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NEAR-TERM MARKET FUNDAMENTALS: After finishing last week on a down note, corn pushed below Friday’s low in the May contract yesterday and then took out Monday’s low overnight. The latest round of selling came in conjunction with a lower dollar, but funds were on the sell side yesterday and this is raising concerns that trend-following funds might resume their long term push to the short side. This week’s export inspections were in line with trade expectations at 34.0 million bushels. Cumulative export inspections stand at 42.1% of the USDA’s export projection for 2009/10, still well below the 5-year average of 49.1%. Inspections need to average 44.8 million bushels each week to reach the USDA’s projection. The pace of export sales has crept a bit closer to its 5-year average in recent weeks than is the case with inspections, but recent sales to important East Asian customers such as South Korea have been for delivery in mid summer or later which suggests that they may be decently covered through late into the current marketing year. This adds to the possibility that sales and inspections will continue to lag the 5-year pace in coming weeks and that the USDA may again need to lower its export projection. In recent sales to Japan, higher freight rates pushed the sales to the US as the freight cost from South America approached $20/tonnes from a more normal freight of near $10/tonne. Brazil’s crop supply agency, Conab, raised its 2009/10 corn crop slightly to 51.38 million tonnes from 51.36 in February. Weather forecasts in the US call for rain in the Midwest and South through the end of the week. Heavier amounts are still called for across the mid-South and Deep South, especially on Thursday, but amounts for the Upper Midwest have been increased somewhat near the end of the week. This comes as snow melt has soil moisture levels at fairly high levels in many areas. After two straight very wet spring planting seasons, traders are thought to be nervous about the potential for localized flooding and planting delays in corn again this year.

TODAY’S GUIDANCE: Traders see ending stocks near unchanged for tomorrow morning but this forecast includes weaker demand numbers (especially export) and a lower production forecast by about 35 million bushels. If the “re-survey” shows production unchanged, the market is vulnerable to some bearish surprise for the report. Given the lagging pace of export sales and shipments, corn remains vulnerable to selling pressure whenever the dollar rallies. That is the case this morning and old crop contracts appear headed for a test of the 360 level, just above the early February lows. The December contract may find better support due to the wet spring weather and it could hold above its February lows. May corn support comes in at 365 and 359. December corn support is near 395 1/2.

TODAY’S MARKET IDEAS: Erosion is hard to stop in the corn market after it starts gaining momentum, and that appears to be where we are at right now. Hold off on buying, and look for continued erosion in call premiums in old crop contracts.

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NEAR-TERM MARKET FUNDAMENTALS: The corn market continued to extend its recent gains during the overnight session with the May contract pushing to its highest level since January 14th. This came despite a strong move higher in the dollar and the lingering effects of last week’s negative US economic data in the areas of jobs and housing. Traders indicate that relatively light farmer selling after the January-February break and fair feed demand is helping to generate a short covering rally in futures. One analyst also indicated that the move to the net short side by trend-following funds in January and early February is mow seeing a minor reversal. The Commitments of Traders report for the week ending February 23rd showed strong buying by Non-Commercial no CIT traders, also known as trend-following funds. They were net buyers of 20,348 contracts to switch their net position to net long 18,105. Index funds were net buyers of just 206 contracts, but their long position is still near its all-time high at over 447,000 contracts. The corn market saw a pause in its advance during the middle of last week, with some traders crediting that to poor economic numbers in the US. However, last week was bracketed by a very strong rally on Monday and an advance to a new high for the week on Friday. Weather in Argentina was dry again over the weekend as expected. Forecasts call for mostly dry conditions into the first half of this week with temperatures at normal to somewhat above normal levels. This is considered favorable for the corn crop as it advances through the filling stage and the crop nears harvest in some areas. Weather in the US is expected to clear somewhat this week allowing for unrestricted corn movement in most areas. Traders continue to see expectations for a wet spring and slow planting progress to benefit corn at the expense of soybeans. Cash markets are developing a two-tiered pricing structure as corn processors and ethanol plants bid up for higher quality corn and lower quality corn is pressured due to an excess supply of lower quality corn. Traders are nervous that as the weather warms up in the weeks just ahead that more corn will spoil.

