Rain Makes Grain
What doesn't grab headlines is that grain prices often rally in the April and May off of any type of weather concerns during planting season. And I am always wary of price rallies when the reason is "too much rain." For I have come to accept the age old wisdom from the trading elders of yesteryear:
Rain makes Grain.
A good spring soaking is just what crops need to start the growing season in ideal soil conditions. More importantly, corn was a winner in this year's acreage battles. There are 4 million acreas more corn being planted this year in the US - a 4.4% increase that is expected to yield about 8% more corn from US fields in 2011 over 2010.
The Real Story on Planting Progress
Despite media hype, planting progress in the US is currently 79% complete in the US vs. 84% on average. With modern farming equipment, this is margin that can be made up quickly. With weather in key growing regions predicted dry next week, this gap could be closed by the planting progress report for week ending June 5th. Planting in Iowa and Illinois, two of the 3 largest corn growing states, are right at the averages (Iowa is 98% complete.) It is only the Eastern part of the belt that will need to make up the ground.
There is certainly still potential for some corn acreage to he shifted into soybeans. But these should be in isolated areas and not involved a significant amount of acreage.
Corn prices rallied nearly 60% last year to account for tight global stocks heading into 2011. This was one reason why corn attracted additional acreage this year. However, the market has now priced that lower supply and added an additional risk premium as anxiety about planting season grew. As the seasonal chart shows below, prices tend to deduct this risk premium once the crop is "in the ground."
We expect that the 2011 corn crop will be safely in the ground sometime in June.
Summary and Strategy
Corn prices have rallied substantially in April and May as wetter than normal weather has delayed planting. We feel that the price rally will run into headwinds in June for the following reasons:
While slightly behind, corn planting progress is still within normal ranges. With a favorable weather forecast next week, it is possible if not likely that the full planting schedule will be completed within the next 1-2 weeks.
Corn prices have already rallied nearly 20% in 2011 after a 60% rally in 2010. Much of the 2011 rally has been due to planting anxieties. These anxieties should begin to ease within the next few weeks, and if so, prices should follow. A seasonal chart of corn prices illustrates this historical tendency. (Past performance not indicative of future results.)
Farmers are expected to plant 4 million "extra" acres of corn this year. Even a slight acreage shift to soybeans will still leave corn with more acreage than 2010.
While we recommend holders of puts sold back in April to hold for full profit, we now are advising clients to begin initiating call sales as premiums are now at inflated levels. Deep out of the money calls are now available as there are plenty of speculative weather players still in this market. We see a mild to moderate correction in corn prices ahead which should be more than enough to deflate the weather premium now priced into the calls. December contracts offer our preferred time to distance ratio.
We will be working closely with client portfolios in the coming 7-14 days to position in this market.
Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.
James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group/Optionsellers.com
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Market Pick Sample:
5/03 July Rice buy 15.41 price hit
4/25 July Wheat buy 8444 price hit
4/13,20 July Corn buy 7892 canceled
5/05 July L-Hogs: sell 92.270 price hit
5/03,4 Aug. F-Cattle sell 134.120 price hit, 132.920 price hit
5/03 Aug. L-Hogs sell 95.450 price hit
Soft's / Misc.
5/02 July Cotton sell 146.20 price hit
4/25,26 July Cotton sell 164.00 price hit
4/25,28 July Coffee buy 302.50 price hit
5/02,5 July Silver buy 49.85 canceled
4/27 June Gold buy 1519.5 price hit
4/07 June Gold buy 1463.9 price hit
3/10,14 June Nat. Gas sell 3.957 price hit, 3.800 canceled
2/22 April Nat. Gas sell 3.949 price hit, 3.867 price hit
2/17,18 April Crude Oil sell 87.06 canceled
5.02 June B/Pound buy 1.6730 price it
4/27 June B/Pound buy 1.6593 price hit
4/18,20 June S/Franc buy 1.12440 price hit
Financial's / Indexes
5/03 June Eurodollar buy 99.715 price hit
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