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BRIAN HOOPS

By Staff | Feb 9, 2010

CORN

In the month of January, corn lost 58 cents from the previous month’s close. The first half of the month of February looks to be bearish, especially with the January supply/demand report fresh in the minds of traders.

The market will search for price discovery and a price level which will stimulate better demand. Ending stocks are estimated at 1.76 billion bushels versus 1.79 bb last year and will limit old crop rallies. With another bearish report in February, ending stocks could swell to over 1.8 bb. This could be the news that puts in a seasonal low for corn. Corn continues to closely follow the crude oil market and seasonally, crude oil bottoms in February before increased usage draws down crude stocks and prices rally.

Last year, U.S. farmers planted 86.5 million acres. Corn producers are expected to plant 2-3 million more acres in 2010 compared to 2009 as the lower input costs and strong chances for high yields will attract more corn acres this spring. With some corn still remaining unharvested in the fields and some corn spoiling in storage, the USDA may choose to lower the ending stocks levels after the revision in the March crop report.

Heavy snow cover in the Midwest and the lack of fieldwork, combined with El Nino conditions this spring could lead to spring planting delays.

Producers should look to buy the weakness in the last half of February.

SOYBEANS

In the month of January, soybeans futures closed $1.25 3/4 lower for the month. February looks to bring the addition of slower export sales as early-planted beans in Northern Brazil begin to come to harvest and hit the world market at a price lower than any U.S. posted price.

Because Brazil can only store up to 25 percent of its harvest, they are forced to forward sell approximately 75 percent of its early-harvested soybeans. It is the period between mid-February and May that South America over takes the U.S. as the primary port of origin for beans.

This will leave weather on late-maturing crops as the sole bullish factor for South American soybean values.

February in Brazil and Argentina is like August here as it’s a key yield-developing month for three quarters of the crop. If weather turns hot and dry, prices will rally sharply, however with good rains across the country, the price of soybeans should continue south. The USDA supply/demand report was slightly friendly in January as the USDA lowered estimated ending stocks to 245 million bushels, down 10 mb from the January report. Ahead of the February USDA supply/demand report, traders will anticipate the USDA to leave ending stocks unchangeddue to the record strong demand pace for soybeans. The soybean market’s main job is to not lose acres to other crops this spring.

Therefore, if corn rallies following crude oil, look for soybeans to join in the rally as well.

With demand forecast at 3.262 bb, U.S. producers are expected to plant an additional 500,000 to 1 million acres this spring.

Corn analysis

Corn closed the week $.08 1/4 lower. With the drop in prices, export business is starting to pick up, including the USDA reporting a 116,000-metric ton corn sale to an unknown destination. Commercials continue to provide support to the market as they are buying back their shorts and are now using price weakness as an opportunity to extend coverage into the summer months, which always brings uncertainty and production concerns.

As the prices work lower during the winter months, producers should look to use options as a way to re-own cash sales for a summer rally. If prices fall to weekly support of $3.10, look for major commercial buying to support the market at this area and should establish a winter low.

Strategy and outlook: Producers should have hedges up to the 70 percent level. Producers will want to use price weakness to re-own cash sales with futures and options on a price correction. Buy July options on a pullback into a support level. Hedgers have sold a portion of the 2010 crop when December futures traded above $4.50. When prices move above last spring’s highs of $4.73, producers should look at buying new crop put option protection and add to cash sales.

Soybean analysis

Soybeans closed the week $.37 1/2 lower. Prices continue their free fall lower as rumors circulated this week that China had washed out of two to four cargo loads of U.S. soybeans in favor of cheaper soybeans from South America.

Growing conditions in South America remain nearly ideal as it has been warm with timely rain showers.

Soybeans continue to be on pace to test key support at $8.92 before finding seasonal lows. The commercials are now holding a net long position while the sentiment index is at a bullish reading.

Strategy and outlook: Producers should have hedges at 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 support level. Producers have sold 2010 crop when November futures traded 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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