September 11, 2013

In Corn and Soybeans, I suspect (but don’t know)

that “bad weather” has been accounted for…

And the next thing we will see is a return to severely lower prices…

The jury is still out, and there is a another major USDA crop report out at 12:00 PM (EST) tomorrow that can certainly shake things up, but with weather having dominated virtually every headline, 50 times a day, in these two markets for the past three weeks, and with neither market having really having gone anywhere, I just have to believe the whole “crop is suffering” story must by now have been fully accounted for from a price standpoint…and it is now time for both of these markets (and Wheat as well) to either resume or continue the bear markets they all began approximately a year ago...

Recent action in the Soybeans DID force me to acknowledge the possibility of crop damage (which I absolutely only caught on to after the fact), and give Corn and Beans at shot at the long side, but my intent is now to aggressively pursue the short side in both markets (I have remained short Wheat), looking for MAJOR bearish moves that will extend all the way out into next summer.

While weather can become a factor at any time, thus precipitating sharp upward price thrusts (which may still be the case right now…which is why I continue to strongly recommend using the “Both Sides Strategy”), I fully believe ANY bullish weather moves will be temporary…and in fact, represent an opportunity to get short at higher levels.

The last 3-4 years have been “GO!GO!” in the grains, but I believe we are now in the early stages of reverting to the mean that I have seen during the past 3 decades in this chair…In the “old days”, bull markets used to go ripping off on the upside, get everybody excited for six months to a year, then proceed to fall steadily lower for 2 or 3 years while the analytic masses pumped out stories referring to the quite stale “bullish fundamentals” as though they would go on forever…High prices DO curtail demand and high prices DO prompt more production…from ALL comers around the globe…and my experience suggests the day will come when prices for Corn, Wheat and Soybeans will all be tremendously lower than most farmers and analysts would ever think possible (AGAIN)…where you look back at a grain chart that just drips, drabs and occasionally spurts sharply lower for the preceding 12 months, and think, “WHY didn’t I see that coming? In retrospect, it just looks so obvious.”

When it comes to putting money on the table, I think it is essential to KNOW the market can easily move dead opposite what you are expecting, either temporarily…or you may just be dead wrong…which is why I try to pound away on the idea of using the approach I so plainly refer to as the “2 and 1”. Just a quick look at what Corn has done for the past ten years (table follows) makes it quite obvious that volatility, and fairly big percentage moves are the NORM in these markets, which might be summed up as resulting in two primary potential outcomes: Big profits. Or Big losses…And as I constantly remind myself (not always often enough), using the “2 and 1” DOES give you the opportunity to have been wrong and STILL get your money back…and then…having only lost “time”, instead of money, reposition at better levels…Obviously the approach does not always, by any means, work out so nicely but I literally cannot count the times when it did…And when you ARE right, when you do score, you NEVER (in my book) sit there and bemoan having wasted money on the “insurance”.

Enough trading philosophy…Here are some real numbers, which is what this stuff is really about…

Futures are inherently volatile…

They do move and they do move in big percentages…Here are some figures that demonstrate exactly that…

I want to be in markets when they are likely to be GOING SOMEWHERE…which is why I periodically examine what markets have done in previous years during specific time periods…like RIGHT NOW in Corn. I then let the resulting statistics speak for themselves…and hopefully guide me towards strategies that can perhaps capitalize on those numbers.

If this table below is too “busy” for you, the bottom line is this. It’s September 11^th. I have tracked where December Corn was at this time for the past 10 years, then noted how much the market moved away (up OR down) from its mid September price between now and expiration of the December contract. The most significant number I extract from this is the last column highlighted in yellow as it DOES give me a very clear picture of what SIZE move I might be able expect in Corn during the next 3 months.

December Corn, Range of trade between now and expiration, last 10 years

And here is what those numbers suggest to me…

With December Corn currently at $4.72, if we only match the smallest trade up or down (8.4%) in the past 10 years, this would mean a move of at least 40 cents away from current levels before December goes off the board…Taking into account there have been some decidedly bigger percentage moves, a 24% move (about the 10 year average) would mean about a $1.13 move…one way or the other.

