Farming for the Government
The title ascribes the feeling in much of the major ag sector, as wire stories of lavish subsidies are causing huge last-minute swings in acreage. A gift to soy farmers of $2/bu represents a massive subsidy, and if it is tied to production, will sway acres away from corn and cotton. Government bureaucrats, aware of these highly sensitive stories, have tried to tamp down expectations and have said with a straight face “these subsidies will be fashioned so as not to impact planting decisions.” Right. They already have.
Farmers in the Delta states are not taking chances, and are looking at the $2 soy goodies and seeing a great year, regardless of late planting. Recall they got $1.60/bu last year, so growing soybeans has become a real winner at $8.50/bu. We are whittling away a few cotton acres as sentiment to grow soy is robust as planting windows narrow down.
Basis levels are rising in the US and key countries, and demand is good. Basis normally goes opposite the futures trend, so this is no surprise. COT reports indicate commercials are buying in short July futures, or rolling, while overall open interest is static. The normal commercial/merchant position is long physical and short July this time of year. Open interest for July is down some 4k in 2.5 weeks, and if each contract was paired with a mill fixation, one could surmise mills have fixed on about 400,000b recently. The COT reports and open interest warn of a bounce coming, but it is difficult to see just what the catalyst would be. Rain delays?
The July/Dec spread has cut half its carry, rising from -100 to +50. This wild beast has traded from -100 to +300 since Dec, and is just below the median level. We have no appetite for it unless it were to move back to +300. Dec/Mar has traded -140 to +20 since Aug, and like the July/Dec, is near its median level. This spread is a much tamer beast than July/Dec, and we like the idea of waiting around for a rally to get back near par to enter the bear side.
As always, please use protective buy and sell stops when trading futures and options.
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