Grains Revivew on November 10, 2011

Wednesday saw a major mess on the floor of the CME. Following WASDE all expectations were for a lower move all session but at 9:30 CST energy inventories came out showing that crude and distillates stocks fell dramatically over the last week. This pulled crude $2.50 off its session low helping corn actually trade higher at multiple times during the session. The other bullish glimmer of hope was in Minneapolis with this market closing the day 5-higher near the top of a 25-cent range. The squeeze is still going on up there so look for further support through the end of the week and beyond. The other mild glimmer of hope was KWZ-H which actually traded flat against a 25-cent flat price loss. This is good for the spreads near future with a bullish stance still suggested. On the flip side of this bullishness was the dismantling of WZ-H and CZ-H spreads as bear spreaders get pushed out. There is no real threat to supply of either corn or wheat right now but this is a money flow issue that you cannot ignore. I continue to feel the CZ-H deserves to be at 14-cents... will see if it makes another attempt at this level heading into FND in a matter of weeks. The WZ-H traded into 20-cents showing a 20-cent loss in just a matter of weeks. This is an small part attributed to Minny but more directly associated to money flow again and a lack of interest in bear spreading due to MF Global issues lingering. Another major mover was the CN12-CZ12 which traded back out to 80-cents after recently trading as tight at 60-cents. This is due to money flow once again, not fundamental changes. The SN12-SX12 spread traded modestly tighter with this trend sure to continue as demand for beans fades and S. American weather continues benignly. I look for this spread to trade a 15-carry in the coming months. This will be a slow mover but a slow methodical spread could be what many need after the chaos of recent weeks.

Shifting to volatility, not to say I called it but it was fairly obvious. CZ vol tanked to 28.50% going home with March leaving at 29.75%. The Dec represents a 8% decline while March shows a 5% decline. Both are warranted under current conditions but the trade does not like corn volatility under 30%. I like buying upside CH volatility looking for the slope to increase again moving into the end of the year. A big factor in the rally potential for corn is crude which today traded in a 4-dollar range leaving about $1.00 lower as things closed. There are rumors that Iran and Israel are taking verbal shots at each other which will raise tensions in that region which could in turn raise the price of crude. If crude pops to $110.00, corn will likely rally back to $7.00. If crude rallies to $150.00 corn could approach $8.00 or higher. This is a big IF but recently I have seen big IFs hit plenty so watch out for further developments here. Bean volatility fell but not dramatically with SF leaving around 20.50 showing a 2% decline while March left around 20.50 offering the best purchase in my eyes. If you are bearish beans, take a look at the SH 1000p for a cheap entry opportunity while bulls can look at the SH 1400 calls for 8-cents or less. I lean towards the bears.

Overall the sentiment following the WASDE report is neutral to bullish for corn. Bearish for beans and Bearish for CHI wheat while the jury remains on concerning KC and Minny. Meal could find support due to increasing feed numbers while bean oil needs a boost out of palm and crude to avert a further decline. I like a long volatility play for corn and a short delta play in beans. I continue to favor KWZ-H and will until Minny gives up.

The afternoon period brought nothing new to the trade so I have to look again at macros for support with minimal momentum found in either direction. The agricultural overnight was mixed to higher with only a modest positive bias noted. A small bear spread bias noted in Beans, a continuation of the bull spread bias noted in corn with CZ-H trading into 8.50 overnight. Spreads are a real question mark right now. The WZ-H traded back out to 21.50 overnight but this is still well below the VSR for this time frame. Why this is happening is a mystery to me. Has there been some fundamental shift is SRW demand? If that were true, traders would see something on exports or from the USDA concerning feedings. We have seen neither. Outside of this, the world seems fairly calm heading into the day session.

The Euro and crude are rebounding from yesterday's choppy downside bias. Equities are higher helping sentiment along with Palm oil. Look higher today and continue to look higher in corn as time moves through the end of the year. I favor the upside in corn, the downside in CHI wheat and the downside in Beans.

Beans (SH) are called Flat-3 Higher with a bear spread bias noted in the front. The market struggled above $12.00 offering more downside with indicators sitting in a strict negative stance. Corn (CZ) is called 2-4 Higher after chopping around the 200-day yet again and failing against the descending 50-day MA. A move over $6.64 is needed for technical momentum to start to shift higher. Indicators are mixed in the upper half of the range. Wheat is called Flat-2 Higher with a bear spread noted in CHI. KC is called 1-2 Higher with a modest bear spread noted in KWZ-H sitting at 11.50. Minny is called 1-3 Higher with a mild bull spread bias noted. The MWZ-H is out to 78-cents. Meal is called Flat/Mixed looking to beans for momentum with a similar technical stance. Bean oil is called 20-30 Higher with more possible if crude holds early momentum.

News: Open interest: Corn +27657. Beans +3534. Wheat -2456. Meal +5359 and Bean oil -3471. The gains in corn are staggering. The questions swirl but I continue to feel this is fund money looking at an undervalued asset while S. America ramps up hedging as corn planting progresses. The gains in beans and Meal I attribute to fresh shorts looking for a further break.

Over the past 24 hours we saw all rains leave the southern plains moving NNE through IA and IL overnight and through IN and OH today and into tomorrow. The forecast offers no further precipitation for 2 weeks basically shutting down the fall season with the attached drought monitor showing there are still major problems in the southern half of KS and all throughout OK and TX.

Export sales came out as follows: Beans 604 TMT sold and 1.2241 TMT shipped. China was the featured buyer of 334 TMT and the taker of 900 TMT. Corn sales came out at a paltry 251.9 TMT with 624.4 TMT shipped. China was a small taker shifting from "unknown" origin. Wheat sales were 298.4 TMT with 353.5 TMT shipped. No word yet from the USDA on a class breakdown. Meal sales were heavy at 291.4 TMT with 112.8 TMT shipped. Bean oil sales were 21.7 TMT with only 3.2 TMT shipped.

Overall nothing to get excited about. Bean shipments were larger than the average guess but remember that we are 34% behind last year's pace so we have plenty of work to do to catch up.

Palm continued its run to the upside gaining 85 Ringgits overnight. This is due to ending stocks down 1.6%, Euro support and crude rebounding. The rally in palm oil will impact oilshare directly so look at palm for direction and momentum. Right now palm states we are moving beyond 46% basis March.

LATE SALES: EGYPT buys 240 TMT milling wheat split between Russia and Ukraine.

MACROS: Are strong with a firming bias moving into the day session. This will help all commodity markets gain on the day.

Gold is trading 16.90 Lower sitting at 1774.70. Money is moving back into currencies because we are lemmings and believe the drivel coming out of Europe.

Crude is trading 1.80 Higher sitting at 97.54 as of 8:30 CST. This is due in part to Iran flapping its gums about completing nukes in "short order". World tensions are rising and crude follows tensions.
The Euro is .0073 Higher against the USD trading at 1.3618. I guess it's all OK in Italy today and we all forgot about Greece.
The Yen is .15 Lower against the USD trading at 77.63.
Dec Cotton is trading .2.78 Higher sitting at 99.96.
Oct sugar is trading .18 Higher sitting at 25.54.

Daily Wisdom: That's the nature of women, not to love when we love them, and to love when we love them not. - Miguel de Cervantes


Matthew Pierce,
Grains Guru of Grain Futures Trading
Learn more about how to trade & futures market.