TODAY’S GUIDANCE: Look for the steady advance to continue in a corn market where managed funds may be looking to boost their very small net long position. The fact that the market held up so well amid poor economic data last week may indicate that corn is either moderately oversold, or perhaps benefiting from a resurgence of mild inflationary concerns. The 100-day moving average is near 400 in the May contract this morning and that appears to be where we are headed. First support remains near 383 and 379 with resistance is at 395 to 403.

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While the soybean complex may be inundated with too much supply, the focus of attention for the corn market over the near term will be on longer term demand factors and of course on the outlook for planted acreage. In its baseline projections issued in late 2009 in preparation for the budget process, the USDA put corn planted area for the 2010/11 season at 88 million acres, up from 86.5 million this past season. This estimate will be updated in the USDA Outlook Forum for February 18-19 (released after this writing), but there is a general market opinion that corn planted area will increase by 2-4 million acres over that number, with some estimates even higher. Traders seemed to dismiss the preliminary baseline projections from the USDA, but we should point out that while there are more than 2 million acres coming out of the Conservation Reserve Program and winter wheat plantings were low, the baseline projections for the 8 major row crops are projected at just 247.1 million acres, down from 248.9 million last year and from 253.1 million acres in 2008. If the baseline numbers are close to correct, the trade may be overestimating total plantings for the coming season.

The enclosed table shows several “what-ifs” for the corn outlook for the 2010/11 season if we assume that producers will plant 4 million more acres this spring than they did last year. We have also assumed a slight increase in usage for the coming year due to the surge in ethanol production and reassuring reports from the EPA last month that helped to confirm that corn-based ethanol growth is likely to continue over the next several years. In November, the US used 362.4 million bushels of corn to produce ethanol. In order to reach the new USDA forecast of 4.3 billion bushels, the US needs to average 361.2 million bushels each month to reach the new projection. Given the recent trend, the USDA may be in a position to increase this forecast again in future reports.

If we assume a trend-line yield for the coming season at 161 bushels per acre, US ending stocks for the coming season are likely to decline to 1.702 billion bushels, compared to 1.719 billion this year and 1.673 billion last year. A record yield would drive ending stocks to just over 2 billion bushels. However, if we were to assume a yield that is the average of the previous five years (152.4) then ending stocks slip under 1 billion bushels, and the stocks/usage ratio would fall to just 7.4%, the second lowest in history. If we were to plug in the same yield as we had in 2005, ending stocks drop to 616 million bushels and the stocks/usage ratio to a record low. A yield level such as that would be only 8% below trend.

In its February Supply/Demand report, the USDA estimated world ending stocks for the 2009/10 season at 134.04 million tonnes, down from 145.88 million tonnes last year. This put the stocks/usage ratio at just 16.6%, the third lowest in 35 years.

There are plenty of factors which could keep grain markets under pressure over the near term, but our analysis suggests that corn prices are not likely to see a long, drawn out bearish trend. It also suggests that any sign of a weather issue that might reduce yield should be taken as a sign of a potential very tight situation ahead. Aggressive traders might assume a 388 to 351 trading range for May corn over the near term.

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NEAR-TERM MARKET FUNDAMENTALS: Traders indicate that the corn market lacks much in the way of fresh news. A sharply higher dollar sent the corn market lower yesterday. Further weakness overnight in corn was accompanied by another modest gain in the dollar. This comes against a backdrop of improved economic numbers in the US yesterday and ongoing concern that sovereign debt problems in Europe will bring a continued flight to the dollar. Weekly export sales will be release tomorrow. Argentina’s Ministry of Agriculture raised its estimate of the maturing corn crop there to between 19 and 21 million tonnes. This is up 46% or more from last year and it is well above the latest USDA estimate of 17.2 million tonnes. Last fall, estimates had fallen as low as the 11-12 million tonne range due to lower planted area and the lingering effects of last year’s drought. A processors’ association in South Korea is tendering for 55,000 tonnes of optional origin corn for arrival on July 20th. Recent reports from Japan and South Korea have indicated concern there over quality issues with US corn that have arisen from the late, wet harvest this past fall. In the US, some fears have arisen that low-quality corn may even be getting rejected by some ethanol plants. If we assume that producers will plant 4 million more acres this spring and also assumed a slight increase in usage for the coming year due to the surge in ethanol production, a trend-line yield at 161 bushels per acre might cause ending stocks to decline to near 1.7 billion bushels, compared to 1.719 billion this year and 1.673 billion last year. A record yield would drive ending stocks to just over 2 billion bushels. However, if we were to assume a yield that is the average of the previous five years (152.4) then ending stocks could slip under 1 billion bushels, and the stocks/usage ratio would fall to just 7.4%, the second lowest in history. While lower yields are not expected, the exercise illustrates how important yield will be for corn values for the coming season. Reassuring reports from the EPA this month helped to confirm that corn-based ethanol growth is likely to continue over the next several years. In November, the US used a record 362.4 million bushels of corn to produce ethanol. In order to reach the new USDA ethanol use forecast of 4.3 billion bushels, the US needs to average 361.2 million bushels each month.

