Friday saw a messy session with wheat and bean oil leading the way higher on relationship buying ahead of the report. Oil share widened on Chinese demand talk and possible production concerns coming out of Indonesia following the recent volcanic activity. There is no wipeout talked about but the light ash cover is coating leaves restricting photosynthetic activity. This is a concern for total production in a time of tightening global food oil supply. Wheat recovered from chart lows versus corn with protective buying seen in options. The WZ 750-800 call spread was bought all day with the WZ 750-775 call spread bought a couple thousand times. The most interesting play is in corn options with paper buying the CH 10.00 calls, the CK 11.00 calls and the CZ11 10.00 calls. This is obviously a gamma and slope play with delta a mute point with calls this far out of the money. Outside of this the market is seeing puts bought in bean oil as players start looking for the downside technical correction. Owning put vol covered is a smart way to play the put slope inversions with long futures helping counter the upside delta move. All in all a very supportive week with the market inching closer to key strike prices as the Dec option expiration approaches. Heading into the weekend the trade is asking itself, what comes next? What happens if the USDA lowers corn yield below 154? What if John Macintosh is correct and corn yield is 148? Is China’s recent absence from the bean export market the first piece of evidence that they are now covered through March? Will the USDA raise bean exports 50 million bushels and if so, where do they get the extra beans? Do they borrow from the “residual” sludge fund or are they going to raise the yield? Bean ending stocks, though larger than last year, are still too low to be comfortable making the trade jittery.
The weekend offered little fresh information leaving the trade erratically choppy heading into the November report. Early strength was seen in the wheat market with this trade seeing a 20-cent range overnight after weekend weather did not offer any relief to the US plains or NW Australia. The macro situation overnight was slightly weaker with nothing dramatic but a slight contraction erased early overnight gains in grains. All markets ended slightly lower with bean oil losing the most following a contraction in palm oil. The USD is gaining versus the Euro on growing concern over Irish debt levels with this looking to continue into the day session.
The day ahead of the report is usually a protection day. This is when traders with naked length or shorts look to buy options as an insurance policy for immediate movement. Look for hefty action in Dec options again today, following the action the market saw on Friday. With the information currently at hand the trade is looking for a drop in overall corn yield, no change to a minor increase in bean yield with world wheat numbers expected to fall again. Overall this report should offer plenty of opportunity for the trade to change their bias if they want to. The “spin” following the trade will be interesting in that pundits are polarized at the momentum concerning the actual impact fundamentals will have versus the impact of the USD. I am a fundamental trader so I feel this will be fundamentals will win the day, if not tomorrow then the market has to wait for the final numbers on the WASDE report come January.
The market looks to open slightly lower to start the day with a weaker crude market and a sizable (100+) move in the USD over the Euro. All factors look bearish heading into the report but do not get enamored with bearish sentiment until we get tomorrow’s numbers behind us.
I am currently in Cartagena Colombia at an international conference of wheat producers and consumers. Following the conference I hope to have a better idea of what the actual world producers are looking for concerning protein, production and overall producer sentiment. From early indications I estimate that the world crop will be big but overall quality is a concern making the wheat versus corn spread a feature following the WASDE report.
World production numbers are going to be closely scrutinized. Focus on Argentina, Brazil, Australia, Russia and look for possible changes in the Chinese numbers. The USDA is currently 16 MMT above private forecasters concerning Chinese corn production so I think this a possible bomb about to go off. The direction of the impact following the grenade is yet to be seen but I have to believe that the upside is the path of least resistance for corn and all agricultural markets due to growing world consumption and questionable weather patterns. The La Nina effect is stated to be the largest in 70 years. If this is true, the Latin American crops are in for a tough struggle as planting approaches completion.
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