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

High Marks

Today the markets eagerly anticipate an announcement from the Federal Reserve as it wraps up a two day meeting. The focus will fall on the full measure of proposed quantitative easing. Heading into the report, there has been little doubt that the Fed will take some easing measures and that the US dollar and metals markets will react. So far this year, gold and silver have made fresh highs, reigniting interest into the high marks of the past and the events that motivated them.


Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro

Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro

The fundamental focus for the last few years has been relatively narrow, falling on a handful of US dollar events and a broad picture of the global economic landscape. The housing and credit crisis precipitated reactions from the Federal Reserve that led to easing and a drop in the US dollar. Subsequent economic fallout including high unemployment and stagnant growth led some investors to the ‘haven’ of precious metals as an alternative asset. This has continued to bring some high price levels in both gold and silver.

The march to new highs in gold was nearly three decades in the making. In 1980, the price of gold topped $850 amid a climate of high inflation, high oil prices, and high geo-political tensions, specifically in Afghanistan. The price of gold tumbled following that peak, apparently bottoming out above $250 an ounce in 1999. The low came in as investors speculated that central banks would begin selling their gold reserves. Once the central banks of Europe signed their gold agreement limiting gold sales, the stage was set for a price comeback.


Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro

In the decade that followed, gold prices picked up steam, gathering momentum as geopolitical tensions began to rise and commodities prices picked up. Starting in 2006, the weakening dollar provided a likely catalyst for investors to move towards commodities. The subsequent price peaks in gold hit a climax in January of 2008 when gold broke that $850 price high. Each new high shook out some investors as profit taking ensued, but the market forged ahead to the $1,000 an ounce level, breaking through in March of that same year. After that, gold prices appeared to fall victim to the commodities exodus as investors began to focus on demand fundamentals and the potential for recovery. Plenty of stimulus was being poured into the global economy in an effort to restart the growth engines, and it appeared to have the potential to work.

However, gold came back after falling below the $700 level. Investment interest and demand, especially in ETFs, grew exponentially last year. That kind of hunger for the perceived haven of gold propelled the market back over the $1,000 mark and beyond. For now, gold has already managed to top $1,380, and there appears no shortage of analysts who thing the twin threats of inflation and fear could move things higher.

Gold prices have not stood alone in hitting fresh highs. Silver has also managed to break out, topping previous high marks. However, cresting the all-time peak in silver prices could be a little more challenging. The peak price in silver took place in the 1980s under the price manipulation of the Hunt Brothers. At that time, silver prices could have been faring reasonably well in tandem with gold as fundamentals like inflation and political tensions affected commodities priced in US dollars. However, the exponentially high silver spike above $50 had some help from the Hunt’s cornering the market. Once the chase had ended, the Hunts were bankrupt and many speculators suffered huge losses.

Finding a high mark in silver prices absent of manipulation, it would seem natural to take a look at the prices in 2008, when gold and other commodities were logging price peaks. In March of that year, silver prices topped $20 an ounce. This level was only recently breached again. Unfortunately, this new high comes as more accusations of manipulation come into play. CFTC commissioner Bart Chilton recently issued a statement that suggests they are looking into the potential that there were attempts to influence silver prices. (1)


Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro

Summary

There seems to be little doubt that the recent economic crisis and the reaction to the same have helped propel precious metal prices higher. Gold, as well as silver, have been the beneficiaries of renewed interest from investors. As a result, prices gained a great deal of momentum and hit fresh highs. Going forward, it seems that there is plenty of room for price action on both sides of these high marks. On one hand, the new peaks are likely to inspire intermittent profit taking. On the other hand, the bigger picture could spell strength and support for these markets. What it comes down to is the strength of the fundamentals behind the move. Price highs based solely on fear and manipulation face a greater challenge in finding support on the way down. Those are weaker fundamentals. Gold and silver prices would need to find strength in the possibility that investor and central bank demand for gold will remain vibrant and that the US dollar will remain in a pattern of competitive devaluation.

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1 http://www.bloomberg.com/news/2010-10-26/silver-market-faced-fraudulent-efforts-to-control-price-chilton-says.html

Gold and silver are no doubt subject to fluctuations, from the discovery of new and more abundant mines; but such discoveries are rare, and their effects, though powerful, are limited to periods of comparatively short duration. - David Ricardo