TODAY’S GUIDANCE: The corn market shows signs of wanting to test the early February low at 359 in the May contract. Weak technical action could carry the May to as low as 351. The slow pace of exports is not helping and one of the few positive factors could be the increased concern over quality issues for 2009/10 US corn which could provide a boost to higher quality deliverable stocks. However, this is a somewhat backdoor kind of ‘positive’ factor that does not support overall demand. December corn support is at 393 1/2 and 391 with 402 and 408 1/2 resistance.

TODAY’S MARKET IDEAS: Consider strategies which could benefit from a short-term downtrend followed by a rally.

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NEAR-TERM MARKET FUNDAMENTALS: The corn market only managed a modest bounce yesterday despite the combination of relief over an apparent resolution of the financial crisis in the Euro Zone and the release of a USDA supply/demand report that was considered supportive in corn. This has some traders concerned that the corn market may not have established a bottom ahead of the planting season. The USDA lowered 2009/10 US corn ending stocks to 1.719 billion bushels yesterday, down 45 million from last month as compared with expectations for a drop of just 20 million bushels. Exports were lowered by 50 million bushels, and this reflected the ongoing lag in export sales and export inspections versus the 5-year averages in those figures at this point in the marketing year. This was in contrast to a 100 million bushel increase in projected ethanol usage to 4.3 billion bushels, with ethanol now representing 32.7% of total projected US corn usage. The need to raise the ethanol number was signaled by the strong pace of ethanol production through November, which is the latest date for which we have an official US production total. In addition, the release of the new EPA guidelines for ethanol production in the US last week has removed any concern that the government will impose significant environmental restrictions on corn-based ethanol production over the next few years. The USDA pegged world ending corn stocks for 2009/10 at 134.04 million tonnes, down from 136.2 million tonnes last month. The increase in projected usage for ethanol in the US resulted in an upward revision in world usage that more than offset an increase of 2.2 million tonnes in the Argentine corn crop. This left the world stocks/usage ratio at just 16.6%, the third lowest in 33 years.

TODAY’S GUIDANCE: Yesterday’s news was somewhat supportive in corn and this may enable the market to push to near last week’s highs or a bit higher over the near term. However, there is no indication that corn has formed a bottom and the raises the distinct possibility that the May contract could push as low as 340 to 350 over the intermediate term.

TODAY’S MARKET IDEAS: Selling resistance for May corn is at 377 1/4 and 381 1/2 with 352 3/4 as next downside objective. The world numbers are still relatively tight and the market will need to see a big jump in acres to avoid tightness in the coming season but weakness in soybeans and wheat could drag the market lower into the end of the month.

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NEAR-TERM MARKET FUNDAMENTALS: A modest bounce overnight in corn may have been tied to relief that the State of the Union address did not contain any further bad news for the markets. This should allow the corn market to concentrate on economic news, export sales and the pace of farmer selling. In recent days and weeks, the economic news has been on the negative side for the US in terms of the outlook for consumer demand. This has dovetailed with uncertainty over the effects of tightening measures currently underway in China. However, export
sales have been strong in corn, and farmer selling has been disciplined, which has kept basis levels mostly steady in recent days after the significant basis gains seen in key areas during the first 2-3 weeks of January. Traders are expecting another good export sales number this morning with estimates ranging up to just over 1 million tonnes. Last week’s total was in excess of 1.6 million tonnes. This compares to a weekly average of 753,400 tonnes needed to reach the current USDA export projection for the 2009/10 crop marketing year. Forecasters in Argentina are calling for scattered rain on Saturday and again to start next week. They expect cooler and wetter weather to start next week which would bring relief from the 100 degree temperatures that have been seen in recent days. Hot weather is expected to continue into the start of next week. The EPA continues to work toward finalizing its standards for the development of renewable fuels that have been mandated for the nation’s fuel supply. Sticking points have involved the impact that the production of various feed stocks for bio-fuels will have on the environment. In addition, progress has been slower than expected toward the profitable use of non-food cellulosic sources for ethanol production. No news on when the new EPA standards will be put in place. An Israeli firm has bought 27,000 tonnes of corn. The origin is thought to be Argentina. Taiwan bought 60,000 tonnes of South American corn yesterday.

