The Trade Idea: After last week’s development in OIL’s Quantitative Gravity, I would avo...
Grains in Search of a Bottom
01/07/2014 7:00 am EST
Corn has been heading downhill since its high-water mark in August 2012, and Chris Lehner of Archer Financial Services outlines why he doesn’t think the decline is over.
Even though I have been suggesting selling corn for over a year, I have to admit I was taken aback when I read that corn has made the biggest yearly drop on record. Seeing it in black and white showed the reality of a big bear corn market. Now I wonder what will make the US farmer sell stored grain.
Can the US farmer believe for one second the world has low supplies? With all the hard facts, can the farmer believe ending stocks are low? Does he or she believe holding record amounts of stored grain will fool anyone into believing they won't eventually need to sell it? Does the US farmer fool themselves into believing the US remains the bread basket to the world?
What is so sad, Canadian farmers are calling and writing me wondering what they can do to sell canola and wheat. Northern transportation systems have succumbed to the energy market’s higher bids for trucks and rails. With competing grain stocks and often lower prices in South America, the US and eastern Europe, the Canadian farmer is being left out in the cold arctic regions unable to rid themselves of massive stocks of grain. Of course, buyers know where it is, but there is really no attempt to buy it, especially when energy companies can outbid grain sellers and buyers for rails and trucks. Canadian grain is being kept off the market when supplies are growing in South America and eastern Europeans are securing market share.
As far as US corn, who is kidding who? For months and months, bullish traders played it to the fullest that preventative planted acres would reduce US 2013 ending stocks to the levels, corn prices would reverse their decline.
Usually I write fairly long reports. However, I think it is time to look long and hard at some real reasons why grains will fall in price. Then it is time to re-read them and give careful consideration to any thoughts why you might be bullish and why as a US or South American farmer you may want to store grain.
1. According to US Department of Agriculture estimates, world corn production may reach a record 964.3 million metric tonnes for 2013/2014. It means US farmers will raise the largest crop ever produced.
2. The price decline for corn, so far, has fallen over 40% in one year and the biggest question must be when will it stop falling?
3. Up to the end of the year, soybeans fell 7.4%. However, Brazil has planted more acres this year, compared to the record breaking soybean crop last year. What can that tell you? It is very possible to see production to surpass 90 million metric tonnes.
4. Wheat prices are down over 18%. Speculative spreaders likely will begin to buy wheat and sell corn trying to push the notion feedlots will switch to wheat feeding. However, we found out last year corn in many areas will be fed over wheat. Last August and September when the corn basis was well over CBOT prices and in areas where wheat was very available rations for livestock pushed cattle and dairy producers to remain with corn. With plentiful supplies of corn now, don't look for feeders to switch to wheat this year.
China rejecting strains of GMO corn now has affected DDG prices. In one week DDG prices fell over $30.00. Naturally, a drop in DDG prices will roll over into soy meal.
Anyone storing grain must carefully consider all the pros and cons. Charts at this time clearly point down for wheat and corn and, as of January 2, soybeans broke a strong technical support line.
Large speculators, along with grain merchandisers know US farmers have stored record grain supplies. Unless there is a severe and drastic weather change in the southern hemisphere in the next 8 to 12 weeks, why would any large trader, speculative, or hedger buy grains?
By Chris Lehner of Archer Financial Services
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