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.
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