First of all, over the past month I have found there is a fundamental supply and demand relationship with the amount of commentaries I write and the demand of emails and calls with questions and comments. I have to admit, I am truly pleased when I hear from readers. At the very least, it tells me that my commentaries are being read all the way to the bottom. But most importantly, I receive great questions and intriguing comments from people with years of trading experience to new or less experienced traders. 

Many questions and comments are from readers trying to understand, or that want help explaining the volatility or what some feel is the lack of stability and direction in the grain markets. When I reply, I usually start out explaining there is no simple answer, but on the other hand it may not be as complicated as it may seem. Trading often becomes more complicated by trying to guess, or make the markets do what we feel they should do. 

Nobody I have personally met, know or have read, in my 29 plus years working in commodities when asked, "What will markets do" has the all-knowing 100 percent answer. However, a question leads to answers and the more we learn will help us become better traders. (When writing or asking a question, please don't start out; "This is probably a stupid question...")

Grain Markets Now –Trading the Most Basic of Fundamentals in Years

As commodity markets go, the corn, wheat and soybean markets have been trading supply and demand factors for years. Markets are moved when commercial entities hedge, buying or selling, with the help from speculators offering an offsetting position for the hedger. No matter what size the contract may be, a farmer protecting 5,000 bushels and selling one contract or a large commercial account buying several thousand contracts, the system is in place to do it.  

US grains are desired around the world because of the amount the US grows and the quality of US grains. The Chicago Board of Trade insures standardized contracts for setting prices into the future that buyers and sellers around the globe know they can trust. 

Using Grain Commodities 

If a processor or livestock producer needs to buy grain, how will they protect their upside risk? They might buy the actual cash grain at a set price and buy all they need at one time, they may buy it and set staggered dates of delivery, or they may buy futures and/or options that set the price for established dates in the future. The point being, if grain prices rally, they are protected. 

Once they are through buying and own the actual grain or forward contracts, what is the risk? How do they protect the contracted grains, or outright ownership of cash grains if prices turn lower up to the date when the cash grain is actually delivered or used? What can they do if prices are at the highest when they need immediate shipment of grain, but commodity futures are cheaper in the future?  

For instance, China has a strong growing workforce where the people want and have the income to buy higher quality food products. For centuries, diets mainly consisted of grains and cereals, but now with better education, leading to higher paying jobs, they want more meat. In order to have more meat, more livestock needs to be produced and/or more meat needs to be imported, until the country is self-sufficient raising livestock. Naturally, raising more livestock means having more grain to feed, especially if the countries hog numbers are expected to grow by 4 percent with increases planned for the next ten years. They not only need to buy grain to feed livestock right away, but if they want to increase livestock numbers into the future, they want to build a big two year grain reserve to make sure the grain is available.  

They will import close to 10 percent of the corn the United States produces. Also, their government established an agricultural think tank, which said the country will import 58 million metric tonnes of soybeans in 2012, which is 2 million more than the USDA most recently predicted. The USDA also has predicted China will grow 12 million tonnes in 2013.  

So far, they have purchased 4.8 million tonnes of old crop corn and the USDA is expecting them by the end of the corn marketing year to buy a total of 5 million tonnes. It is also expected for 2012/2103 they will import 7 million tonnes. The growing demand into 2013 doesn't seem to be letting up, according to the Chinese think tank group. They are expecting corn consumption to be 199 million tonnes, making a deficit because projected production is 197.5 million metric tonnes. Fortunately, as of May 16th, 2012 there was an announcement the country may be able to expand the planted area by 2 percent. 

If US farmers plant the entire amount of expected corn acres and the estimated yield of 166 bushel to the acre is harvested, it will be close to a 180 degree turn about in ending stocks from 2012 to 2013. According to the USDA, world corn ending stocks will be more than 150 million tonnes, the most left over since 2009/2001.  

What can the buyer in China do to protect the massive amount currently purchased and the expected need to import and buy for new crop?  Throw a few rumors into projections that crops are damaged because it has been to dry and rumored weather predictions over the next two weeks that call for heat, but little if any rain, and it is possible newly planted corn about to emerge will set back. Suddenly, a match is lit that sparks speculative interest to liquidate short oversold wheat contracts and to buy corn and soybeans. But, is it weather moving markets or entities working as hedge funds buying grain? 

In China, years are named with animals that designate what may take place in the coming year with behaviors of the animals. However, if more than animal names were used, 2012 could aptly be named the Year of the Rumor. Throughout my entire career I cannot recall a time when so many rumors, some true and others false, moved markets. 

I feel most rumors are simply the need for some type of factual information to give readers a story rather than explaining who may be actually buying or selling because it is very hard to know. 

When grains were all traded by open outcry, it was fairly easy to see who were the big buyers and sellers from speculators to commercial grain companies. Reporters could see the "players" and every afternoon a report would be issued naming the big traders. 

