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Markets to Watch
Look for opportunities in corn & wheat
The combination of late planting and slow maturation in the US corn crop resulted in a full-fledged October weather market in corn last week. In this case the "weather market" came on a freeze warning in the Northwest Corn Belt that is expected to trim 100-150 million bushels off the most optimistic private forecasts of a just a week or two ago. This would still leave the corn market with adequate stocks of somewhere near 1.5 billion bushels at the end of the 2009/10 crop year, all things being equal on the demand side.
Of course, all things are not equal in terms of 2009/10 demand, and ethanol may turn into the real change factor. This was signaled by the latest monthly report on ethanol production from the Energy Information Administration. The EIA showed a surge in ethanol production in July to record levels. This implied actual corn usage of a record 347 million bushels that month. If this high rate of usage continued into August, it would have added 60 million bushels to the USDA's previous projection of 3.675 billion bushels for ethanol use during the 2008/09 crop year. (EIA reports lag by two months.)
The USDA's September 1st Stocks-in-All-Positions report seemed to confirm that this is exactly what occurred. The report pegged stocks at about 45 million bushels below trade expectations but slower feed usage by about 15-20 million accounts for the usage.
The accompanying charts show the monthly corn-for-ethanol usage rate along with the monthly rate of production for ethanol itself. The latter chart highlights the sharp uptrend in US ethanol production in recent years, and this is where the real change in demand for 2009/10 is likely to come. This starts with the latest USDA September projection for 2009/10 corn ethanol usage at 4.2 billion bushels. The big July corn-for-ethanol usage number we mentioned earlier has already reached to very near the average monthly rate needed to meet the 4.2 billion bushel usage projection for all of 2009/10. This means that if ethanol production were to flatline at the July level for the following 13 months, we would come in near the 4.2 billion ethanol usage projection. However, the steep long term uptrend in actual ethanol production shown on the second chart makes that scenario seem highly unlikely. It is far more likely that this uptrend will continue into 2009/10, resulting in much higher than expected corn-for-ethanol usage. (Note to readers: the USDA released its Crop Report and Supply/Demand reports on October 9th, after we went to press.)
Some analysts have already bumped their corn usage numbers for ethanol to as high as 4.6 billion bushels for 2009/10. This is considered high at present, but we would not rule out a number that high or even higher when all is said and done. US ethanol capacity is already far above that level, and some traders are talking about possible US ethanol exports to India and Europe. In addition, the allowed blending rate might increase, which could increase ethanol demand even further.
If we do see a loss of 100-150 million bushels of corn from a freeze on Oct 9-11 and we add another 200-400 million bushels (or more) in ethanol usage for 2009/10, this could push 2009/10 ending corn stocks down near 1.1 billion bushels. That is very manageable and could easily support a price of over $4 in the nearby corn contract in 2010. If this comes in conjunction with a continued slide in the dollar and the inflationary surge that so many Americans fear, the pace of imports could also surge as buyers around the world try to stay ahead of the next wave of food inflation.
If you'd like to receive daily information on these markets, click here.
Suggested Trading Strategies:
- Buy March corn/sell March wheat at 125 1/2 cents or better premium the wheat with an objective of 75 cents premium wheat. Risk 19 cents on the trade.
- Buy March corn futures at 352 1/2 with an objective of 415. Risk the trade to a close below 333.
If you'd like to further discuss these strategies to determine the best execution strategy for you, contact us.
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Industry News
Demand for Physical Commodities Increases
Last week a number of commodity markets were lifted by a resurgence of fund buying that seemed to be coming from long-term investors. With several commodity fund managers reallocating investment Dollars from US oil markets to foreign energy markets and also reducing their investment in some commodities and raising their allocations in others, it would certainly appear as if the "funds" have begun to maneuver around the anticipated regulatory changes. With some managers also moving into commodities that previously hadn't seen much fund activity, it would appear that the bullish attitude is spreading towards all commodities. Given the persistent rise in inflationary expectations, we suspect that demand for physical commodities will begin to climb the way that demand for derivative instruments has.
With the nature of the financial crisis forcing many key central bankers to promise to "leave interest rates at extraordinarily low levels for a long period of time," those who are supposed to control inflation seem to be doing everything they can to create or foster it. Just to add to the upward bias in commodity prices, the markets are also likely to face an ongoing and perhaps historical slide in the US Dollar.
In addition to the US President at the UN seemingly calling for a new world economic order (that would seem to mean old leaders becoming followers), the markets also recently saw rumors that some Gulf oil states were working toward oil contracts that were priced in a basket of currencies instead of in Dollars! Even though those rumors were denied, it is clear that in the past Russia, Iran and even the Euro zone have in the past pushed for a diversification in the currency pricing of oil.
In the end, promises by the US Federal Reserve to leave interest rates at low levels coupled with exploding US Government budget deficits look to keep up the pressure on the US Dollar. Already markets like crude oil, gold and cocoa are seeing a tremendous amount of support from the sagging Dollar, but it is also clear that many traders and investors are becoming more interested in piling into commodity markets that would be expected to appreciate in the face of developing inflation.
Until last week's the freeze threat for portions of the US growing area, there were few supply-side concerns supporting the commodity markets. We had already traversed through the brunt of the hurricane season without a serious threat against the oil sector. As a result, many commodity markets have little in the way of uncertainty or inflation factored into their prices.
At the depth of the recession, we maintained that many commodity markets were capable of sustained recovery rallies because of their ability to govern their supply, but in the wake of surging investment demand or as they call it in the gold market, "implied demand," the amount of available commodity supply could tighten with only a modest improvement in the economy. (We have to wonder what commodity prices would be doing if the outlook for the economy was better.) In the mean time, we think that a host of "small" markets like cocoa, cotton, zinc, palladium and orange juice will, over the coming weeks, catch an anticipatory inflationary run, but we also think inflation will be a bullish bug that can be caught by almost every commodity market.
Keep a pulse on the industry and access more industry news.
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Use technical signals (charts) to maintain discipline.
The vast majority of traders are not emotionally equipped to stay disciplined without some technical tools.
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Download Your Free Grain Trading Starter Kit
Your comprehensive starter kit will include over 85 pages of professional options trading guidance and education.
Designed to serve as your complete grain trading guide, the topics covered in your kit will include:
- Introduction to the grain markets
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About Daniels Trading
Daniels Trading is a relationship-focused commodity futures brokerage located in the heart of Chicago's financial district. Founded in 1995, we have a history of providing effective and reliable trade executions to both individual traders and institutional investors around the globe. In addition to our focus on relationship and execution, Daniels Trading is a leader in providing ongoing education opportunities and resources for our customers.
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