Grains Review on Jan 13th

Calls: Following WASDE the beans and corn trades touched limit twice before backing off slightly on the close. There was plenty of selling into the rally early with front end corn vol dropping by a whopping 18% to 34% basis Feb. March dropped by 6.5% on the day due to a lack of follow though once we touched limit. Also, this report offered a great exit for entrenched longs looking for an exit early in the year. The report offered no momentum for wheat after raising world stocks leaving the trade in the dust as compared with row crops. Outside momentum helped all session with talk of an Argentine farm sector strike starting on Jan 17th and running for 7 days. This is in protest of changing export parameters for corn and wheat. This is another brilliant political move by Kirchner that I think will blow up in her face. Bull spreads carried the day in corn and beans with the N/Z and N/X (beans) widening on the day. Paper was an aggressive seller of the N/Z 100p CSO for 20-cents. This is a bullish play commercials should love. Overall it was a day of many exits with few fresh positions put on. The strangest and most interesting one was in Beans with ADM buying 3,000 SN 23.00 calls for 8-cents. This smells of fund business going through a commercial. Heading into the afternoon, the trade is waiting for further word concerning the Argentine strike possibilities with confirmation seen late in the day. The strike is a no selling stance by farmers for corn, beans and wheat between Jan 17th-24th. This helped the market into the overnight with corn continuing to lead the way with oil losing to meal but this looks short lived due to production problems in Malaysia and India looking to eliminate their palm import tax. Heading into the day session export sales were nothing to get excited about and macros are having only a minor impact so far with both the Euro and crude chopping on either side of unchanged. This is a big pullback for the Euro so watch this factor closely.

Beans are called 6-8 Higher to start moving above the daily contract high and into no man's land on the weekly chart. The only comparative year is 2008 but I think the market actually has a major world production and consumptive problem. Indicators on the weekly chart remain in the upper end of the range with no overt signs of weakness. Corn is called 8-10 Higher breaking above contract highs with indicators turning positive following a week long pullback. A perfect picture for bulls, I think. Wheat is called 6-8 Higher holding the most upside ground to gain. There is nothing to stop the wheat except a lack of excitement. I favor KC and Minni over Chicago and ride this horse all season long. Meal is called 2-3 dollars Higher breaking above contract highs yesterday and continuing this overnight. There is no reason to be bearish from a technical standpoint. Indicators are at the upper end but they have been for weeks. Oil is called Flat/Mixed looking for momentum for crude and palm oil. A break above 59.10 is needed to spark fresh interest.


Fundamental: Argentine weather is looking at bit wetter through the weekend with the southern and central regions favored over the far northern regions. BA and surrounding areas look to receive .50-1.00" with 70% coverage through Monday. This will help overall prospects but the north remains too dry for anyone to be comfortable. Brazil remains in good shape overall with only the far south of any concern at the moment.

Open interest shifted as follows: Corn +27277, Beans +12701, Wheat +3633, Meal +8310 and oil +9485. Rebalancing is a major factor right? I feel the population of new ETF's and fresh allocations from CTAs is the major factor. Add commercial fund money and this looks to continue, not abate. Commodities are a hot topic that will continue to garner media attention potentially pulling more money into the trade. It's a beautiful circle.

China bought 40 TMT US bean oil yesterday for second quarter delivery.

Pakistan has sold between 200-2500 TMT of wheat to Bangladesh and Myanmar. This is their first sales in three years due to floods and drought ravaged crops. This is a mildly bearish impact but Pakistan will not export to anyone not abutting the country so the world impact is minimal.


The 6-10 day maps continue to show below average temps in the Midwest but there is ample coverage following the recent snows to cause no worry. The worry still lies in the HRW regions with no precipitation expected with the current 3-4-days system moving through the northern half of the US. This only adds to woes for farmers in that region. The trade impact is minimal today due to this being a known factor but it offers no relief for shorts nor any threat to those long KC versus CHI.

Jordan tendered for 100 TMT Hard milling wheat. Bad timing I think.

Following yesterday's WASDE report the corn stocks to use ratio is down to 5.5% (Thanks MaryAnn). This is shockingly low forcing more and more corn users to sweat against shorts July forward. If Argentina continues to show problems I believe corn has no choice but move higher due to world supply concerns. The corn carryout at 745 million is the lowest in 15 years...want to get short this? I don't.

Palm oil traded 44 Higher overnight on production concerns. Couple this with India talking of eliminating their palm import tariff and you can start to paint the tight world situation that I talked about in the preWASDE report. The US is swimming in oil but the world is not, the world will win.

Talk has Chinese crush margins back to even and possibly turning positive shortly. This is a major swing from the talked about 20/tonne loss just a month ago.

Export sales came in as follows: Corn 439.2 10/11 and 68.3 11/12 with 613.7 TMT shipped. Beans 495 10/11 and 180 11/12 with 950.2 TMT shipped. Most of the sales and shipments were, of course, to China. Wheat 147.3 10/11 with 27.9 11/12 with 613.7 shipped. Meal 26.2 TMT sold with 278.2 shipped (none to China) Oil 7.5 TMT sold and 57.2 TMT shipped with 29 TMT heading to China.

Overall disappointing but the trade was still in holiday mode. I look for these numbers to pick up dramatically in the coming weeks.

Options: Yesterday the market learned how volatile cereal options can be with an amazing drop of 18% in CG options. This was due to a lack of follow through following WASDE with March taking a 6% hit now sitting at 39%. May was down 3% lower with deferreds down about 2%. This is a solid drop but still expensive enough to make buying it scary but I would not sell any vol. If you want to own vol, look to beans. Following yesterday's drop, SH vol is down to a scary low level of 31%. This is 8% under corn or wheat in March with July sitting at only 32%. I like looking at owning upside calls in beans and straddles with vol ownership advised. Corn bulls may want to simply buy calls or invert 1X2 call spreads looking for an explosion. There is no slope so buying call spreads is not advised.

The following chart includes my observations:

***chart courtesy Gecko Software
Past performance is not indicative of future results.

MACROS:Are mixed but support from a surging Euro following good bond sales in Spain and Italy helps the upside momentum. Crude remains choppy with metals on the sideline so far. Cotton is 200 higher with sugar inching its way higher helping even more.

Gold is trading 4.20 Higher sitting at 1,390.00.
Crude is trading .20 Lower sitting at 91.66 as of 8:25 CST.
The Euro is .0148 Higher against the USD trading at 1.3276.
The Yen is .22 Lower against the USD trading at 82.74.

Daily Wisdom: A peace is of the nature of a conquest; for then both parties nobly are subdued, and neither party loser. - William Shakespeare

- Matthew Pierce, Grains Guru