Obviously, just because it has moved by these percentages does NOT mean it will do so again, but from an educated guess, calculated risk standpoint, I think it makes sense to assume these numbers can be used as some degree of a guide in formulating a strategy.

And so how CAN I use those numbers in the Corn market…?

Here’s one way…Positioning with my very bearish opinion….

By the way…All recommendations in this newsletter include all commissions and fees (rounded).

There are any number of combinations you might use, even simply buying 1 put and 1 call, and just letting the market “fly” in either direction…

Or if YOU are bullish, reverse the position I’ve recommended to own 2 calls and 1 put…and let the market go whichever way it wants to go…and handle it accordingly, looking to either recoup 100%...or see how far you want to let it go if it is working for you.

Important thing is, I really think sideways is NOT what’s coming from here…I say I am truly either dead wrong…or dead right. I firmly believe this market IS going up, or down…in a BIG way.

 Wheat, where we have remained on the short side

and are more bearish than ever…

There are two things I especially note about Wheat…

Firstly, if I have read, “seasonal low coming in Wheat”, once, I have read it a thousand times during the past few months…and my overwhelming experience has been, bottoms are made when NOBODY is looking for them, NOT, when every analyst I read keeps warning about the “sharp rally” soon to come.

And two, I have seen all sorts of supposedly bullish factors touted in Wheat, but here it sits…DEAD on its lows…and looking, to me, like it truly IS ready to roll sharply off a cliff…My guess is it definitely has been recently supported by all the weather hurrah in Corn and Soybeans, and all it needs is one good shove to begin what I think could be a straight down shot to the LOW $5.00 AREA.

I see a bear market that started rather briskly 9 months ago, with a rapid $2.00 break down into spring…then spent some months grinding lower (supported by weather issues in Corn and Soybeans)…and is now, I think, primed to abandon its recent “orderly” descent and accelerate into more of a classic futures “panic”, one of those 5-6 week phases where the direction is hard, fast, and unrelentingly DOWN…Shockingly so…as, to me, it’s just the way this game gets played…

And King Soybean…MAYBE there IS some weather to still be played here but I want to be on the short side (using the 2 and 1). At some near point, if not already, the “hot and dry” story WILL be history…and from there, I think there is nowhere to go but DOWN.

For one thing…

By some estimates, farmers would normally have about 40% of their Corn and Soybeans already sold (with futures, or contracted with elevators) by now…Instead, that number is probably in the 15-20% range…the point being…THERE IS A TON OF FARMER SELLING LEFT TO BE DONE…80% OF THESE TWO CROPS IS NOT GOING INTO STORAGE…And you’d better believe that all that SELLING can be exactly what pushes these markets over the edge…It is always important to remember that all you need for a sharp decline, in any market, is for producers to be in an ACTIVE sell mode while users are laying back, even just a little bit. EVEN when you have “tight supplies”, if harvest is cranking away and end users have more or less covered their immediate needs, you CAN get one of those 3-4 week stretches where selling is the dominant force, and buyers are, simply stated, “out doing something else”,…and what then appears on a chart is an unending series of straight little lines…ALL pointing further south.

Enough of my chatter...Here’s the chart and some numbers…I’m doing a slightly different version of the both sides strategy here…going with 3 PUTS and 1 CALL…And I take this position with the expectation there still may be some further weather or post USDA Report blast left on the upside…But if there is, I think it will be short-lived…however big it might be (these are King Soybeans…it pays to expect ANYTHING)…and I assure you, if there is more left in this rally, I will be positioning into the short side as it goes…as always, using both puts, and calls, as defense.

Give me a call if you’re interested…For what it’s worth, I think it makes sense to take positions ahead of tomorrow’s 12 noon (EST) report…From what I gather, the masses are undeniably looking for bullish reports…such that if they are NOT perceived as bullish, who knows how fast or big we could see the markets move on the downside…

At any rate, my principal advice is: GET SHORT ALL THREE…CORN, WHEAT AND SOYBEANS…AND STAY THERE FOR THE NEXT 3-6 MONTHS.

Thanks,

Bill

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The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Corn, Wheat