December 14, 2011
By: Craig Haugaard, Grain Origination Manager
Recently I had a friend from New York City come out and visit our state for the first time in his life. I should preface this by saying that my friend grew up in New York City and has no familiarity with country living in any way, shape or form. I was excited to show him around and let him experience some of the things that we take for granted living in rural America. As we were driving around he turned on the radio and starting flipping through the stations looking for something to listen to. As he hit 570 on the AM dial this is what we heard, “We are selling 48 big, black, bred females.” Now, this didn’t bother me in the least, in fact I could kind of see this line up, of what I assumed were cattle, in my mind. My friend on the other hand snapped off the radio and glared at me with a look that was a combination of disbelief and disgust. Finally he said, “You do realize that we fought a Civil War don’t you?”
The more I have thought about this exchange the more convinced I am that what happened in that exchange happens probably millions of times a day across this nation. Two people hear the exact same thing and have radically different responses to it. It occurs to me that we “hear” what our experience and background allow us to hear. My friend, with his background of city living had no context in which to place what he was hearing on the radio and thus his mind went to something he had at least heard of that could have fit the information he had heard on the radio.
Folks that study how people process information have found that when making a decision people tend to “positively evaluate and continue a course of action even when the available information indicates that withdrawal is necessary to reduce further losses.” The research further shows that folks persist because they don’t want to admit to themselves that they have made a mistake, to say nothing of the desire to keep other folks from finding out that they have made a mistake.
I suppose this all helps to explain why I have held on to so many losing trades over the years and probably goes a long way towards explaining why some of you have a tendency to keep grain in the bin even when the market is dropping faster than greased lightning. Now if we could just figure out how to correct that and all turn into marketing geniuses.
CORN: 2 lower
It didn’t take a genius to see what was going on in the corn market yesterday. A Reuter’s story yesterday led off as follows: “A member of the Iranian parliament's National Security Committee said on Monday that the military was set to practice its ability to close the Gulf to shipping at the narrow Strait of Hormuz.” The thought of Iran closing the Strait of Hormuz was enough to cause a run on Depends as well as sending the price of crude oil back up over $100/barrel. As crude oil rallied it pulled corn higher as well. Crude oil settled up $2.37/barrel during the day session while corn struggled to settle virtually unchanged for the day. The problem seems to be that in the final analysis there is still a huge pile of course grains and feed wheat in the world that folks are willing to sell at prices lower than our current prices. We have some analysts that continue to hold out hope that a drought in South America will generate the spark needed to re-ignite this market. While that may eventually turn out to be the case for now it should be noted that the vegetative health index maps are showing that the conditions in both Argentina and Brazil are better than they were a year ago and substantially better than they were during the drought year of 2008. Finally, we need to keep in mind that the funds still will be re-balancing their portfolios once we get to the first of the year. As things stand right now it appears as if they will need to sell 11,000 contracts in order to get their corn position back to where it needs to be. The technicals are not giving much of a direction at this point as we continue to consolidate against the support point as indicated by the thick red line on the following March futures chart.
SOYBEANS: 5 lower
In the 2007/08 crop year Brazil and Argentina combined to produce107 MMT of soybeans. In 2009/10 that number was 123 MMT. In they had a La Nina drought year and production came in at 89.8 MMT. That, in a nut shell is why beans performed relatively well yesterday. As noted in the corn comments, thus far the vegetation maps look much better than 2008/09 as well as better than last year when the two nations combined to produce 124.5 MMT. It appears as if some risk premium is being built into this market in the fear that a serious drought may develop. Should a drought of the magnitude experienced in 2008/09 occur this market will go higher. If, on the other hand these fears turn out to be unfounded you run the risk of beans breaking sharply lower from the current level. As we stand here today, two of my three indicators are bullish. In looking at our old friend Fibonacci it appears to me as if any sort of rally in the January futures shouldn’t run into any substantial resistance until we hit the $11.67 level.
WHEAT: 2 lower
I believe it was a couple weeks ago that I remarked that I felt the only thing that wheat really had going for it was the huge fund short position. I really have not changed my mind on that yet. As we open the session today it appears as if the funds will have to buy back 33,000 contracts in early January when the fund re-allocation takes place. This would be about 9% of the current open interest in the wheat market and that should push this market to higher levels. I guess the other news is that HRW is getting more and more moisture and the other countries are beating the living daylights out of us in the export market. I wasn’t the sharpest economics student to ever grace the campus of SDSU but as I recall good growing conditions and un-competitiveness in the export market are not things normally associated with a strong bull market. Looking at the charts this appears to be a sideways choppy market at the present time.
The information contained above was taken from sources which Wheat Growers believe to be reliable, but is not guaranteed by Wheat Growers as to accuracy or completeness and is made available for information purposes only. There is a risk of loss when trading commodity futures and options.