Market Monitor

By Marlin Clark

Bull market continues to bellow

Grains made new highs over the last week on the Chicago Board of Trade. The bull market continues to bellow, even though it is having trouble catching its breath at this high altitude.

Traders are looking at historical charts trying to decide how high we can go. Producers are wondering what to do, worried that they sold this crop too early. They don't want to repeat that for the new crop. Jobbers are wondering where the next margin call comes from, and fading basis to give themselves some protection. End users are questioning why they wanted to feed chickens or distill ethanol.

Markets like these put the fear of the Lord in everyone. (As in, "Please, dear Lord, don't let my banker know I used my hedge account to go long some soybeans!" Please, dear Lord, if you get me out of this corn short I will never talk to my broker again." Please, dear Lord, let the elevator forget I contracted that corn for 4.15.")

A little volatility is great for everyone. At the lows, the users get a chance to price. As prices go up, the producers get to price. Over the course of the swings, the cash traders get to buy high, sell low, and use hedges to make money on the swings.

A lot of volatility is tough on everyone. It is about to get tougher, like it did two years ago. Bad things happen when prices get high. Every hedged trader runs out of margin money and has to stop buying corn. It is always easier at high prices to buy corn than it is to sell it. Producers want to sell for next year, and the trader decides he cannot commit his line of credit to any long-term hedges. The end users don't want to buy any deferred grain because they are hoping it will be cheaper by the time they really need it.

Associated with the margin calls is a slowing down of pay in the entire business. The end users want six weeks now, and the margin calls mean a trader can't dip into his own money o keep payments fast.

So, soon the farmers will decide the prices are high enough, only to find that no one wants to buy the grain if they have to hedge it. The cost of carrying the hedge is too great compared to the chance for a profit. This happened two years ago when futures on corn got into the $7.00 range. I remember all the complaining. "But you have to buy it!" (No, I don't. I am not providing a public service at the risk of my company.)

Anyone selling grain to a cash trader needs to understand what his position in the market is. For example, I am a hedged trader. I am not interested in risking price change. If you want to sell to someone who does not hedge, be aware that if the market changes, he cannot afford to honor his contract with you.

If I buy corn, I have to sell futures. If I buy 500,000 bushels of corn and the price goes up a buck a bushel, I have to send $500,000 to Chicago for the privilege of buying your corn for a small margin. This can only happen so long. The bigger the trader you are, the bigger the problem you have. This is why, in 2008, everyone stopped buying. We are about to that point again. Traders will be buying for March, but not for November. Then, they will not be buying at all.

Looking at prices for the week, March corn futures have gained most of a dollar since the January 7^th low of 5.95. February 7^th the high was 6.82-1/2, but by the overnight going into the 8^th we are back to 6.69-1/4. So, a small break, and the fear the top is in again.

March soybeans are similar, with a 14.52-1/2 high on the 3^rd, then a break to 1416 Monday night. Chicago March wheat futures also made a new high the 3^rd, at 8.72-3/4. We are now trading 8.57, but we have come a long way from the January low of 4.59-1/2.

So, the corn made a new high in the last few days, but not the beans or wheat.

 

Marlin Clark trades producer and elevator grain for Keystone Commodities from an office near Andover, Ohio. He welcomes your comments at 866-293-4433.