corn supplies, with basis levels showing no sign of shortages yet. It is April 1, and new crop harvest starts in 5 months.

2) South American crop estimates continue to grow, in spite of the excess rains in some areas of Brazil, with Argentina corn now over 20mmt, and beans at 50mmt

3) China bean buying has been quite limited as of late, and there has been no confirmation of corn buying by China yet

4) Feed wheat is now very competitive with corn, and the wheat stocks were a little higher than expected

5) While the midwest has been cool and wet in the northern areas, with plenty of snow yet to melt, planting progress in the south is going well

We can argue forever about the acres situation, and what will actually get planted. Weather in the next 60 days will be the driver, as well as economic incentive. While last year we had a large amount of prevented plantings, we also had corn prices under $4.00. The late Earl Butz would argue that with these prices, we should assume "maximum plantings" of every grain, and being a student at Purdue in the 1970's, I learned to respect his teachings. We must assume that every effort will be made to maximize production at these price levels, both here and in every other nation as well. That said, we should expect very volatile markets that react to every weather forcast all over the world, with risk premium added until more is known. If weather is good this spring, I think we can plan on these acreage numbers growing some, with some shifting in some areas such as northern spring wheat areas possibly growing more beans.

From a price standpoint, we still believe money flow both into and out of our grain markets will be the most important factor. After the significant liquidation in grains by the spec community lately, we wonder if they will come back in with a vengence, or use this report as an opportunity to take more profits and move on? Watch the July/Dec corn spread, as well as the July/Nov bean spread carefully for clues. As this article is written on March 31 and posted April 1, we certainly want to see a strong close on friday, and then see if every small break is met with good buying support. If for some reason this does not happen, it may be time to get busy with some sales or option protection. We note that the high in the July/Dec corn spread not that long ago was about $1.35, and traded down to about 75 cents. The July/Nov bean spread has traded down to 17 cents after being over a dollar more, again, not that long ago. The market will be watching for evidence of "demand destruction", and until then, we watch those spreads closely for clues that we have reached that point.

For those wondering whether to sell into this rally or not, we stand by our previous statement that $6 corn and $13 beans are good prices, and now we wonder if we should put sell stops at those levels to protect some really nice cash flow projections. This is one "tool" in your marketing tool box besides the many option strategies we have outlined before. Simply put a "stop" in at a price you do not want to go below, and be prepared to margin it, defend it with options, or spread it if hit. You have the security of knowing that price is there, and can move the stop up, or cancel it if you feel the need to. Again, it is your crop and farm income at risk, and you have many ways now to protect something we have not seen at this time of year. We have no way of knowing if this is short term, or a price level that can be sustained over more than one year, but we do know that this level of profit is something special compared to years past.

From  the technical side, we have the following numbers from our computer to consider:
July Corn                Support                 Resistance
                                 6.43                      7.21                                                                     
                                 6.18                      7.48
                                 5.93                      7.76
July Beans                 13.14                     14.53
                                12.59                     15.13
                                12.02                     15.76

In conclusion, while the news today is very friendly prices, and we can go a lot higher, we all know how fast things can change. We remember the wheat market that was limit up in the day session, limit up on expanded limits in the night session of 90 cents per bushel, only to close down 90 cents the following day. We dont know if or when that could happen in corn or beans, but it does remind us to have our price targets in place and have the orders in, just in case. Look over your cash flow today, as I did after the close and ask yourself what this means in terms of real dollars and cents to your operation. We are all chomping at the bit to get out there in the field and plant, and I am confident that given any kind reasonable weather, we will do all we can to meet demand at this price level, because we are producers, plain and simple. Easter is late this year, many planters should be well on the way to completion, but we still pause that day to enjoy the blessings we have received, and hope for you and your family a blessed and safe busy season with time to reflect as well. Keep it safe, and keep in touch!

Mike Daube      888-391-6330
Allen Gard       800-205-1700