CANOLA HEDGE THOUGHTS
Prices have been rallying on South American dryness lately. As we have been continuing to stress, if you haven’t already, we highly recommend you start hedging some of your 2012 crop! If we learned anything in 2011 it is that prices will not stay high forever. We continue to suggest that you should have sold or should now sell AT LEAST 10-20% of your 2012 crop. In fact, by using options, we would encourage increasing hedges for next year to the 25-50% range. Prices are still very attractive versus historic levels. We are starting to offer options and OTC structured products to help hedge the 2012 canola crop. As an example, a 450 November 2012 put is approximately $11. That would achieve at least “disaster protection” at a reasonable cost.
If you are storing your canola for future sale, we still recommend placing a hedge in March to July. Do not simply store to speculate on price! That is not risk management. In order to protect your stored canola, you could sell further out futures or buy a further out put in March. Right now a March 500 put is about 8 dollars.
We have seen a strong rally in all grains lately. Canola is no different. Some underlying support in canola was tied to speculative commodity funds buying back previously sold positions ahead of year end. Light domestic processor demand and the pricing of old export business was also keeping a firm price floor under canola futures.
Canola is still following soybeans which have seen its strength come largely from weather concerns in South America, where hot and dry conditions in Argentina could lead to yield reductions for the soybean crops there.
The advances in canola were tempered by the strong Canadian dollar, as the firmer currency cuts into crush margins and makes exports less attractive. Light commercial hedges and ideas that values were looking a little overbought also slowed the upward move in canola, causing the futures to lag their US counterparts higher.
The March 12 canola contract has been moving steadily higher since setting a recent low at 495.8 in early December. The rally higher has lifted the contract above both the 10 and 40 day moving averages which turns the near term trend bullish.
This is the first potentially bullish crossover between these two moving averages and the contract price since late August. The March 12 contract is currently trading at 525.6 after setting a recent high at 532.2.
The 10 and 40 day moving averages should be tested as support in upcoming trade. The 10 day average is currently at 518.0 followed closely behind by the 40 day average at 516.0. If these averages can hold as support, the near term market trend will remain bullish.
If moving average support is broken and the contract closes under 516.0, the primary market trend will remain bearish and turn the 495.8-500.0 area into the next downside objective.
MGEX HRSW HEDGE THOUGHTS
Wheat has surged as well as of late. We are entering unfamiliar territory right now for pricing wheat. Due to the dismantling of the wheat board, we have the opportunity to price wheat with whoever we please next year. Though this is good news, it does make your hedge plan a little more complex right now. We still look would look to begin hedges (5-20%) for 2012 on this rally.
Though option prices are still expensive, you can always buy a put or put strategy to try and stay protected.
We have just started being able to do OTC structured products and options for December 2012. If you have any questions on those, please do not hesitate to ask.
MGEX HRSW FUNDAMENTALS
Wheat values finished the year firm in sympathy with corn, maintaining its feed grain status in a high corn price market. Export sales were above expectations at 431.2 mt vs the exchange guess of 350 mt. Commitments for the marketing year still lag the USDA’s figures by 13%.
Wheat started the year stronger, like all grains on continued erratic intermarket action.
Weekly export inspections at 13 million vs 12.7 last year. Cumulative loadings down 9% with USDA forecasting annual exports down 28%. Trade looking ahead to the Jan 12 stocks report for confirmation of much larger than expected second quarter wheat feed use.
Trade also expecting the WASDE report to show ethanol demand for corn likely shifting higher and South American corn production to shift lower.
USDA expected to shave US ending stocks in January 12 update. Still adequate US moisture situation for winter wheat now allows us to project fully adequate US supplies next year allowing wheat to continue to only follow corn price action as a feed grain.
MGEX HRSW TECHNICALS
The March 12 Minneapolis wheat contract remains in a four month sideways trading range that currently shows no technical sign of ending.
A rally higher from an 805’0 low set in mid-December closed the March contract back over the 40 day moving average. The contract peaked at a 873’4 high on Dec. 27th and has since been trending back lower to the current 839’0 level.
The 10 and 40 day moving averages have been broken as support on this latest price break which turns the near term trend back lower.
These moving averages have converged between 845’0-848’0 and are the first areas of resistance followed by the 873’4 December high. Longer term resistance is the 200 day moving average currently at 888’2.
The November-December double bottom low between 803’4-805’0 should be retested as support in upcoming trade. If support holds as it has over the past four months, the sideways trading range will remain intact. If 803’4-805’0 support is broken, the downtrend will continue and the 789’4 low set last July will become the next downside objective.
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