PROFITABILITY
Page 11 Monday, September 30, 2013 FarmWeek
CASH STRATEGIST
Money leaving commodities
More than a few times over the last few months, we’ve come across a debate about whether the “Commodity Super Cycle” had come to an end. Looking at changes in the amount of money invested in commodities, there’s certainly reason to think that is a possibility. Still, there hasn’t been the “smoking gun” occurrence that would lend credence to that possibility. Nevertheless, the investment playing field has changed markedly over the last few months. Europe finally stopped the financial hemorrhaging of some of their weaker countries, bringing interest rates down while boosting economic activity. Chinese economic activity is starting to improve after going through an extended slowdown in their growth rate. And a new government in Japan finally took steps to aggressively stimulate growth to hopefully shake off the malaise that had plagued them for more than a decade. Our Federal Reserve continues to pursue an easy money policy to stimulate our growth. Stock markets around the world have responded,
attracting increasing interest. Hence, the big institutional investors that had been the cornerstone of the flow of money into commodity index funds were finding new opportunities outside of the commodity arena. This came at a time when investing in commodities had become more challenging. The spring swoon in the gold market likely hastened the departure. Meanwhile, the amount of money in hedge funds trading commodities remained near historic peaks, but it started to flatten out when it pushed over $300 billion in early 2012. The latest data for the second quarter of 2013 shows money may be starting to leave there as well. Given lackluster action since midsummer, we wouldn’t be surprised to see it drop again in the third quarter. From one perspective, the change is good. The decline in money in the market should mean less volatility than the last four years. But, as money leaves, it reduces the chances of seeing markets move near historic highs, let alone to new ones. Maybe the Commodity Super Cycle has peaked. A drop under 500 on the Continuous Commodity Index would certainly tilt the odds in favor of that. But it doesn’t necessarily mean lower prices, just less volatile ones.
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Corn Strategy
ü2013 crop: Even though the corn market struggles to hold gains, we still believe the downside has been exhausted for now. Wait for a rally to $4.70 on December futures to make needed sales. Unless there’s something unexpectedly bullish in the Oct. 11 USDA report, leave an order to sell another 10 percent if December futures hit $4.80. If corn is farm stored, use a hedge-to-arrive (HTA) contract for spring delivery to capture storage income. ü2014 crop: We continue to think initiating sales at $5.15 to $5.25 on December 2014 futures is a good move. But we are reluctant to leave an order to begin pricing until we know more about the current crop. vFundamentals: Early yield reports continue to be very good. Even though the later planted crops aren’t expected to be as good, as well as the western crops, it still looks like USDA’s last projection at 155.3 bushels is a realistic estimate. Even though acreage may be reduced as much as 3 million, it’s still difficult to build a scenario with ending stocks under 1.5 billion bushels
Cents per bu.
Soybean Strategy
ü2013 cr op: Continued short-term weakness in the soybean market has damaged the possibility of seeing a new high. But short-term downside risk is limited at this time. Wait for a rally to $13.60 to make catch-up sales. We might even add to sales at that level; check the Hotline. We don’t believe it will pay to store soybeans this year, other than maybe for a short time after harvest. ü2014 crop: The higher soybean/corn price ratio will stimulate plantings in South America, and maybe in the U.S. next spring. We may initiate sales if November 2014 futures rebound to $12.25; check the Hotline. vF u n d a m e n t a l s : L i k e corn, we continue to mostly hear of surprisingly good yields, even in many of the drier areas. But like corn, those crops in the western/northwestern areas will be the poorest. The Oct. 11 USDA report should offer good insight into
both yield and acreage on the crop being har vested, yield being the most uncertain.
Wheat Strategy
ü2013 cr op: T his past week’s rally should have turned the minor trend in wheat higher. World crop concern was the ingredient that helped turn the trend up. Use a rally to $6.95 on Chicago December futures to price another 15 percent, boosting sales to 70 percent. If wheat is far m stored, consider a winter deliver y with an HTA contract based on March futures. ü2014 crop: Leave an order
to make a 10 percent sale if Chicago July futures reach $7.05. vFundamentals: A wave of frost/freeze in Argentina, continued wet weather slowing planting in Ukraine and high Chinese prices carried wheat prices higher last week. The Argentine frost could cut expor t availability, tur ning Brazil to the U.S. or Canada to cover needs. Some think delays could cut Ukraine plantings 30 percent. China was rumored to be buying wheat again, this time from Australia. But it’s important to remember the world is not short of wheat.