$$October 3rd MPUpdates – A Bullish Key reversal in Canola late in today’s trade. We’ll watch for confirmation amidst turmoil of StatsCan tomorrow, but otherwise, the Funds continue to dump Beans and seem poised on taking it back to the $14.80 gap (a further 60c drop from here). Corn has bounced off last week’s Bullish USDA stocks report but has stalled so far exactly at 38.2% Fib retracement – a level it needs to take out in order to prove a bottoming process – a fail here and a test of the $6.75 gap is likely due up (an 85c drop from here). Wheat is the stalwart, holding up nicely as Beans and Corn look for their bottom. Market is expecting a further reduction in Canola yields in tomorrow’s StatsCan, but we are not expecting that to deviate it from it’s marriage to Beans quite yet, unless it’s a surprisingly large yield reduction. Outsides are mildly Bullish but tailwind or headwind, the Funds are re-balancing a very profitable Long position and we continue to believe it a short-medium term phenomenon before a challenge in the New Year of previous highs. That said, we continue to pick our spots on selling laggards of the downtrend to mitigate the very real risk of being wrong. Targets expire Oct 8th. We believe it in your best interest to be within 20% of our official Benchmark positions – plus or minus.
$$CanolaMPU(NewCrop) – Target $14.30 Oct Delivery {658-27Basis} on 15% to be 70% sold (24bu of a 34bu crop). Benchmark is 55% sold. At Current Sep $13.09, be 40+% sold. Great basis levels are a sure sign the Canola market is stronger than current drop would have us believe. Canadian Canola crop is significantly lighter than anticipated 6 weeks ago and this will eventually lead to some good pricing opportunities but it still must play it’s part in the Oilseed Complex and there are substitutes for many of Canola’s uses. There has been a discount to Beans that should flip into a premium over time but Oil is a weight on Canola moreso than Beans and it will take time to shake that burden if it remains one. Reminder to Sell Yield Overages (above 34 bushels) into the the $13.50+ range to help lock in $190+/ac profits.
$$Gr.LentilMPU(NewCrop) – Target a 24c Oct-Nov delivery on a #2 contract on 15% to be 55% sold (15bu of a 26bu crop). Benchmark is 40% sold. At Current 21.5c be 25+% sold. A number of key criteria have been met to enable a solid bottoming process in Green Lentils. Canadian price moved towards and met up with the Pigeon Pea Put, a solid feed market has pulled off-quality bushels from the bin, all other grains have rallied, and the foray into the teens will create an entirely new perception at seeding time next year. Where 24c bids prevailing last winter were thought to be a pit-stop on the way back to 30c, the 18c scare this year will be remembered as being a possible precursor to 15c – an entirely new yet just as foolish mindset. With Chickpea yields solidly in the 40’s and netting 6X the profit level of Lentils, capitulation will be in full force during acre planning this winter. J-MAS remains neutral on 2012 price prospects but is solidly Bullish the 2013 crop. Reminder to Sell Yield Overages (above 26 bushels) into the $0.215#2 range to help lock in $103/ac profits.
$$Y.PeaMPU(NewCrop) – Target $9.15 Oct Delivery on 15% to be 55% sold (19bu of a 35bu crop). Benchmark is 40%sold. At current Mar $8.18 bid be 35+% sold. Our Bullish Pea thesis has lost some of it’s sheen over the last few weeks as Kariff prospects improved but we continue to believe a 9-handle is in the cards again in the New Year based on solid fundamentals and tight exporter carryovers. Reminder to Sell Yield Overages (above 35 bushels) into the $8.30+ range to help lock in $120+/ac profits.
$$FlaxMPU(NewCrop) – Take $14.35 Oct delivery on 10% to be 40% sold. (10bu of a 27bu crop). Benchmark is now 30% sold. At Current $14.00 be 20% sold. Even though we saw a good sign in the Canola pits today, we need to mitigate our Oilseed risk exposure since the charts are somewhat damaged. Flax can only go so far without Canola’s help so a 40% sold position is good risk management position and still allows us 60% to capture the explosive upside Flax can possesses and is setting up for. Reminder to Sell Yield Overages (above 27 bushels) into the $13.50+ range to help lock in $177+/ac profits.
$$ChickpeaMPU(NewCrop) – Continue to take 35.5c rough #2 specs on 35% to be 75% sold (35bu of a 47bu crop). Benchmark is now 75% sold. At Current 35.5c be 75+% sold. It is exceedingly difficult to market Chickpea on Fundamentals as the data is limited and our own crop is not influential. Yields have been fantastic and quality impeccable. It’s a promising sign that prices held through harvest pressure. Reminder to Sell Yield Overages (above 47 bushels) into the 35c#2 range to help lock in $600+/ac “gross” profits.
