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10-25-2018 10:56 AM - edited 10-25-2018 11:09 AM
Depending on whether you hedged some of your production on the run up to $3.785 during the first two weeks of October, the news is either good or bad for you today. Corn prices are getting hit pretty hard today, following the trend that began once the sun starting shining over corn country a week or two ago. Presently corn futures are down over 6 cents, trading in the $3.615 area. What's more important is the price is very close to the $3.602 level that was the last bottom before going up to the highs of mid-October.
Further troubling is that the price is getting monkey hammered worse today while the stock market is doing a bounce off recent selling than it was when stock prices were falling. That tells me that the corn price is moving out of its own dynamics and not in sympathy with other markets. That's a rough pill to swallow if you have production that has not been even slightly hedged yet.
So where do we go from here ? Well, I will say that the market is short-term oversold even if the longer term picture is looking quite bad. I think that while there is a good possibility of a small one or two day bounce off the $3.60 level, bottom line is we will have to go down through it before we have any chance of a sustained move to higher highs than we saw in mid-October. As we have seen most of this year, the only time Open Interest is rising is when prices are falling, and that has been true now since the $3.785 top was hit.
So, while I am not now looking to add to my short position, or advise anyone to sell production at the present levels, I still advocate selling at levels I have stated in the past, if we see them again. Which means that if we get a bounce during the next few days up to the mid-to-upper $3.60s, it would make sense to play catch up if you have not sold anything yet or if you are below 20% hedged for your expected production. Remember the original plan was to get 20% hedged in the $3.60s and another 20% above $3.75.
Now what about if the market keeps going down ? I think its pretty simple, there is a major support point at $3.545 from back in late September, when that level held the market immediately ran up the next day to the mid-$3.60s. If that $3.545 level breaks, I expect an avalanche of supply hitting the market, as producers who thought there was a bottom in July and September and held their production off market then panic to get it sold, fearing prices will be going to new lows. I hope that the market goes up one more time before making that swan dive, and I think the chances are better to see a move back to $3.65 or slightly higher as opposed to a move through $3.54.
Bottom line is that the bearish trend is trying to re-assert itself. As the last harvest report said for corn, there was not a lot of damage and the harvest is still proceeding faster than in most prior years. The selling we have seen the last couple of weeks I think has been by producers or their coops who decided to sell once the sun came back out and they saw the crop was in better condition than was feared. However, the volume in the market has not been all that great even though Open Interest has risen. So there probably is one more upswing in prices to levels better than today in order to place production or get short in the futures market.
So, here's the way I am playing it :
- I will sell some more, maybe 10% of my total allocation, in the $3.65-$3.70 area if we get a bounce to there from the $3.60 or slightly below area.
- If we break above $3.70, I will expect a move back to the $3.85 to $3.95 area, where I will sell enough to be short 90% of my targeted allocation. (I am about 50% short now of that target).
- Finally I will sell the last 10% of my target if we trade slightly above $4
- If we break down through $3.54 I will sell 20% more of my targeted allocation, leaving me short 70% of target..
- I will probably cover half of whatever I am short at the $3.29 area, depending on how the market and charts look at that point.
The market is at a dangerous area right now. A hard break down without a bounce means there is an avalanche coming, and I think we could see prices get pounded really badly. However if we do bounce, depending on the volume and breadth of participation, we still could go to new highs for this correction that began in September. That's why this is a dangerous area, the market has the potential to go either way, maybe by a lot. So for right now keep the bin warm and the kernels dry, but be ready to do something regardless of whether prices rise or fall from here.
That's how I see it today.
10-25-2018 12:01 PM
10-25-2018 12:54 PM - edited 10-25-2018 12:56 PM
As a matter of fact, I have received an invitation to come and work on a farm for a summer, and I am thinking about doing it. Would be a nice change from what I have done for most of my life, a real learning experience.
As for the "bs prices", ultimately the market trades based on supply and demand. Even for the smart traders who don't work on the farm, when we short or buy a futures contract we at some point have to cover that position because we surely cannot make delivery on a short contract and we don't have the space in the backyard to store 5000 bushels of corn per futures contract. So even if a big fund tries to move the market in a way contrary to the underlying supply and demand for the product, at some point close to the delivery date those positions have to be closed and the market moves to where it would be based on the supply and demand.
Remember another thing, traders have no inherent bias as to the direction of prices. We can make money in up-price markets as well as down-price markets. We don't care which way it goes. So don't think for a minute that any traders are trying to depress the price of your farm product, because we have no vested interest in doing that. Besides, the markets for most agricultural products are so huge that it would be very difficult for any one fund to move the market that much, especially is the supply demand dynamic is working in the opposite direction.
Perhaps if the big end buyers of farm products want to reduce prices they pay, maybe they have trading desks that may engage in speculative trading to push prices down when they need to buy. I doubt it happens because it really is not what they are in business to do, and also because the amount of money they would have to commit to such an exercise would be too great a risk for them, their Directors would never stand for it. But the bottom line still remains that if they sell contracts short, they will have to buy them eventually, so the price is going to wind up where the supply and demand dynamic dictates, not where any trader thinks it should be at.
