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May 15, 2006
Let's just start with the chart below. I think this is as classically bullish a breakout as you ever get. Friday morning's USDA Supply-Demand Report surprised everyone with projected Corn World Ending Stocks being the lowest since 1975. Furthermore, the World Stock to Usage Ratio was projected to be the LOWEST ON RECORD, or at least since this data was first reported in 1960. The USDA news resulted in a gap up into new contract highs and a roughly 10-11 cent higher close. This action follows last month's move into new highs and, by any definition, can be classified as a break out from an over year long consolidation...If you EVER would make a chart trade, this is, in my opinion, as good as it gets. On the other hand, if you are a fundamentalist, you can't ask for anything more bullish than the lowest numbers on record...Throw in the massive fund presence in commodities nowdays, the concurrent seemingly rampant bullish commodity atmosphere, plus the fact that the USDA also projected a 34% increase in ethanol production during the next yearand it makes one hell of an argument for getting on this market....I have no idea where it might go...I do know the record high in corn is $5.54 a bushel (almost $3.00 away) and, as you are certainly aware, there have been a number of record highs made in commodities during the past few years...And do not forget the weather. Corn is probably the most weather sensitive crop we produce, needing rain and sun at specific stages of development, and with stocks being as tight as they are, just a "hint" of unfavorable weather could make for extreme fireworks.
Is this a no brainer? Obviously not...This is the futures market and ANYTHING can happen...but the first objective in any commodity analysis is the determination of which way you think the market is going...and this one looks up...It may rattle around, it may have sharp may be going south...but it also has an execellent chance of just blowing out of here.
I'm getting on....and for what it's worth, somehow I doubt this is at all like last year's cotton trade...that just kept going sideways.
I'm buying corn with futures and/or options. Margin per futures contract is $475. If you are using strictly futures, I'd be starting with something like a 12-15 cent stop ($600-$750)...and looking to add more if it goes...I've been here before and think I know what to do with this...and how to do it.
This, to me, is a VERY bullish look...with VERY bullish fundamentals to go with it...
Ending stocks are what you have left over from one crop year before the next crop comes in. This number should never ever fall to zero. When stocks are low, prices have to go up to ration that crop such that the world doesn't "run out of corn" two months before new supplies are harvested...The Stocks to Use Ratio is a guide to how tight supplies actually are, currently 12.9% (lowest on record).
chart: The Hightower Report
Here are the same numbers for the USA only...The United States is responsible for about 60-65% of the world's corn exports...which makes what happens here quite important.
Here's what ending stocks look like with the 800 pound gorilla...I would also point out China is on the verge of going from being a net exporter to an IMPORTER....which is a dramatic change...and potentially of massive importance.
chart: The Hightower Report
And here is the long term chart...
Give me a call...sooner the better...I may be dead wrong but this doesn't look like one that is going to wait around.
Bill Rhyne
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