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Calendar 10 Administration Modules 11 FAQ 12 Members List 13 News 14 Search 15 Sections 16 Stats 17 Topics 18 Top List 19 Web Links Who's Online We have 1 guest and 0 members online You are an anonymous user. You can register for free by clicking 20 here * 21 The Hightower Report (Corn) Posted Feb 06, 2003 - 02:00 PM 22 Send this story to a friend Email this to a friend 23 Printer friendly page Print this story 24 Economics The longer-term impact of the declining US dollar, the impending El Nino weather ahead, the projected tight ending stocks level and the prospects for the coming year suggest that the downside may be somewhat limited for corn prices into the early spring. This assumes the USDA demand numbers are close to accurate. A general uptrend in commodity prices, some indications of "food" inflation and indications that the world economy, and especially the economies in Asia, are growing rapidly are all factors which indicate solid demand for feedgrain ahead. In addition, a return to profitability for the US livestock producers and record ethanol production in the past several months are other solid demand indicators. If this trade psychology changes slightly, the market is likely to find support from tight world and US ending stock projections and expectations for corn usage to continue to expand next year. New developments on the supply/demand front in the next several months are likely to have a positive tilt toward prices. The market seems to have the fundamental set-up to move higher over the near-term, as long as there is an uptick in the export sales news. Given the tendency for corn to build a weather premium "early" in El Nino years and the oversold condition of the market, look to buy a minor correction over the near-term. Traders believe China corn exports for the coming year will be 12-15 million tons. Reports from an official at the Jillian Grain Group in China (one of the two China export firms) indicate that China is likely to cut financial support for corn exports this year. This news may or may not have much of an impact on the China export market depending on the differentials between China and world prices. Weather is beginning to provide some support to the corn market, especially after a recent front page article in the Wall Street Journal highlighting US drought conditions. Dryness in the western cornbelt might begin to provide some short-term support to the market. It was the driest December on record for Omaha, Des Moines and Kansas City. While these figures show a dramatic dryness problem developing, the direct impact on summer production at this point in the season is typically minimal. El Nino Years During the past 40 years, there have been 10 major El Nino events. The weather impact on certain areas of the world is strongly correlated with the severity of the El Nino, while other areas of the world (the US Midwest and Central Plains) do not show a strong correlation. Drought in Australia and South Africa and severe storms on the west coast and the southern coast of the US are highly correlated El Nino events. For the impact on the corn market, the "uncertain" weather in the Midwest combined with disruptions to feedgrain production in Australia and South Africa are factors which may have helped September corn prices stay relatively firm during the December to March time frame. The 1997 September corn futures moved from near 260 cents per bushel in December to near 290 by early March of 1997 as the market was finding support from the El Nino uncertainties. For the 1998 September corn futures, prices peaked in March near the 290 level before pushing lower into the spring. The 1982 September corn futures moved from near 265 in December to near 300 by early March of 1992. For the 1983 September corn futures, prices moved from near 260 in December to near a peak of 300 in March. In 1977, futures moved from 250 to a peak of 275 in March. In 1992, futures moved from around 255 to a March peak of near 278. While some of the price rise may be attributed to seasonal factors, the strong tendency to begin to build a weather premium "earlier" than normal seems to be influenced by the El Nino events. Supply/Demand Update for 2003/2004 At the American Farm Bureau Federation convention held in mid-January, speakers generally believed that corn plantings for the coming year will be up 1-3 million acres from last year. The real point of this exercise is to show that even with a significant jump in planted acreage, and a record high yield, the corn market is unlikely to see ending stocks come back to the levels seen just a few years ago. The key to a "tight" situation for the coming year will be to see stability on livestock feeding and exports as industrial usage appears to be in a solid uptrend. It will take good weather to avoid a tight situation for corn for the coming year. The USDA has significantly raised their industrial usage forecast for corn in each of the past two supply/demand reports and at the current pace of expansion, we cannot rule out further ethanol expansion ahead. Record ethanol production for the month of December (the fifth monthly record in a row) added to the positive tone with production at 176,000 barrels per day as compared with 120,000 barrels per day just 6 months ago. A report from the China National Grain and Oils Information Center indicates that China industrial usage is expected to rise sharply for the 2002/2003 season. World numbers were equally disappointing to the bulls as beginning stocks were revised higher. May corn has been following a 90-day cycle which hit highs near March 9th, 2002, a low on June 11th and a contract high on September 9th. The weekly closing reversal for the nearby contract on December 9th helped confirm that a 90-day low might be in place. However, the new lows into mid-January caused significant damage to the structure of the market and leaves the longer-term cycle view a bit uncertain. Key resistance points for May corn include 258 and 274 1/4. The weekly chart is operating off of a 25-week cycle with the next cycle due the week of May 26th. The market is approaching an extremely oversold condition with large traders building a net short position that is approaching historically high levels. The Commitment-of-Traders report with options showed that fund traders have increased their net short position to nearly 54,000 contracts as of January 21st. Historically, a net short of 50,000-70,000 contracts has occurred near major lows. Watch the weekly reports and when funds (large traders) begin on a buying trend, expect positive action as long as the trend is intact. Key resistance points on the monthly chart include 319 1/2 and 409 1/4. The January 17th reversal to the upside with an outside day is a potential sign of a low for July corn. If this low holds, key resistance points for the remainder of this contract include 258 1/4 and 273. A series of divergences at the November, December and January lows suggests a loss in downside momentum. Particulars of the Short Futures/Long Option "Investment" Strategy: 1. Sell September Corn at 246 or better and buy 5 September Corn 280 calls for 7 cents each (or 35 cents for all 4). Initially, your net delta position is long 20% of a futures contract! The short futures component is initially to be used as a hedge against the long call premium and is intended as a vehicle to finance part of the long speculation. If the market never falls after we have entered the trade, then our options should benefit. If there is any failure in excess of 14 cents, we would suggest taking profits on the futures and assuming the slightly reduced risk of the remaining long call premium. By using the September options, the investor/trader will have 242 days until expiration (as of January 28, 2003), but given the impact of time decay and the use of out-of-the-money options, one should be aware that risk can become substantial if the futures market rallies, but does not make it through the long call strike into expiration. Rule #1 in a short futures/long multiple call strategy is that the position has to work or be liquidated before time dec...
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