Grains at crossroads
As of today, the grains appear at a crossroads.
Should they run higher, and once again defy the technicians who typical are able to pick tops by the amount of price changes which occurred (recent breaks in wheat and soybeans are large enough to qualify)? Or do wheat and soybean markets break now in a new downtrend that will continue for months?
This is the question currently heavy on the minds of traders as we move into the USDA acreage intentions report on Monday. Much has happened already this winter, and the rally which began in Sept'06 is now getting more mature by the day. The 19 month rally in wheat had a blast off top in HRS wheat (followed a few weeks by winter wheat blasting higher) that can certainly qualify for a trend buster. HRS wheat cash prices are almost $8 off their highs, and the market is more erratic than one could have imagined.
Here are the reasons wheat and soybeans may have topped:
1) The erratic nature of the grain market is typical of market tops - very volatile and very unpredictable.
2) Funds appear to be willing sellers of wheat, and to a lesser extent, soybeans. Since funds were the ones who pushed the market higher with little change in fundamentals, they can push it lower, too, on no change in fundamentals.
3) Technically, both have sold off sharply from their highs. The limit down moves on consecutive days last week are enough to indicate a top. In fact, soybeans have lower lows and lower highs on daily charts. The dramatic downside weekly reversal in soybeans a few weeks ago also looms ominously over the market.
4) Wheat has a double top in Mnpls Sept. wheat, and Chicago July 08, 09, and 10 all have dropped dramatically and together. This indicates more consistently that wheat prices are overpriced across the board.
5) Wheat prices in the US are higher than in Europe/France. That indicates wheat is overpriced in the US.
6) We are now only months away from new crop wheat supplies, which should be much more plentiful than old crop supplies.
7) The eastern Corn Belt is very wet as is the Delta/Southeast; this can delay corn planting and mean even more acres of soybeans than currently expected. The USDA planting intentions report also will likely be bearish beans, as more people want to switch away from corn due to high fertilizer costs and rotational considerations.
The reasons for wheat to have topped are probably more convincing than for soybeans, and seasonally wheat prices are more likely to peak now than later. Soybeans typically peak in April or June, with May also typically a strong month. But then again, things might be different this year given the potential late spring we may have in the eastern Corn Belt.
Here are the reasons why grain prices could go higher:
1) The US economy is in the tank as housing prices plummet, meaning the Federal Reserve will do anything to try to pull it out of this mess, including causing inflation if they have to. That's bullish commodities!