By Chris Lehner

In 2010, when a farmer was able price cash corn at $4.00/bushel, over and over and then over again, I heard, "You can't get hurt selling $4.00 corn." I am not sure who or where it was started but it was truly believed by all who sold corn. It was estimated by the end of June 2010, close to 80 percent of new crop corn was sold. On top of 2010/2011 sales, there was close to 30 percent sold for the 2011/12 crop for $4.00/bushel.

Now, it is the exact opposite. There is very little corn or soybeans and, for that matter, wheat contracted for delivery. For one, over the past four to five years there have been more on farm grain bins built than I can recall except for raising of the big blue thermos silos back in the early 1980's. (I hope it isn't a foreshadow and warning of things to come.)

Besides all of the open on farm storage, and the feeling if there is storage, it should be used, the desire to hold off sales for higher prices is probably the main culprit for the lack of sales or contracting. If you can't get hurt selling $4.00 corn was the motto of 2010, in 2013 the motto will be, "I will wait for a bounce." The problem with waiting for a bounce to sell on a bear market is from what lower level will there be a bounce and then at what point and price is the triggered pulled to sell as the market bounces. 

At this point, it is not just waiting for a rebound to sell but hoping the areas that were not planted or had problems during the growing stages are worse than what is already in the market. Traders know there have been problems from the start, but they also know there are crops in much larger amounts that are superior. I talk to farmers every day that are looking at their fields with potentials to do 20 to 30 more than they have ever done, but are apprehensive to say it thinking counting their chickens before they hatch could come back on them. I
would be the same.

In many ways, I hope I am wrong and the market soon hits a low. From my own point of view, if we get a bounce, several clients may sell. Without a bounce, brokers like me miss their commissions. But...

There does come a point when fear takes over and contracting takes place. It will be interesting to see what level is the "fear factor." Where will the panic button be pushed? When will farmers say, enough is enough.

At some point, the CME Group will likely lower margin requirements for grains. When commodities rally, the directors at exchanges raise margins. When prices fall, they reduce the required margins. With open interest falling for all commodities, they may reduce margins to stimulate interest. Margins  requirements often run from seven percent to ten percent of the total contract. Not always but it is usually pretty close. If and when margins are lowered, the shorts that have positions on the books will pick up additional trading money.

I have noticed the best traders rarely add to winning trades by using profits that haven't been realized by liquidation. Paper profits become real when trades are liquidated. More often I see larger traders use a reverse pyramid method, taking profits and keeping fewer and then few positions. It is usually the small speculators that seem to pyramid winning positions and paper profits and doing this can become a very dangerous way of trading. However, if and when the exchange reduces margins, this will be a time when real additional risk capital is put into the account versus unrealized profits from trading. Large traders now might add positions with freed up margins.

Why Won't Large Traders Liquidate

There really is no reason large traders take off and liquidate positions, even if they become slightly oversold. They realize at harvest large cash sales will come to the market as farmers deliver. Cash sales will add big pressure to a market especially when demand is slowing,

As I wrote in my previous report, one of my producer clients brought up a valid point when he reminded me that cash sales this fall may have to be larger than last year. Last year, from Sept. 4 to when December Corn futures closed on Dec. 14, the range in prices were from $8.15/bushel to $7.04/bushel. The current price for December 2013 corn is around $4.76. Between now and harvest December corn will need to bounce at least $2.25/bushel to be near the level of cash received for sales of corn compared to a year ago. With cost to plant this year equal or higher than last year, to pay off operating notes and for cash flow expenditures, as you can see, much more corn will need to be moved to be near levels of last year.

Putting two and two together, more corn coming to town plus less demand does not equal an outlook for higher prices.

To generate cash from soybeans this year compared to a year ago, from September 4 to November 14, 2012 when the November 2012 futures contract closed, prices ranged from $17.89 to $14.27/bushel. Currently are holding above $12/bushel around $12.25. Between now and harvest to generate cash flow a minimum rally of $2.00/bushel is needed. With the excessive amounts yet to be moved in Brazil and Argentina, it is difficult to see a $2.00/bushel rally. On 25,000 bushels sold last year at $14.27 it was $356,750.00 now at 306,250.00 or a difference of $50,000.00 If soybeans were sold at $16.00/bushel off the combine, the sale was $400,000.00 and at $12.00.bushel the amount is $300,000.To make up the difference 20,000 more bushels will need to be sold.

One strategy you can use as a seller; buy puts. If you feel a bounce will take place, when it comes, use it to sell calls. If you buy puts and prices fall to your targets, sell lower puts. Just because a market has turned into a bear and prices are down hard doesn't mean you need to sit on the side waiting and waiting especially for the farmer seeing big lush fields growing and hoping for the bounce.  Call or email me and let's see what we can do together. I can be reached at (913) 787-6804 or at chris.lehner@archerfinancials.com.

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Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS.
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