As 2009 draws to a close, it is time to look back on some of the most important events of the last year.
Electronic growth. The futures industry continues to shift away from “open outcry trading” or “pit trading” to the faster and more efficient “electronic trading” or “screen trading.” In 2009, many option markets, as well as futures, are now traded electronically.
As we enter 2010, nearly all the markets have the ability to trade either in the “pit” or on the “screen.” The majority of traders are embracing this change in technology by moving off the floor to trade on their own computer screens.
MGEX goes electronic. The Minneapolis Grain Exchange, one of the world’s oldest and the largest exchange for spring wheat, has moved to an entirely electronic platform. Pit trading, which has been the staple of the MGEX since 1881, is no longer available. Both futures and options are now traded on the electronic platform. The MGEX made the move as a cost-saving measure. In time, look for the Kansas City Board of Trade, the Chicago Board of Trade and the Chicago Merchantile exchange follow suit.
Record corn crop. In 2009, U.S. producers harvested a record large corn crop. U.S. producers seeded 87 million acres, the second largest planted acreage since 1946, second only to 2007.
Production is currently estimated at 12.9 billion bushels. If you were only looking at production for price discovery, you would have to be bearish, however 2009 should have taught producers there is much more at work in price discovery than only production.
Record soybean crop. In 2009, U.S. producers harvested a record large soybeans crop. U.S. producers seeded a record 77.5 million acres, up 2 percent from last year. Soybean production is currently estimated at an all time record of 3.319 billion bushels.
H1N1. In the spring of 2009, H1N1 became a major concern in the world. The media labeled it “swine flu,” mistakenly, of course, associating this flu with hogs. Due to consumer fears and concerns about effects on long term demand, lean hog futures dropped nearly $30.
Difficult growing season. Producers struggled to plant the corn and soybean crop this spring due to El Nino and extremely wet conditions. During the summer, a cool summer kept growing degree units to a minimum and delayed the maturity of the crop. Heavy rains in October limited the harvest activity and some of the corn and soybean crops will not be able to be harvested until the spring.
Corn closed the week $.10 1/2 higher. Corn harvest is essentially over, although there is still some corn left in the field that will unlikely be harvested. Farmers in South and North Dakota and Minnesota, where discounts for drying corn and low test weights are signaling producers harvest corn later, are indicating they will let corn stand all winter even though stalk strength weaker than year.
With the remaining crop unharvested, end users would be concerned they will not be able to get enough crop to meet feed and fuel demand. Producers need to be making sales on rallies into resistance levels.
Commercials have also been aggressively selling into this rally and are now short over 91,000 contracts. With the commercial selling, prices have stalled during the last eight weeks of trading. After the calendar turns to 2010, expect increased farmer selling for tax and quality purposes.
Much of the 2010 crop was harvested and binned in wet conditions. Farmers will want to move some grain after the first of the year to make sure grain does not go out of condition.
Strategy and outlook: Producers should have increased hedges to the 70 percent level. The strong rally without fundamental bias should encourage producers to sell the product now and use price weakness to re-own the crop with futures and options.
Buy July options on a pullback into a retracement level. Hedgers have sold a portion of the 2010 crop when December futures traded above $4.50.
Soybeans closed the week $.11 lower. Soybean demand remains strong as a private sale of soybeans of 367,000 mt last week was announced by the USDA. Demand remains strong as well as usage. November census soybean crush was reported at 168.6 million bushels, right in line with expectations of 168.4 million, and up slightly from last month’s 163.5 million.
Crush continues to run notably above last year, with November up 17 percent from last year’s 144.7 million.
Additionally, November crush at 168.6 million was easily a new record for the month, surpassing the previous November crush record of 156.3 million in 2007.
This year’s export profile remains well ahead of last year’s record pace, 1,086 mb versus 708 mb. The U.S. only needs to export 6.7 mb each week to reach the USDA forecast of 1.340 bb.
Strategy and outlook: Producers should have increased hedges to the 70 percent level. With the tight basis levels and lack of carry in the market, the market is telling producers to sell the product now and use price weakness to re-own the crop with futures and options.
Buy July options on a pullback into a retracement level. Begin selling 2010 crop with November futures above $10.30.
Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.
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