The Grains Pit Review

For the week of October 26th, 2009

By PitGuru Matthew Pierce

The previous week saw a continued upside effort with weather, a weak USD, and strong crude all working together. Harvest progress stalled out due to heavy rains all across the growing region of the US with more rain expected early this week offering farmers no legitimate chance to get into the fields. This is causing domestic basis to skyrocket as both consumers and commercial exporters are caught short. The second and just as important factor is the weak USD. This is helping all export expectations with China a continued force in beans exports and sales. The third factor is Ethanol margins with crude continuing to climb. As the grind increases, domestic basis will rise causing domestic supply to tighten, in turn clipping excessive margins. This market has nothing on the horizon to change current factor so continue to look at the aforementioned factors for the week ahead.

Looking to the week ahead, I have a mildly higher expectation for Monday after weekend rains with only mild momentum seen from macros to start. Rain will be a major factor all week with showers expected to continue through Tuesday then take a two day break before they return heading into the Halloween weekend. This will eliminate any major progress again putting pressure on dwindling old crop stocks with farmers looking in angst at a monster on the field. Just to state the obvious, they have delays and they may have damage to the crop but this will come out of the fields and will still have monstrous ending stocks for corn - but beans are in a bit of trouble. To take advantage of the possible drop in bean production, look to the relationship between corn and beans moving forward.

Macros also maintain a firm handhold on the market with the USD and crude dominating the landscape. With US equities in question heading into the end of the year the USD could easily sink to new lows against the Euro, helping maintain the upside momentum as seen for many weeks. If the USD bottoms out on profit taking then we will see a scary reversal in agricultural commodity prices. If crude holds the 70-80 range through the end of the year it will offer good support for corn and in turn beans but any break will be most directly felt in corn as Ethanol margins collapse.

From a trading perspective this market is at a tipping point. Trade has seen many of the weak longs flushed out while speculative capital continued to pour in. Corn OI moved almost 50K higher last week showing there is fresh capital moving in but I have to wonder how much is farmer selling ahead of the expected harvest. If it is the latter, this market is far weaker than it appears with a flat or negative put slope offering little incentive to buy the downside. I want to sell calls again but there are no direct signals by which to initiate another market short. For those looking to take the short side, you have to consider buy puts in beans rather than corn due to relative volatility levels. The only way to get short wheat or corn is short calls due to steep call skews and inflated volatility levels. Wheat has rallied nicely against corn and looks continue with wheat representing the only short left on the floor. If you are or have been bullish this spread, continue to be with winter wheat acreage in jeopardy as row crop harvest is delayed. Continued talk of quality issues in Ukraine also makes wheat a growing issue as compared with months ago. One more wheat point to make: KC is trading at even money to CHI. This is something to look at in that KC should be trading at a 20-cent premium.

In conclusion, not much is changing. Weather, crude, and the USD will dominate our markets for the next week and will continue to until harvest is complete. Nothing fresh out of S. America with their planting going along smoothly. Continue to watch equities for direction with the all important Christmas retain season about to move into high gear. Watch weather looking as far as next weekend with farmers now looking for a frost to firm the soil so they can get into the fields. Overall the slight bullish momentum continues though everyone feels it waning as corn gets above $4.00 and Beans get above $10.00.