In a previous report, I wondered why US grain producers are calling and writing about old crop corn and soybeans and why they seem totally unconcerned new crop grains on the futures market have been heading lower. When I ask about new crop futures and cash prices, it still surprises me how very few have an idea what is happening to their local cash markets and why basis is extremely wide.
As I write, Thursday May 16, the spread between July corn and December corn is close to $1.20 with December under July. The difference for cash corn is the difference between night and day for old crop grain and new crop. Across the Midwest, it is common to see July cash bids 40 cents/bushel over the July futures. For December 2013 cash corn bids, it is common to see cash bids minus 40 cents/bushel under December. It means July corn is near $6.80/bushel for corn held in storage and for corn being planted, a corn price for fall delivery around $4.80/bushel.
Of course, bids by river terminal markets and close to processors are better and bids far from terminal markets may be wider, but the point is if a producer is holding old crop, they are likely to get a price for July corn near $6.80/bushel or better and for new crop, a price if futures are around $5.30/bushel, cash prices are $4.90 give or take a few cents. It is time to face what is going on.
Supposedly, US farmers have very little old crop grain to sell and we know very little new crop has been sold. If farmers remain concerned about old crop grain, does it mean there is more old crop yet to be moved? Does it mean producers believe new crop will rally and cash basis will narrow? OR does it mean, there is a lot of hope new crop will rally and ignoring cash markets and falling futures are a method to make the cash to future spreads narrow for new crop.
If farmers in Brazil hold 20% to 25%, of their corn and soybeans, Argentine farmers store 45% and US farmers refrain from contracting, will buyers this fall pay higher prices?
Unfortunately, it probably means there is a lot of hope. Calls and emails from producers run far more to the bullish side than bearish. The calls I received from readers in March were concerned subsoil moisture levels were too low. Now the same people are claiming late planted corn and cold weather in April and May will reduce yields. The farmers calling know better. They know the heat units during the summer and moisture throughout the summer make the crop.
Also… very few bullish traders are looking at the rally in the US Dollar Index and the falling Australian Dollar, Euro and Brazilian Real and a Japanese Yen falling almost 21%. For the past 2 ½ years, US agriculture could depend on Japan, Mexico and China. Why don’t bullish traders want to look at trade agreements Egypt, China, and Japan have made with FSU countries. Few bullish traders look at cancellations of soybeans. Exports for new crop compared to the previous three years of strong exports are dropping.
To insure new crop wheat sales this summer, Russia brought old crop wheat out of reserves over the past few weeks to meet demand and to keep buyers. They are working to keep buyers. Foreign buyers do not have incentives to buy US commodities and storing crops when crops around the world are available is not bullish.
I get a big kick out of all the assumed bullish talk with shipping delays from Brazil and how Argentine farmers have only marketed or contracted 45% to 50% of crops. The longer it takes to move grain in South America, the more bearish it will be for US new crops. Is there some reasoning that grain in Brazil and Argentina will remain in storage? Currently and from now on, it really makes no difference if shipments are slow from Brazil. Even if it has been taking more than 50 days for Brazilian grain to reach China, with the shipping lag over the past two months, it now means grain shipped two months ago is reaching destinations. If it was the reason as some believe, May grain futures rallied, it won’t be a justifiable reason for July to squeeze August soybeans or July corn and wheat squeezing September futures. What was once delayed, will now take more months to move.
The truth is US grains are too expensive compared to worldwide grains. The US Dollar Index is making a new move to the upside. If I was teaching technical trading, the June 2013 US Dollar Index chart would have to be a chart used. As one client wrote me, “It is picture perfect.” A strong dollar is not bullish for exporting US commodities. A strong US Dollar allows the US companies to buy commodities from foreign buyers. Beef imports from Brazil and Australia are being ground up going to fast food chains and onto grocery shelves. US hog and poultry firms are taking shipments of grain from South America and Canada.
US DOLLAR INDEX 2:00 PM CENTRAL May 16, 2013 CHART by eSIGNAL
When markets rally, buy put options, or sell futures. It can’t be easier. If you aren’t convinced grains
and livestock will fall, sell futures and buy call options.
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Felix (Kyung) Seo