TODAY’S GUIDANCE: Price erosion is likely to continue over the intermediate to longer term, but another round of increases in open interest in corn this week may be setting the stage for a modest bounce. However, fund selling remains an ongoing negative factor, and we would still not be tempted to pick a bottom. First support remains at 354 in the March contract. Resistance remains at 372 1/2.

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NEAR-TERM MARKET FUNDAMENTALS: Corn extended its recent lows overnight in line with a surge in the dollar. Traders indicate that buyers are on the sidelines in cash and futures markets and cash demand continues to languish due to the fact that export freight capacity is still being dominated by soybeans. The USDA will release its latest export sales numbers on Friday morning, one day late due to the holiday on Monday. Open interest fell yesterday in corn by 4803 contracts after surging to a new high for the year in the previous session. This week’s export inspections for corn were 30.3 million bushels, up from just over 24 million bushels last week. Total inspections to date stand at 29.2% of the USDA’s export projection for the 2009/10 marketing year compared to a 5-year average of 36.5%. Inspection totals should begin to increase into February. Inspections need to average 44.2 million bushels each week to reach the USDA’s projection. The USDA reported a sale of 116,000 tonnes of corn to an unknown destination yesterday. This follows a week of improved export demand, and some of this will appear on Friday’s Export Sales report. While the short-term fundamental and technical set-up appears quite negative, there is still talk that China may eventually be an importer of feedgrain; maybe even by later in this marketing year. China corn prices at some key locations are up 25% from last year and private trade houses believe that the lower crop and drought conditions in some areas are the reason for the rally. Corn starch plants are in full swing due to strong demand and livestock operations are also expanding rapidly. While the National Grain and Oils Information Centre have pegged the China corn production at 163 million tonnes, the USDA is at 155 million tonnes and the USDA attache is below this level. Some private forecasters in China have the crop as low as 140 million tonnes as compared with China usage expected near 159 million tonnes.

TODAY’S GUIDANCE: A new low late in the day yesterday followed by a new low overnight added to the downside momentum from a technical standpoint which points to a test of the 335 area in the March corn contract over the short to intermediate term. Light support is near 360 and then at 350 in the March contract. Better support is in a range from 330 to 340. At this point, a break to 391 area for December corn is likely a buying opportunity.

TODAY’S MARKET IDEAS: The market is seeing increased downside momentum and with high open interest, the downside still looks considerable but the market should find support soon.

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NEAR-TERM MARKET FUNDAMENTALS: Corn moved lower overnight in conjunction with a higher dollar and fears of tightening in China. This contrasts with yesterday’s gain in corn futures, which included a strong close. Despite the new high for the move on Monday and the sharp break early in the day on December 30th, closes in the March corn contract have held within a narrow band of 413 3/4 to 421 3/4 for nearly two weeks. Weather has again become a factor in the corn market with snow hitting the central and northern Plains and the western and NW Corn Belt into yesterday. The system is starting to dump snow in the central Midwest today, although snowfall amounts are expected to be lower as the storm moves east. Cold temperatures have already caused some icing on the Illinois River and the areas of heavy snow will curtail cash movement in parts of the feed belt that stretches from the western Corn Belt into the Plains. Traders report that the weather and mixed price action are helping to keep farmers on the sidelines as they focus on their financial plans and planting intentions for 2010. Traders said that yesterday’s strength came in part from outside markets as well as a lack of substantial farmers selling. Basis levels were steady to firm at the Gulf in corn yesterday and higher in the western Midwest where transportation is becoming more difficult. The USDA will issue its latest Export Sales report this morning. Traders are expecting today’s figure to fall below last week’s total of 772,500 tonnes, and is also expected to be below the 754,600 tonnes in sales that are needed each week to reach the USDA’s export projection. Brazil has boosted its estimate of their 2009/10 corn crop to 50.49 million tonnes from the previous month’s estimate of 50.15 million. South Korea bought 55,000 tonnes of GMO corn for delivery in April and an Israeli private firm bought 32,000 tonnes of corn.

