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Ray Grabanski: Cotton top showing the way?

Ray Grabanski 02/24/2011 @ 7:12am President, Progressive Ag www.progressiveag.com

Cotton prices finally appear to have blown their top off Friday, moving limit up for the second day in a row, and then moving limit down the same day to finish with huge losses.  Since then it has been downhill from there, with cotton making a high of $211 on Friday, only to drop to a low of $180, or a drop of $31 or about 15%.  That's enough to consider this a potential top in the cotton market.

The corn, wheat, and soybean markets followed the cotton lower Tuesday, with a limit down move that jolted the grain markets, especially since grains didn't see the blow off top action that cotton did, with a more gradual push higher that kept the uptrend in place, but didn't really blow prices to new highs in an accelerated uptrend (as in cotton).  But grains tumbled anyway, with little to no news other than the cotton price action to blame for the price decline.  Funds seem to be unloading long positions of grains and soft markets, with large price declines of both.  

While corn prices have remained closer to old highs (a low of $6.66 and high of $7.12 for slightly over a 6% decline), the soybeans and wheat have seen larger price drops into this week, with soybeans down nearly $1.50 from their highs (about 10%), indicating a potential top may have been formed in soybeans as well as cotton.  Soybeans have another fundamental working against the bull market recently, and that was the improving South American weather that has pushed prices lower recently.  

Some are not only increasing the Brazilian yields due to the excellent weather they experienced this season (so much for an El Nino impact there!), but they are also increasing the Argentine crop estimates due to the turnaround in weather during February - just in time to salvage a decent crop for Argentina as well.  That is a big surprise, and with Brazilian soybean yields coming in better than expected (now about 15% harvested), that is putting pressure on the soybean market.  

Wheat has seen price action similar to soybeans, with prices pushing near $8.92 two weeks ago for the high, and now prices formed a low yesterday of $7.46 for a total of $1.46 decline or over 16% in just two weeks!!!  That is also price action that could be indicative of a market top.  So we have two of the three major grains with potential price tops in price action. 

That makes for an interesting situation as far as farmer decisions this spring.  While prices are declining, we still have a great need to allocate a short corn crop out over the remainder of this year, and also to entice growers to grow more crops on more land, and to pump lots of money into that production to ensure maximum production.  This is needed to ensure that grains supplies will be more than adequate next year.  Yet, funds are unloading grains at a historic clip.  

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