Battle for Acreage

September 11, 2007

Wheat, corn, soybeans and cotton will all be battling for acreage next spring as farmers try to decide which crop will provide them the biggest dollar return for their work.

This spring it was corn - fueled by record prices, falling ending usage numbers and strong forecasted demand, led by ethanol. But the farmers' dreams of $4.00 per bushel corn may be far in the past. Corn is currently trading in the $3.40 range, which is not bad considering it is usually in the $2.00 to $3.00 neighborhood.

But who can go wrong with wheat, now pushing an eye-popping $9.00 per bushel? Expectations are for farmers to switch their acreage in hopes of basically printing money. When farmers do this, however, it opens up a number of new trading opportunities.

First, there will be a shortage of corn, soybeans and cotton next year. The Hightower Report today released a special report called the "Battle for Acreage," (if you would like a copy send an email to davidbrown@midwestfutures.com). It outlined several trading strategies for the coming year. If wheat and cotton grab acres away from corn, we'll have a shortage of corn and soybeans.

Prices for 2008 crops are still a little too high to start trading. We'll be buyers on pull-backs, and would most likely use futures rather than options as the time-premium for the strikes we're looking at are almost the same as futures margins.

Crop Report Out Wednesday Morning
The World Ag Supply & Demand report from the USDA is due out at 8:30 am on Wednesday. There are expected to be few surprises. Corn yields are expected to up, which may depress corn prices for the short-term. Wheat yields in the U.S. are expected to be up also, but worldwide demand is expected to create one of the smallest ending stocks ever, pegged at round 373 million bushels (which sounds like a lot, but evidently is not).

Wheat may continue to rise, pushing above the magic $9.00 per bushel price tag and eyeing the coveted $10 club. Every single newsletter I read, however, says that this market has to start moving down as harvest gets more underway. Also, much attention has been shifted to Australia's drought in some wheat-growing areas (other reports have some areas claiming record production, however), and all eyes will be on if they get any rain in the next two weeks. Some weather reports say yes while others say it will not be enough to boost yields.

Anyway, I'm still jumping on Dec. '07 and March '08 wheat puts when this freight train finally slows down. I would also think about spreading, buying Dec. '08 corn and selling Dec. '08 wheat, but the margin is still higher than I would like (pushing $1,700 initial). Whatever happens, it should be an interesting day!

Heating Oil Shortage?
Saw a great story on zman's Energy Brain's website that distillates used for heating oil are at record lows. This coincided with the heating oil contract setting new highs. With several refiners getting ready for maintenance breaks, he does not see the supply pipelines for heating oil to begin filling very soon. We would be buyers of heating oil contracts (or call options) on the next pullback on this contract.

Hurricane centers say there is some new tropical storm activity, and this could help natural gas jump in price as well. As reported in the last post, we are very bullish on natural gas. The market is finally moving up off some severe lows, and a storm threat could be enough for our option contracts to see a nice pop.

If you have any questions or comments please send me a note at davidbrown@midwestfutures.com. Futures and options trading is speculative and involves a high degree of risk. The risk of loss can be substantial. Neither the information presented or any of the opinions expressed constitute a solicitation for the purchase or sale of any commodities.