TODAY’S GUIDANCE: The March corn contract posted its highest close since June 19th yesterday. China’s move to tighten credit is likely to have a much bigger impact on soybeans than corn. First support is at 413 3/4 in the March contract with next support at 405 to 407. First resistance is near 425 and with next resistance at 440.

TODAY’S MARKET IDEAS: With a “sell commodities day” corn buyers can be a bit more patient. Buying support for May corn is at 417 3/4 with 451 as next upside objective.

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NEAR-TERM MARKET FUNDAMENTALS: The corn market started the week with a strong advance. This follows a series of winter storms across much of the Midwest that started around the middle of last week. Traders indicate that this, plus the Christmas holiday, has slowed farmer selling and stalled last-minute progress in this year’s harvest. A lower dollar index overnight and last week’s very strong export sales in corn were also considered supportive. Last week’s net export sales in corn were well above trade expectations at 1,591,800 tonnes, all for 2009/10. As of December 17, cumulative corn sales stand at 46.6% of the USDA forecast for 2009/2010 versus a 5 year average of 50.5%. Sales need to average 755,000 tonnes each week to reach the USDA forecast. There is somewhat of a disconnect between the recent heavier pace of export sales in corn and the light pace of recent corn shipments. This is due to the fact that shipments of soybeans are taking up most of the export shipping capacity into the start of 2010 as buyers such as China continue to rush to fill the gap left in the world’s soybean supply pipeline by last year’s drought in Argentina. Soybean shipments are expected to tail off as we approach the start of the South American harvest in March and the shift to corn shipments is expected to be well underway by that point. Weather forecasts in the US call for light scattered precipitation in the northern Midwest today and eastern Midwest tomorrow. This may be followed by light and scattered precipitation in the western Corn Belt on Wednesday.

TODAY’S GUIDANCE: The corn market is becoming the focus of traders’ attention and this should continue to pull in spec and commercial buying, including funds. The corn market may not be as susceptible to swings in the dollar in coming days as it appears to be ready to start making a move toward the 470 to 480 level. First support is near 405 to 407 1/2 in the March corn contract and then at 393. Resistance is at 421 to 425 and then at 440.

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In this update, we will concentrate on a few longer-term strategies for key markets for the coming year. All of these strategies are designed with limited risk and to the trader stay in the positions for an extended period, to be able to take advantage of longer-term nature of these moves. The presence of widespread global recovery expectations is going to facilitate even more fund interest in commodities into 2010. Periodic attempts to reign in inflation through the use of rising interest rates could cause the equity markets to chop around in 2010, as opposed to the very impressive uptrend pattern they exhibited in 2009. With rising rates also serving to make bonds and fixed income investments less desirable, commodities might become even more attractive in 2010. Therefore, traders should look to historically cheap commodities, to commodities with strong demand, and especially to markets that are small enough to be dramatically impacted by an influx of capital.

In looking forward, we see a major slide beginning in the US Bonds and the Yen, with the prospect of significant gains in orange juice, corn and cattle. We expect some rather significant price swings in these markets over the next 9 to 12 months. In general we are operating under the assumption that the global economy is set to recover, but we also think that US growth could end up being a little stronger than the anemic predictions that were being embraced by many markets as recently as the end of October.

In addition to the prospects of fundamental changes, we also are seeing some classic technical signals calling for big moves in the coming months. We are using strategies designed to

1. provide lower, defined costs,
2. offer leverage potential and
3. present an extended time horizon for the “big picture” developments to unfold.

Furthermore, by utilizing multiple units of the enclosed strategies, we hope to capitalize on partial moves by banking profits on a portion of each trade while holding the balance of the positions for an extended period. The idea here is that it would help us increase our resolve to hold out for an even bigger reward.

We admit that these strategies might have some flaws, the most prevalent being a lack of liquidity that could make them difficult to execute. Given their out-of-the-money nature, it could take significant moves for them to turn profitable, and without a significant move in the right direction it could be difficult to exit the trades. On the plus side, the trades generally have a defined risk, and in the event that our predictions are correct, the out-of-the-money options should become more liquid. Finally, one should not forget the potential benefit of holding a multiple positions in the face of favorable, big-picture market reactions.

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