This article is brought to you by:
THE ALLENDALE ADVISORY
REPORTPrepared by
Allendale, Inc.
Commodity
Wrap-Up For September 19, 1997Squeeze,
Freeze, Crash!
That was a good description of this week's
trade. Monday morning greeted the short September bean positions
with 2 choices: either buy cash beans and deliver them in order to
meet the short obligation, or buy back and offset their short
futures position. Since commercial firms were not willing to accept
beans from the farmer and issue deliverable receipts for delivery,
they were telling the short speculator that no beans were available
and thus the only way to satisfy the short obligation was to buy
back and offset. One of the same commercials who were refusing
these receipts were also (apparently) long the futures. Thus as
this short speculative (or farmer) position would buy back to
offset the short obligation, the market would move up sharply
because the commercial would not make an offer to sell their long
unless it was at a significantly higher price. (September made a
one-day, 49-cent move, the second largest move in history). Futures
were rallying as this short bought, but the same commercial who
claimed no beans available for delivery, were refusing ALDL
customers offers to bring in beans for delivery. Instead, the
commercial would bid a cash price 65 cents below what the delivery
process could offer. As a result of them refusing to issue
deliverable receipts, cash prices were falling (no demand syndrome)
as farmers jumped on the premium(even though it was discount of 65
cents to delivery). This caused futures to move up while cash fell.
The divergence instead of convergence was unusual. In all fairness,
we must note that Chicago cash markets were paying even with the
CBOT futures and there was convergence but Toledo and St. Louis
were discount. Aside from the squeeze, forecasters called for a 3-
day freeze Saturday through Monday. Most customers of ALDL say the
freeze will cause little if any damage. In fact, many northern
farmers say the freeze will help knock down weeds and will expedite
harvest. The majority of calls continue to report better than
expected yields. All in all, futures rallied sharply this week on
the squeeze and the freeze, but then crashed as September futures
went into final expiration and cash values plummeted. For the week,
December corn fell 2.5 cents, November beans +7.75 cents, and
December wheat fell 7.25 cents.
This week, ALDL sold corn and
beans. Advised producers to sell cash premiums. Advised to sell
wheat on the bounce and then took profit. Entered into a oil/meal
spread and a bean/wheat spread. We also took profit on meal and
placed new orders to trade meal.
Next week, we will update our
advise after we know more about the freeze. At the moment, we would
speculate that the traders will take a sell the fact approach to
the market unless the forecast turns real wet. We expect that key
support in corn at 260, support in beans at 624 and support in
wheat at 363 are all subject to failure as harvest
approaches.
Final Note
Many of you will be putting your
grain under loan and hoping for a rally. This strategy worked when
there was deficiency to make up for the market decline when your
hope turned into discouragement. With today's policy, you are
better off binning the grain, selling the futures or buying a
put/selling a call for protection and then taking out the loan for
cash flow. This will give you equity protection, pay for on farm
storage, and give you marketing time for basis appreciation.
Furthermore, it will give you cash flow via the loan.
Have a
great weekend.
September 19, 1997
Allendale, Inc. 4506
Prime Parkway, McHenry, Illinois
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