$$Eth/Fd.WhtMPU(NewCrop) – Continue to take $6.80+ Oct delivery on 20% to be 80% sold (59bu of a 78bu crop). Benchmark is now 80% sold. At Current $6.93 be 80+% sold. White Winter Wheat should be sold at least 15-20% further sold than Red – on the election year potential of a waiver of the Renewable Fuels Mandate in the US. There is enough uncertainty surrounding Corn which has performed very poorly that we are adding to our Feed sales as we foresee the next leg higher to be too far out to hold a crop we grow for early movement, and because we have continued concerns about Ethanol markets in an election year. Reminder to Sell Yield Overages (above 78 bushels) into the $6.50+ range to help lock in $300/ac profits.
$$DurumMPU(NewCrop) – Target $8.90+ March delivery for #2 on 15% to be 55% sold (25bu of a 46 bu crop). Benchmark is now 40% sold. At Current $8.55 #2 March be 40+% sold. J-MAS would not be holding more than a greedy portion of this crops based on its own Fundamentals (i.e. – very Bearish in the Short Term) but like Lentil we believe in a Long Term Bull case and we hope to capture some late 2012 pricing in anticipation of a very Bullish 2013 story. With Wheat poised to underpin and outperform Durum going into next year’s Acre Battle, Canada is poised to short Durum Acres next year. And while there is likely to be a surplus (pending Western Saskatchewan’s crop quality – as feed will disappear quickly), low acres and El Nino weather could spell a very light Canadian crop next year. If the Mediteranean comes in average, the market will quickly see a developing shortage of Durum and with it’s volatile nature, we could easily see a Bid well into the Teens at Port – as it was not at all unusual to see a $16 bid at Port during supplies scares in the CWB days. Now in a competitive market we are less likely to see the 16 as we can’t squeeze the end-user as effectively by holding supply back, but we actually get to capture the price itself (rather than just see a floating PRO go from $7 to $8.50 on $16 port bid) and it should still be in the mid-teens at port, netting us $12-$14 in the pit. While the average marketer probably still sees his average only go from $7 to $8.50 on such a move due to previous sales and lack of discipline once/if this price arrives, we are positioning ourselves specifically to capture it by underselling now and planning ahead for that type of outcome. We do so against what we consider a favorable risk/reward on an unlikely but possible scenario developing next spring. Reminder to Sell Yield Overages (above 46 bushels) into the $7.85+ range to help lock in $170+/ac profits.
$$HardRedSpringMPU(NewCrop) – Target $8.95 #2 on 15% to be 55% sold (22bu of a 42bu crop). Benchmark is 40% sold. At Current $7.58 #2 be 15+% sold. Wheat continues to move its way into feed rations, replacing the more expensive corn. It is moving almost lockstep with Corn but some supply burden does still exist and there are a number of Wheat crops around the globe poised to come in average or better. Russia’s export ban is the watch and it should happen after they blast out their excess – and then things should get interesting – though I do believe a Ban is mildly priced in. That said, it should grind towards a more historical relationship to Corn and Beans which at current levels would put it into 4 digit territory quite easily. Reminder to Sell Yield Overages (above 42 bushels) into the $7.70+ range to help lock in $120+/ac profits.
$$Nitrogen Fertilizer(NewCrop) – Fertilizer has not taken off, and may not if Beans become the crop of choice and drought acres in the US are long Nitrogen for next years Corn crop. We are cautiously backing off on Fall purchases, but believe you should take advantage of any price drops. Continue to buy $580-600 Fall Delivered Nitrogen on 60% of your 2013 needs. Benchmark is now 60% Bought. At Current $605 be 50-60% Bought. Go to 100% of Needs if you marry this Purchase to an extra 5 bushel Canola sale to lock in margin. The Math is embarrassingly simple but 3-fold in its analysis:
1) Cornola Method – Dec Corn at 759 ($7.59) + Nov Canola at 598 averages 678 and 678 becomes a Nitrogen fertilizer target price. Remember $2.40 Corn and $360 Canola in the early 2000’s? Prevailing price of N was roughly $300/mt. Remember $4.50 Corn and $500 Canola in 2009-11? N was about $475. It’s crude but historically on cue – but can also be slow to follow – which we are seeing currently.
2) Canola C.O.P Method – $605 Nitrogen is 60c/lb. 3.1/lb of N/bu of Canola is $1.91/bu. With a $13.50 price, $1.91 is 13.7% of Production. If we think back on the last two years, Canola averaged around $11/bu prior to the latest run-up. Nitrogen probably ranged between $475 – $625. When Nitrogen was $475 and “cheap” it was roughly a 13% Nitrogen Cost of Production, when it was $600 and “expensive” it was nearly a 18% N-COP. Deeper into history, we see Nitrogen taking up to 21% of Canola cost of Production when Natural Gas was a more expensive component.
3) Natural Gas – Natural gas has proven itself an ineffective indicator of where Nitrogen pricing will go as Demand fundamentals are superseding Supply side indicators at the moment and for the foreseeable future. The huge findings, especially locally, should depress NatGas pricing for the foreseeable future and this could well be entering into the current lag to movement higher.