Published Tuesday morning, 10/16/12

The overnight markets have made a feeble attempt of recovering some of the devastating losses that have occurred in the past 2 trading session. The beans as of 8:00Cst are hovering near 10 cents higher in the session, meal has gained $3, oil increased by 40-50 points, corn increased by 6-8 and wheat has gained 8-10. Its Tuesday and the markets have been punished over the past few sessions, don’t be too quick to jump back on the bull wagon as there has been extreme technical damage and the beans have a gap that should be filled down to 1478 that dates back to June. For those keeping score the bean have virtually erased the entire summer rally and the last time the markets have traded at these levels it was thought that the bean yield was near 42 bushels an acre.

The overall sentiment of these markets has been one of liquidation for the past 6 weeks as once again the seasonal play of selling into harvest has indeed worked well and bean yields have astonished even the most hopeful individual after the driest summer in over 50 years. The bean yield is now rumored to be nearing 40 bushels an acre, if this is correct trying to create another bullish weather story in the future will be virtually impossible, but we also must remember that these are futures markets and not history markets, beans are down nearly $3, the spreads have collapsed and the CO is less than what was projected in September, the bottom line is that demand is taking every bean produced…no matter what the yield might be and with a $3 break the consumer pool has only become deeper.

The SA weather has improved in nearly every corner over the past 7 days and appears that the forecast is favorable for early germination in a large portion of the region. The crop sizes that are projected are massive, but has anyone asked the question that with a $3 break in beans would the massive expansion of acres possible not be as massive? The other factor is that last year was very similar and the growing problems in Brazil didn’t start until the 1st week in December and by the end of their growing season over 15% of the crops were lost. The planting pace has picked up in both Brazil and Argentina in recent days and % of plantings are quickly nearing what the 5 year average should be. The US harvest is nearly done with 79% of the corn accounted for and 71% of the beans. These are both record paces.

The OI in corn fell by 6164, wheat dropped by 604, beans were up 1213, meal was up 1108 and oil increased by 4421. The outside markets are mixed with equities increasing, crude oil is up .29, natural gas is down .01, sugar is up .30, $index is weaker, the Dalian Exchange is higher in all markets, the Matif is higher in all markets, and the MDEX finished down 10 ringgits.

The option markets have been decimated in recent days, especially in the deferred bean options. The SH forward are trading back in the teens which hasn’t been seen in nearly 15 months. It appears that the SA hedger is taking lessons from the Chinese as they sell calls rather than sell futures for hedging purposes, the difference is that China sells puts on something that they will eventually buy, SA is selling something (calls) that they haven’t produced yet. Either way sub 19% seems like tremendous value vs. either corn that is trading still in the mid 20’s or even vs. the meal or oil that is higher than beans. The crush margins would also point that beans are too cheap vs. the products as every CME crush calculations are over 50 cents. The way that seems most advantageous in beans is to buy puts with deltas and over hedge it for those who are bullish. The corn has eased as well but is still in the mid 20’s, corn is wrestling with the fact that there seems to be a floor down near $7 and a ceiling above $8, it’s too cheap to sell and too expensive to buy, if anything the skews would favor buying puts selling calls and use futures. The wheat structure is similar to the corn as puts are discounted. The deferred wheat options have also eased into the mid 20’s keep an eye on these as owning wheat Vega in the lower 20’s could be something of value.