Allendale Wrap-Up 1/4/2010
Corn: This is the week that the grain markets have been looking forward to. This morning started exactly according to plan with corn running up and taking out the $4.25 resistance that has held for some time. That is where the disappointment began though. Upon breaking the $4.25 level the market was so excited to find stops that it only traded a penny and a quarter higher to make a high of $4.2625. That was the first disappointment to being bullish today. As the day moved on, the buying dried up and what started with good volume buying ended in lighter volume setback. It actually had the typical signs of fund buying. Large buying in the morning, then when the big buy orders took the sidelines, the remaining sell orders took over. This big fund rebalancing is not supposed to begin until Friday but there is no rule to say the fund buying can’t get an early start. We will have to keep a watch to see how much of the buying today will be attributed to the funds. As stated last week, just how often do the funds follow what is expected of them anyway? It would make sense for them to be here buying early so that when Friday comes around they at least have a decent start. Allendale has sold 50% of 2009 production to the cash market for March delivery. Our 2010 production level is a moderate 25% hedged via December 2010 futures. We do not recommend further levels at this time. Producers who are aiming high on big price expectations should be prepared with a backup plan of putting on slightly lower hedges if this market starts to turn lower. Either way these are good levels to work on light sales at. Let’s stay excited about the possibilities from the funds this week and be ready to pull the trigger when the time calls for it. If you have a target in mind, then aim for that should a fund buying spree come in but be ready to change the order quickly if less than expected support occurs.
Soybeans: With a strong start followed by weak follow-through support this market looks concerned once again. This buying in beans has support from strong recent sales and crush but not as much as recent gains would suggest. Once again that makes this market technically overbought. Fund buying is not supposed to be nearly as much for beans, as expected in corn. It is quite possible that a setback in this market could come swift, especially if China moves their purchases elsewhere which is always possible. Positive continued exports have continued to exceed expectations making the government’s objective for sales relatively easy to reach now. Let’s remember that when beans broke resistance of $10.80 to start December there was not much follow through buying to back it up. Should upcoming fund buying break the $10.80 resistance again, it will look much more like a sale than a level to buy looking for a run. We want to take a similar approach to hedging beans with the fund buying but need to be very alert to pull the trigger and change price should the support fade. Allendale has sold all 2009 production via the cash market; 2010 production is hedged a moderate 25% via November 2010 futures. Allendale does not recommend further hedges beyond that level at this time. Producers who would not to do futures may work on an option strategy such as simply buying a put or a three way position. One example of a three way position is to lock in a $10.00 floor by buying the $10.00 put, selling the $12.00 call, and selling the $8.00 put. One idea for traders, which is not a hedge, is a bear spread. If funds sell this market then March will fall faster than November. Applying a bear spread (selling March and buying November) may be a way to take advantage of this.
Wheat: This market has had nothing but bad fundamental news for the past year and a half or so. The first signs of responding production will come from the Winter Wheat Seedings report on Jan. 12. We expect to see a 1.9 million acre drop in winter wheat plantings. Technically, this market has taken out recent resistance which will leave the door open to a move higher in near term trading. This coincides well with the expected fund buying. March Chicago wheat now has potential all the way to $6.05. With the ease in which the funds move this market it is not beyond expectation to think that we could go even higher. Until something changes in world stocks any move to levels near $6.05 should definitely be seen as selling opportunities.
Ryan Ettner is a registered broker and grain analyst at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com