Ray Grabanski: 2007: A Rocky Start, But How Will We Finish?
We started 2006 with a big price break, dropping 20c today in corn and wheat and slightly smaller losses in beans. While the 2006 price trend had been strong finishing the year, there were some troublesome signs in the market - at least for the short term.
First, new crop months were running to new highs, while old crop months barely touched old highs (a divergence). The struggle of the nearby futures meant bear spreads were working - that shouldn't be the case in a healthy bull market. Also, the beginning of the year also usually brings some tax sales, and certainly farmers are more willing sellers at current levels once tax problems go away (ie a new tax year begins).
So markets broke hard today, and actually this break could be extended further in the coming week (or maybe even month). Can we drop to $3.40 corn, $6.30 beans, and $4.50 wheat in the near term? Two reports that could impact that near term is the new Commitment of Traders report coming out next Monday showing the index funds position separate from the other 'commercial' hedge traders. This could show speculators much longer the market than previously known, but what impact will that have on markets? All it does is further indicate the power speculative traders have in the CBOT. Haven't we known that all along?
The next important report is Jan. 12, with an estimate of quarterly domestic demand (feed) and a final 2006 yield estimate. With ending stocks already projected tight, any surprises could be reacted to violently by the market.
But in the end, aren't all these reports like a prelude to a Kiss? We still have ethanol plants being built every week, and so far crude oil hasn't dropped enough to slow this development (although crude dropped to new lows today). We still have all the 2007 acreage concerns, and with nitrogen prices skyrocketing the last few weeks, we doubt farmers will show much enthusiasm to plant corn if prices drop significantly into planting. Note also the irony of skyrocketing nitrogen fertilizer prices, while crude oil is setting 2 year lows (and natural gas prices even softer). Wasn't high energy prices the excuse to raise nitrogen costs in the first place? So now what is the excuse, fertilizer hoarding?
So in grains, we are left in somewhat of a void pricewise. Perhaps we just need a nice, deep correction to clean out the market and get things back into perspective. Corn might trade in a $3.30-$4 price range for the near term while things get worked out, as its spring planting when prices need to peak to attract acres, not now in January. SAM has already made their commitments, so why pay more now that the crop already has been planted? Even the speculative longs can see some reason for a correction at this point.
There's nothing wrong with a break now, one that will once again at least question whether the bull market can continue at current lofty price levels. We may need some time to digest recent gains and have farmers put them into perspective for the coming planting season. We can still rally grains back again in Feb/March for the final acreage push.