Published Tuesday morning, 9/25/12

The overnight markets have attempted once again to recover from some of the punches it has taken in the gut over the past few weeks. It’s amazing to look back at seasonal trades and think “why didn’t I respond to what history has taught me”? One of the biggest seasonal trades in grains is to sell the market through September, this has been no different yet on September 1st the perception was that this year is different. Well if we look back at history again there is typically a quick 50% retracement of the September losses during the first few weeks of October.

The USDA will release its final estimates for supply on Friday morning which happens to be the end of the quarter and the end of the month. Here is what is expected, beans are should fall somewhere between 115-152, corn should be 887 - 1.261 and wheat will be 2.159-2.533. The bean and corn figure are what will really matter come Friday morning.

Here is what’s changed in the past 30 days, corn prices are now $30 below global feed wheat prices, the US is still shipping corn to China which shows that they still want it even though its higher priced than our competition, animal prices are back on the rise with falling feed costs…this will eventually create an increase in feed usage and ethanol is still much cheaper than fuel so the cuts that have been seen in ethanol production will be bottoming out.

The bottom line is that it doesn’t seem that there is any rationing going on in the feed sector. Beans are even more inspiring, Brazil is rumored to be tapped out of beans, the global crush rates are profitable in every corner, meal consumption is on the rise due to lack of DDG’s and on the break China continues to add to their coverage rather than slowing.

The big problem with all the grain markets is not the bull story but rather the landscape of trade, which has liquidated a fair amount this month right into the consumer’s hands. The basis levels in both beans and corn for this time of year are near record highs as well. The longer the markets hover in these areas creates the potential for an even bigger rally later.

The weekly condition figures show that the late rains in August did indeed help some of the bean crop as its now 35% G/E and also some of the early yields have been surprisingly good, with this there are some that have increased the overall yield to 36-37. The corn yields are all over the map and with 39% harvested it seems the 116-121 range will capture the corn yield…the wild card remains the harvested acreage.

The OI in corn fell by 396, wheat is down 278, beans were down 2717, meal was down 3674 and oil fell by 5524.

The outside markets are showing some signs of recovery as well with the Dalian Exchange higher in all markets, the Matif markets are higher, MDEX is up 28 ringgits, crude oil is 90 cents higher, RBOB is up 280 and the $index is lower.

The option markets have become very quiet over the past weeks with very little new activity, some think that the paradigm has shifted and the grain market will fade away for the balance of 2012, if will most likely be quieter than what has been seen for the past 4 months but don’t forget that the markets are still within 10% of all-time highs and another 10% move in either direction could happen very quickly. The 1x2 call spreads in both SX and CZ still seem like something to have for the seasonal play, such as the SX 17-18 for less than 5 cents, or a CZ 780-850 for 5 cents. The wheat market still seems to have the most smoke surrounding it, look at buying puts selling calls with deltas as the skews favor this.