Grain Marketing 101

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Comment by Lanny Smith on September 23, 2011 at 1:32pm

Newsom on the Market
Meltdown
Darin Newsom DTN Senior Analyst
Bio | Email | Blog
Thu Sep 22, 2011 01:48 PM CDT

BOOM! An explosion followed by a meltdown and just like that everyone is wondering if the end of the world is upon us, as far as commodities are concerned. In my opinion, not yet, but we still have December 21, 2012 to look forward to.


Markets were awash in red Thursday. Do supply and demand matter anymore? (DTN graphic by Nick Scalise)As I watched tweets appear on Twitter (there is a sentence I didn't think I'd ever write) over the last couple of weeks, there was a growing sense of disbelief over the sharp sell-off in commodities, including grains. After all, wasn't the September USDA report deemed bullish for corn? Aren't we still talking about reduced supplies and strong demand? Has the world gone mad to the point that supply and demand simply don't matter anymore?!

I added the exclamation point to the last question intentionally, for the perceived mood of "tweeters" is growing more agitated, particularly those fundamental analysts of commodity markets. The answers to the above questions are: yes; yes; and yes, to a certain degree.

The question that interests me most, naturally, is the last one. The recent sell-off in the market is a classic example of commodities trading something other than supply and demand. It happens often, probably more than die-hard fundamentalists care to admit, that technical factors take a lead role in market direction. This particular event could be a poster-child for technical analysis as markets across all sectors are simply following technical patterns that have already been established. Let's take a look at a few.

The Dow Jones Industrial Average. This one is a bit different than some of the others in that it not only is following previous patterns, but establishing new ones as well (I'll discuss in more detail in Friday's Technically Speaking blog). The longer-term target now is near 9,500 (again, from a technical point of view) and if realized could trigger increased noncommercial (investment, speculative) liquidation in commodities.

This is a factor often overlooked but increasingly important when the DJIA starts to collapse. The idea that commodities, including ag markets, can be that heavily influenced by world equity markets is nauseating to some, dismissed by many, but true nonetheless. However, before fundamentalists look to hurl themselves off the nearest one-story building, it should be remembered that even in times like this, those markets WITH bullish supply and demand situations will continue to have an undercurrent of support as commercial traders use the sell-off to cover demand needs.

The U.S. dollar index. During my recent outlook presentations, I've called the U.S. dollar index a comatose market. But like The Bride character from the "Kill Bill" movies, the dollar seems to have snapped out of its coma looking for vengeance. Its recent rally has been fueled in large part by the economic chaos in Europe weighing on the Eurodollar, a topic discussed in much greater detail by DTN's Vice President of Editorial, Urban Lehner, in his Letter From the Editor column.

If we look at the long-term monthly technical chart for the U.S. dollar index, though, we see that the recent rally has amounted to no more than a 38.2% retracement (a technical level based on Fibonacci percentages) of only the most recent sell-off from the high posted in June 2010 through the low in May 2011. In other words, the rally hasn't amounted to much so far, but certainly enough to put pressure on the commodity sector.

This segues into a look at the Continuous Commodity Index, an index that uses a basket of commodities across many sectors to set a price. The price direction over time (simple definition of trend) can be analyzed, giving us a good understanding and possible outlook of the commodity sector as a whole. Like many of the individual markets, the recent sell-off isn't something new but rather extends a downtrend that began back in April 2011.

So, where do we go from here? Most likely we will continue to see pressure tied to the sell-off in the stock market. But, October is just ahead and that month is famous for seeing important turns in the stock market. The U.S. dollar index lacks fundamental support as the FOMC (Federal Open Market Committee) reiterated its stance that the Fed Fund rate will stay between 0% and .25% into 2013. Therefore, the rally in the dollar could soon be checked.

As for commodities, those lacking bullish fundamentals (e.g. wheat, coffee, copper) will suffer most. Others like corn, cotton, and soybeans should soon see a wave of headlines talking about increased buying interest both home and abroad. If nothing else, this could cool the bearish fervor caused by the overall meltdown in the markets.

Darin Newsom can be reached at darin.newsom@telventdtn.com


(CZ\BS)

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Comment by MikeMcGinnis on May 25, 2011 at 12:47pm

Funds are rolling positions from the July contracts to Dec, old-crop to new. This is a month-end event. Plus, the famous Golman Sachs Roll takes place in the next few weeks. Watch the spreads cave, due to this activity. With rain dramatically slowing the planting pace, traders see some upside to these markets. Beware of the three-day weekend, with markets closed Monday. That Crop Progress Report won't be traded until Monday night.

 

Mike

Comment by Herman Wiid on May 23, 2011 at 1:20am

SINGAPORE, May 23 (Reuters) - Chicago corn rose 1.2 percent on Monday to its highest in nearly a month, while wheat rose almost 1 percent, adding to last week's spectacular rally as harsh weather from the U.S. to Europe and China threatened to squeeze grain supplies. U.S. farmers face a crucial decision in the coming days to abandon corn planting plans and switch to soybeans amid smallest supply of corn in the world's top exporter in 15 years. Last week, July corn CN1 climbed more than 11 percent, its biggest weekly rise since October, while July wheat WN1 rose over 10 percent. "It is highly likely that the farmer will not be able to finish corn plantings, so it's going to very bullish for corn prices," said Ker Chung Yang, an investment analyst at Phillip Futures in Singapore. "The weather is a key factor and the market is looking forward to USDA's crop progress report."

Comment by Brian Grossman on April 3, 2011 at 8:12pm

Any ideas as to when corn will try to fill the chart gap that was created after Thursday's report?  Would it be a "safe" speculation to go short and and then buy back once the gap is filled, if it is filled? 

