The Grains Pit Review

For the week of November 9th, 2009

By PitGuru Matthew Pierce

The previous week saw a good downside move based strictly off of the crude markets and fundamental concerns. Crude fell apart as the week progressed due to multiple factors, first and foremost talk of another recession and that direct impact on demand. Row crops fell apart due to a major dry shift in weather with harvest rolling along quickly right now. This eliminated any commercial bid allowing for new crop beans to fill SX deliveries as we roll towards expiration. There was a subtle divorce from macro factors last week due to the harvest but this is a short term anomaly with the dollar and crude leading once again once the market gets through tomorrow's WASDE report.

Looking to the week ahead, as mentioned above, WASDE comes out on Tuesday with crop yield and production updates. Subscribers will see the total list of estimates today. This report should show minor pullbacks in both yield and total production due to the delayed harvest and the estimated damage done. Wheat acreage should show a decrease but due to relatively high temps there should be no major swing lower as some talked about early in the planting season...me included. Also see crop progress Monday afternoon showing beans approaching 80% with corn still lagging but picking up quickly. With the forecast still looking dry this week there is no real concern at the moment allowing for domestic basis to continue plummeting...as it should. This has been seen in bean spreads with F/N widening out 10-cents last week...really Weds-Fri. This pattern should continue this week. Corn spreads will move a little as will wheat but compared to beans only the CZ/CZ10 spread is worth looking at.

Looking at macros the market still has to deal with the USD and its massive moves with crude, equities, and gold all contributing factors. I am not a fan of following any DOW rally and I also feel this warm weather should continue to erode heating oil demand in the NE. I like the downside in both but "supernatural" factors are helping support both. CNBC has become a joke with their interpretations of economic data, skewing everything bullish. We are all in for a sad reckoning in the near future. If I'm right, agriculture will get hammered due to money flow, ample supplies...on hand...and a lack of inflation concern. If I'm wrong we could easily see $5.00 corn in the next couple months. The downside is far less damaging with only a legit 30-40 available with the upside looking at a possible 1.30 making the interest in the call skew warranted.

Looking at volatility I see corn vol still leading the floor sitting at 43% with wheat backing off to 36% with beans dragging up the read at 28%. I like selling corn vol as we roll through harvest allowing the call skew to collapse while the put skew remains flat to negative. Look to sell corn vol and buy bean vol if you are bearish both direction and volatility. Overall the market is again waiting for information. Last week went as expected with this week looking for more downside pressure after a higher opening as weak shorts exit early. WASDE will set the tone so don't do anything drastic ahead of the report with crop progress also a factor. Retain a focus on the USD for best direction following WASDE with crude a secondary factor.

***chart courtesy Gecko Software
Past performance is not necessarily indicative of future results.