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Grains in recovery mode, analyst says
Grains have recovered a good share of their losses since the Nov. 9 USDA
report, when grains retreated sharply from recent highs. Since then we
have recovered between 50-60% of the losses to date. The key question
now is whether prices will continue higher to challenge the old highs, or
if this recovery is something that should be sold right now.
There are plenty of bulls left in the market, with the season still far
from over and the problem of allocating the short world crop across the
whole marketing year still ahead. That argues for there to still be more
price rise ahead, as we still continue to export too large a share of
soybeans each week. South America still has a long ways to go before
their production is assured, so there are lots of reasons why the world
still needs to be concerned about a lack of stockpiles around the globe.
Wheat recently has got the attention of the trade, with prices shooting
sharply higher the past few days as more concerns over weather have
emerged in Australia and Argentina. Argentina is starting to suffer from
dry conditions due to the recent few weeks to a month of dry weather
there that is starting to put stress on crops. Australia has the reverse
problem - too wet of conditions that is hurting the quality of the
That has pushed wheat prices higher, and the corn and soybeans are
following which has given us a nice recovery in what looked like a very
bearish market based on the sharp break from the post-November USDA
report. While the report was friendly, prices retreated rapidly as funds
unloaded a barrage of long positions. On weekly charts, wheat has pushed
back up near its recent highs, with prices likely to test those highs in
the near term.
Corn prices are following wheat higher, although reluctantly as corn
seems to have lost its bullish enthusiasm from funds. The huge downside
reversal formed the week of Nov. 9 seems to have kept that market more
subdued, and it is struggling to move higher (although last week formed
an upside reversal on weekly charts, although a much weaker one than the
downside reversal formed 2 weeks earlier).
Soybeans are acting in between the corn and wheat, with prices drifting
higher and the strong weekly export sales and shipments numbers
continuing to draw soybeans higher. We seem to ship and export between
40 and 60 mb weekly in the soybeans, with recent numbers still in the 40-
50 mb range (very strong numbers indeed). The large purchases by China
and their seemingly unending appetite for soybeans continues to support
this market. Weekly soybean charts are reaching back up to near old
highs as well.
While all this seems positive in recent weeks and days, the market also
formed a potential top the day of Nov. 9 that cannot be forgotten easily.
The wheat, corn, and soybeans all dropped over 7% from recent highs,
another potential top therefore in weekly charts, and certainly a line in
the sand which cannot be forgotten. Its always true that tops can be
formed when everyone is most bullish, and typically they surprise us at
the timing and the location of tops. This would certainly be a surprise
to top out now, as it would defy many of the prognosticators of the
market. But sometimes that is what markets do.
For the conservative hedger, the recovery has presented an opportunity
that cannot be denied, a potentially low risk/high reward type entry
point for hedge positions. Selling a 50-60% retracement of the recent
break from Nov. 9, using a stop slightly above the recent highs might be
an opportunity that shouldn't be passed up. These sales can be made for
almost any crop year - 2010, 2011, or even 2012 - as prices are around $5
corn, $12 soybeans, and $8 wheat for all three crop years. Already, a
lot of problems are priced into the market at these lofty price levels.
And profits (in fact, large profits) can be locked in for multiple years
at these levels. The potential reward could be great - just recall how
quickly prices retreated from the 2008 highs and one can imagine a huge
potential price break in the markets. Short crops have long tails is the
old story. Last year was indeed a short crop for much of the world. Of
course, we also have strong demand this year. But then again, at least
hedging at these levels we have a well specified risk level that we can
use to make these sales against.
So place your bets, and lets see where things settle out!
Tim Hannagan, Progressive Ag
The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable.
The opinions and recommendations contained are based on our judgment and
do not guarantee that profits will be achieved or that losses will not be
incurred. Recommendations should not be construed as an offer to buy or
sell commodities. There is substantial risk of loss in trading futures
and options on futures.