Comment by Tim Wallender on January 1, 2011 at 6:13pm

Another double top in the September 2011 wheat futures contract.  What do you believe will happen now? Rumors are flying around the internet.  Anyone have factual information?

Comment by Brian Grossman on November 22, 2010 at 9:14am

What does everybody think: Is the market working on creating a top with long term outlook down or is it just chopping around until there is new news which will determine the new bull or bear trend?

Comment by MikeMcGinnis on September 24, 2010 at 8:33am

Grossman,

Here are a few comments from a trader this week that touches on your question of when does the market start a rationing motion:

He says, "This week's low corn yield estimates by many firms represents a very tight supply- to- use ratio and implies that the market must use price to limit demand. Russia is still a major issue in Wheat with planting progress poor there although some rains are finally appearing. But, we are also looking at potential problems in Argentina and Australia from dry conditions in parts of both countries that could affect production and the La Nina effect that could reduce production in these countries and others as the year moves along. Finally, there are not many problems with yields for Soybeans here yet, but la Nina has been known to have a pretty dramatic effect on yields in South America and we all know it. So selling pressure has been less.

Beans have been as strong as Corn or stronger in recent days in part due to the need to maintain a ratio of Soybeans to Corn of at least 2 to 1 and on South American weather, especially the weather in Center West and North."

Yet another analyst touched upon the same topic saying: "We are tighter stocks/use today than we were in the summer of 2008 when corn hit $7.00/bushel. That tells you we were artificially inflated in 2008 in my view.

Now, to the wheat. It changed the feed usage equation. It took feed wheat out of the ration and put corn in. it also changed the acreage picture for 2011. more customers will plant wheat and then double crop soybeans behind it rather than corn/corn, which will ultimately pull corn acreage down next year."

Hope this helps.

Mike

Comment by Brian Grossman on September 23, 2010 at 11:06pm

Mike: With this talk of 6 dollar corn or maybe even higher, this will likely carry soybeans and wheat up with it. Since all of these commodities are dependent on the demand from other nations, at what point does the cost become too much for our importers to throw in the towel and buy elsewhere? Today I read an article about the Russian wheat yield coming in higher than expected giving them room for export as well as the demand for ethanol dropping due to rising costs. Would 6+ corn be sustainable or would it likely only happen on a sharp market rally with and equally sharp fall? I agree that there will be a greatly reduced supply of corn, but wheat still is showing a relatively high market carry. Do you have any estimate as to when the fundamentals in wheat takes over the market and we begin to see less technical trading by the funds? I understand that nobody knows what will happen, I am just looking for an opinion.

Comment by MikeMcGinnis on September 23, 2010 at 2:14pm

Due to trying to keep up with this huge 3-month rally, I have been neglecting my FFF friends. Wait a minute, I could just say my FFF's, kinda like that valley talk of BFF's. I digress. Anyway, what a harvest season, what a market, what a time to be farming.

What kind of yields are you hearing in your neighborhoods. I'm hearing between 150-200 corn in central Iowa, mostly below 200 though.

This market is one day going to wake up and say, oh crap, these Iowa farmers really are bringing in less corn than we thought. I've heard $6 corn will not be hard to reach. For those that really want to get bulled up, $8.50 has been kicked around. Why? Demand, demand, demand. The world demand is like those lady bugs you get inside your house during harvest season, it's coming from all corners of the world, and it just can't be killed.

Here are my thought-starters for you, for what it's worth:
Corn prices hit $5.00 per bushel, some traders say we could be headed for $6, at least one analyst says $8.50. Soybeans are nearing $11.00 per bushel. Wheat is over $7.00. These prices haven’t been seen for nearly two years.

--Grain prices are seen holding up, due to extremely heavy demand from China and other Asian countries. From Russia to Canada to Australia to China to Brazil, crop-weather issues deplete the yield expectations.

--A lot of farmers, in non-traditional wheat-growing areas, are planting wheat. It’s been known for awhile that wheat seed is very hard to find. Why all the wheat acres? Russia’s drought, Ukraine’s crop problems, and Canada’s lower wheat production has the market nervous about future shortages.

--For next spring, a ‘battle for acres’ will certainly be in-play. As the wheat market asks for acres, lower than expected 2010 corn yields creates a need for more 2011 corn acres, and the world needs large soybean production.

--I’m hearing of a lot of farmers that are utilizing good profits to pay off end-of-year bills and buying new equipment. Recently, there has been a lot of farmer-selling into this awesome grain rally.

--Brazil is getting set to plant its 2011 corn and soybean crops. However, drought-like weather is causing a delay in corn planting. This will create more soybean acres, less corn.

--Caterpillar is sinking millions of dollars into Brazil. The Illinois-based company sees huge growth in agriculture and construction in that Latin America country, due to farm expansion and preparation for the Olympics.

--Outside investors have poured billions of dollars into commodities, including the grains. This has helped push up grain prices to two-year highs. However, farmers are being urged to pay attention to when these funds decide to take their profits. At that point, the markets could fall dramatically.

--The U.S. harvest is well ahead of last year’s pace and its five-year averages. There is some threat of cold weather from Canada dropping into northern states. However, no frost is expected to harm the U.S. corn/soybean crops.

--To sum it up for the agricultural industry, it’s all about demand, demand, demand. The U.S. has it and the world wants it. That’s great for the U.S. farmer.

I would love to hear what you think, on any of these thought-starters.

Comment by David Ernst on September 23, 2010 at 12:30pm

i actually heard from a seed salesman prices could go up. Fertilizer prices have been rising as well.

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