Remember too that the downtrend in corn prices has been going on since 2012, and no traders or trading firms could maintain such a trend for that long a time period. The reason corn keeps falling in price is because - as I have written here time and again - corn farmers are victims of their own success. They have done a remarkable job of keeping the world supplied in corn, probably too good a job considering that the price keeps falling. That indicates there is more supply than demand, and when that occurs prices fall. There are a lot of reasons why there is more corn than demand for it, and many of those topics have been and will be discussed in this forum. But in the end, the price of corn will not go higher until one of two things happens : either the supply that is presently being grown each year in the US and elsewhere has to be reduced, or inflation has to gallop higher like in the late 1970s. Neither of those things are happening now so the price continues to be in a bear market.
From a longer term perspective, again as I have written here before, corn above $3 a bushel is an anomaly. Corn traded for twenty years - 1986 through 2006 - between $2 and $3 a bushel, so it actually has defied its long term price band for the last decade when it has traded above that band.
I would agree with you that perhaps the USDA might not do a good job in its surveys and estimations except for the fact that the private companies that perform similar surveys contemporaneously with USDA often find the same results. No traders take the USDA surveys as the final word, we look at all surveys and all other information available to make trading decisions., But as it pertains to crop reports, when the private surveys agree with the USDA surveys, then the case is pretty strong that what is being reported is as correct as any report is going to be.
When I traded bonds exclusively years ago, the week before the monthly employment report - a report that has the potential to move the bond market sharply - I used to walk the malls looking for help wanted signs in order to determine what the national employment report was likely to say. I figured that what goes on in one part of the country was the same for all parts, Turns out it was not a good indicator...as are most anecdotal stories from small sections of the United States. Look at the harvest reports, some States are reporting a lot more progress than other States. So the farmer in a State where the corn is still in the field may think that the supply coming to market is going to be weaker than expected, while the farmer in a State where the fields are empty of crops might think there is an abundance of supply coming. Bottom line is that no one person in one State is going to know what the situation is for the entire country. That's why we have private surveys and we get reports from all of the States. So if you think your information driving around your area is correct when it is at odds with the national surveys, you're probably wrong.
I have written extensively here about some innovative ways that farmers can increase their profitability even in a world where prices are declining and costs remain the same or increase. As I see it the problem is not that markets are wrong with how they are pricing corn, the market is always right because that's where prices are set whether you like them or not. That being the case, the small farmer has to find other ways of reducing costs and maximizing revenue to offset the oversupply of corn throughout the world. Banding together to buy in volume so that you have some control over prices is one way, putting a good hedging program in place to enhance the price you sell your corn is another, getting the government to invest in a land bank to lower your land costs is a third. Those are a lot better solutions than complaining that the market is wrong. You can't change the market but you can change your business practices to adapt to the market. That's where the real "balls" come into play, are you up for the challenge ?
10-25-2018 12:58 PM
just relevant advice.
I deal with a lot of poducers and end users... none of them employ a market advisor.
I do a fair amount of profit analysis. Market advice is seldom a consistent profit creator.
Few market advisors can offer consistent above average results.
10-25-2018 01:05 PM
Occasionally you find something valuable in that sand. You just have to know where to look, and then take the time to look.
How much homework do you do in finding good advisers who have a proven track record of predicting where prices for your product are going ? Its as important to your business as anything else you do, yet I'll bet you spend less time on that task than most every thing else you do in your business. But then you complain that there are no good advisers.
Success comes before work only in the dictionary. Spend the time to find a good adviser with a proven track record, you'll probably find that you should have looked a long time ago.
10-25-2018 01:07 PM
Well there are a lot of hedge funds making millions of dollars trading corn because they have excellent traders who can see price changes before they occur. And I know from experience that there are a lot of good brokers and advisory services doing the same thing. Maybe you should try harder in your search, they are out there.
10-25-2018 05:04 PM
10-25-2018 06:40 PM - edited 10-25-2018 06:42 PM
Do you buy your supplies through a cooperative buying agency that pools together orders from thousands of farmers to achieve volume discounts ? Do such cooperatives even exist ? Do you hedge your expected production by selling forward or hedging using futures contracts whenever the market makes a significant (~50+ cent) upward correction to its perennial six year downtrend ? Such as in May of this year when corn popped its head over $4 a bushel, or even in the last few weeks when prices rose 45 cents off their lows of the year to date ? Did you at least try to refinance your farm during the last few years into a fixed rate mortgage at the lowest long term interest rates since the 1950s ? Have you developed relationships with local end users of your crops so you can sell to them directly and save some of the basis cost you lose when you sell to the local middleman crop dealer ?
Maybe you did all of these things, but my bet is many did not. I hear it all the time around here, how these ideas won;t work and how I don't know what I am talking about. Yet the funny thing is that all of these opportunities are available to small and big farmers alike, and you can bet that the big ones are doing it. I know that ADM and Cargill sure are, I see their orders in the corn futures market, and I see the balance sheets of other publicly traded farming companies so I know how their debt is structured. So when you say you're trying every possible way, measure that statement against practices that are common in the big farm businesses but not in the small farm businesses...then you will know if you are doing all you possibly can.
btw, I am not saying this as a form of criticism, but rather as a source of suggestive ideas.