A turnabout came with electronically traded markets. Large traders, speculators of size and commercial hedge accounts, must report when they control reportable amounts to the Commodity Futures Trading Commission, but the actual players names are withheld. The public cannot tell where orders are generated and who is trading.  

Rumors that have been more truth than fiction are early reports of Chinese buying corn or soybeans. Rumors happen when grains have already begun to move higher. China has been a consistent buyer of corn when it falls to lows of $6.00/bushel, or slightly lower and when corn moves higher, around $6.75 to $6.86/bushel prices retreat. But who are the large speculators that move the market high off the lows and come back to keep it from falling? 

From the harvest low October 4, 2011, China has purchased large amounts of corn on four different occasions and the market has rallied up to the highs with anticipation of more buying. When more buying doesn't surface, the market falls until the rumor mills say Chinese buying is about to occur. It has been a rollercoaster. 

Four times China has purchased when prices were down and waited each time to buy until prices fell. Thanks to the large speculator, price rallies took place following the actual buying from China and retreated when buying dried up. 

When China buys grain and after buying grain on lows, along with buying massive amounts, their risk is if the market falls below their originally purchase point. 

Up to the first week of May, large speculators held a historical amount of net longs. On the CFTC Commitment of Traders Report for the first week of May, it showed large traders in soybeans had begun to liquidate longs and the overall large speculative position changed by 23,041.  Interestingly, the commercials accounts added to their net short position 24,191contracts. Speculators were liquidating and commercials were selling. It will be important to follow what both are doing week after week

Reports show the American farmer is doing anything but selling. It is estimated that only two percent of American farmers are 100 percent hedged. So who are the new hedge sellers? 

We know China has already purchased 4.9 million tonnes of corn out of the 5 million projected. So when prices rally, since they own the corn and beans, their risk is if prices fall. At the same time, and it is no secret, they support prices to encourage growth not only for Chinese farmers, but to encourage growth throughout the world. This year they got what they wanted. The American farmer with the aid of Mother Nature is about to finish planting the largest amount of corn in decades.  

So where are the large speculators sitting, as they push buy and sell orders through the electronic markets? Could money come from the Chinese Investment Corporation? The Chinese Sovereign Wealth fund is responsible for managing part of China's foreign exchange reserves. When it was established in 2007, it started with approximately $200 billion of US assets. It may now be the largest of all wealth managed funds. In 2009, it started focusing mostly on resources and real estate. It is said to have an advisory capacity to the Chinese agricultural think tank group. 

So are commodity markets as volatile as many believe? Possibly wide swings in  markets should be viewed in the future as opportunities to sell when highs are neared or opportunities to buy when lows are where past KNOWN buying takes place. 

In the grain markets for 2012 since October, highs and lows have been established. As we see buying at new lower levels for the 2012/2013 crop years and where selling so far has occurred should we use levels as opportunities or hope for higher markets when there is need to sell or lower markets when there is need to buy. 

Until the charts change and because we have a good idea on amounts China will purchase for speculators and hedgers, I prefer using what we know versus what we may want or feel should happen. For as long as China is a strong KNOWN player, and have repeated told us their plans, the best plan trading for me is going along with the big reportable traders and paying attention to chart formations. China is the power player until they decide to change. Year after year they tell us their plans and they are and will be a dynamic force on the commodity markets, until they become as they desire, self-sufficient.

Call 913.787.6804 or email me chris.lehner@archerfinancials.com for strategies and recommendations for hedging and speculating.  Also, keep the questions and comments coming my way.  

For Chris Lehner's entire career, beginning in 1976 fresh out of Michigan State, he has worked with agricultural producers and businesses from the cash side of markets, to twenty-nine years as a commodities broker, branch manager, general manager and senior hedging analyst for two of the largest packing companies, livestock cooperatives, one of the largest seed companies and renowned brokerage and agricultural consulting firms.

He is a stickler about continuing education for his clients, as well as for himself.  His library has well over 100 books from the basics of fundamentals to the micro-economics of markets, technical trading and the masters of markets, plus the extensive notes and recordings from times he spent with some of the very best traders in the futures industry. 

Chris' philosophy on marketing and trading is based on the necessity to adapt to multiple variable factors, while maximizing the satisfaction of movement and change. 

Recently, a client of many years, after reading one of his marketing commentaries called him the Paul Harvey of commodities. Rather than duplicating what other analysts or reporters too often repeat, Chris tells the "rest of the story" for the bull and the bear and finishes with his own outlook.  He uses supply and demand, combined with in depth charts because, like washing hands, he personally feels using two in unison is more efficient.

Chris has a weekly news and website commentary and his daily radio grain analysis is heard in several Midwestern states. Whether it is a phone next to his ear, in person, or in front of an audience, Chris looks forward to sharing and using his experiences to enhance his clients' trading experience.

Chris can be reached at (913) 787-6804, or via email at chris.lehner@archerfinancials.com.