Bullish Corn? Buy Wheat
month of July was an unmitigated disaster for corn pollination.
One of the hottest Julys in 40 years coupled with a
record number of warm nighttime temperatures have devastated
any hope of achieving good yields. The likely outcome
will be a national corn yield near 152 bushels per acre.
Harvested acre estimates likely between 1 million and
2 million acres are too high. This would place overall
U.S. corn production near 12.7 billion bushels.
Current United States Department of Agriculture estimates
are for corn demand to be near 13.5 billion bushels
in 2012. During the post-crash year of 2009, corn demand
fell by 800 million bushels. Even if we assume a similar
Draconian decline in corn demand for 2012, that still
would place overall demand at 12.7 billion bushels,
which would be equal to production. It is doubtful that
demand for corn will fall by 800 million bushels this
Bottom line: Overall corn supplies will not be able
to increase this growing season despite the best efforts
by farmers. Outside of temporary bouts of fund liquidation
because of the current bearish macro factors, the downside
in corn seems very limited between now and the spring
2012 planting season. Should the corn market make any
quick declines to the low $6 range because of outside
forces, it would be a solid buying opportunity. Hopefully
next year Mother Nature cooperates.
However, owning corn may not be the best way to play
this bullish fundamental outlook. As a result of the
corn market's yield debacle, one must be hyper-bullish
CBOT wheat. "Cheap wheat," (below) shows the
long-term correlation of wheat vs. corn. As you can
see, wheat is historically undervalued in relation to
corn and this can mean only one thing: Substitution
feed demand for wheat globally as a replacement to corn
feed is going to skyrocket. In fact, evidence already
is showing as much as a 20% increase in feed wheat demand
from a year ago. That could be the highest feed demand
for wheat in two decades. Although at the moment wheat
supplies look plentiful, they will evaporate before
your very eyes. As global wheat disappearance grows,
global supplies will begin to get very tight again and
wheat will begin to rise and outperform corn in a major
the market buying CBOT wheat for feed should do it during
this current deflationary macro period and do it aggressively.
End users should get their needs taken care of out into
the future. Beyond the bullish demand side fundamentals,
the money flow picture is locked and loaded for a massive
In the recent
commitment of traders report (COT), commercial net positions
are showing one of the greatest commercial buying panics
ever seen in CBOT wheat. When they buy like this, there
can be only one reason. They believe prices are going
higher and future supplies will be less available.
COT money flow factor that very few pay attention to
is the small trader net positions. Small traders are
contrarian indicators as they tend to get record long
at tops and record short at bottoms as they move in
herd like fashion at the tail-end of trends.
traders are approaching near-record short positions
that have coincided with the last two major bottoms
in wheat. This is a confirming bullish money flow factor
to the bullish commercials that suggest all the speculative
traders have already sold the CBOT wheat market and
are vulnerable to a massive short covering buying spree.
of going long the CBOT wheat market, two other opportunities
exist. The first would be to go long wheat and short
corn in a cross market spread. Cross market spreads
always are risky but can be insanely profitable for
those that have the stomach for the typical volatility
that comes with this kind of trade. The other, and perhaps
less volatile opportunity, would be a bull futures spread
on CBOT wheat. That involves buying the March 2012 contract
and selling the July 2012 contract.
August spread level near -30¢ represents a historically
attractive entry point for a bull spread. The July low
of -52¢ goes back at least 35 years, a period that never
saw this spread go below -30¢.
approach you prefer, there is a historic bullish opportunity
in wheat as there still is a great deal of selling because
of the current sovereign debt concerns. Deploying spreads
in the current volatile commodity environment will help
provide a lower risk investment vehicle and lower margin
requirements with plenty of time to have the bull trend
in wheat come to life.
is any guide, the upside potential for both the long
wheat/short corn and bull wheat spreads are outstanding.