How to Play Yellow Gold
by George
Kleinman
Editor, Commodities
Trends
April 3, 2006
Last Friday�s crop report was a shocker.
The US Dept of Agriculture estimated planted corn acres for this coming crop year at only 78 million, 2.5 million acres below the historical average yearly estimate. The announcement was the largest downside surprise ever.
Where did these acres go? Soybean acres were up 2.9 million. Apparently the US farmer is looking for a lower-cost alternative (soybeans are cheaper to plant because they don�t require expensive nitrogen fertilizer).
As you can see on the chart below, December (new crop) corn gapped higher Friday to close up 3 percent at a new contract high of 268. I�ve indicated the gap--from 260 1/4, the Thursday high, to 267, Friday�s low--on the chart.
December 2006 Corn
In the March 6, 2006, Commodities Trends, "The Next Gold Will Be Yellow", I discussed my reasons for the coming bull market explosion in corn. And the case is compelling even without this news.
The acreage reduction only makes the story more bullish because, in effect, it takes 450 million bushels of expected production out of the picture. Assuming good weather, the carryover stocks will drop to just more than 1 billion bushels. If weather, certainly an unknown at this point, turns unfavorable it wouldn�t take much of a yield reduction to wipe out the supply cushion. It would take higher prices (perhaps much higher) to ration demand, which is somewhat inelastic with corn usage for ethanol exploding.
The longer-term chart below is reproduced from the previous article. As you can clearly see, corn is still historically cheap.
Corn Prices 1993-Present
In the March 6 article I outlined a couple of option strategies that are already working. But what if you�re not in this market yet? Should you jump in now?
Consider the following trade ideas.
How To Play
For those of you who understand the risks and rewards of futures trading, here are my thoughts:
I ouldn�t chase this market this week. Last Friday, large hedge funds piled into December corn due to the bullish crop news. Brokers in the corn pit estimated funds bought 60,000 contracts (a one-day record, I believe). They�re in this for the long pull and aren�t going to sell out easily or quickly.
Farmers stepped up their selling of old crop (last year�s) corn on the price spike. The cash price of corn, though up, didn�t keep pace with the futures. On average, farmers have about a two-week window before they get back to the fields to start planting, and I�d look for additional old crop corn sales to take place in the coming few weeks. This could result in the price easing into the gap on the corn chart above.
My objective is to accumulate futures contracts in the gap--in other words, between 260 and 267, hopefully toward the lower end of the range. This should be accomplished by April 14. While I can see this �easing� coming, I�d buy at the market on April 14 if we�re unable to accumulate a position by that time. The risk point would be a stop at 250 December corn futures.
© 2006 George Kleinman
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Futures and futures options can entail a high degree of risk and are not
appropriate for all investors. Commodities Trends is strictly
the opinion of its writer. Use it as a valuable tool, not the "Holy
Grail." Any actions taken by readers are for their own account and
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mentioned including at times positions contrary to the advice quoted
herein. Opinions, market data and recommendations are subject to change
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Results.
Hypothetical
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Hypothetical performance results have many inherent limitations, some of
which are described below. No representation is being made that any
account will or is likely to achieve profits or losses similar to those
shown. In fact, there are frequently sharp differences between
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achieved by any particular trading program. One of the limitations of
hypothetical performance results is that they are generally prepared
with the benefit of hindsight. In addition, hypothetical trading does
not involve financial risk, and no hypothetical trading record can
completely account for the impact of financial risk in actual trading.
For example, the ability to withstand losses or to adhere to a
particular trading program in spite of trading losses are material
points which can also adversely affect actual trading results. There are
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accounted for in the preparation of hypothetical performance results and
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