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Ray Grabanski: Market top?
There have been some concerning price signals recently in commodities, of all kinds (grains, metals, softs, crude oil and energies), that are indicating potential highs may have finally been formed, especially softs and energies. Recall that softs have been the driving force higher in the CRB index, with prices well above 2008 highs, as they have spearheaded the 2010/11 market rally. But soft markets have taken a turn for the worse, with most well off recent highs and indicating that potential tops have been formed.
Commodities may be in some trouble now, as the CRB index formed a downside weekly reversal last week that could mark the end of the bull market of 2010/11.
There are other negative technicals as well, with the soybeans and wheat forming monthly downside reversals last month and followed by large weekly losses last week. Corn has now confirmed the possibility of a market top by dropping more than 7% from the recent high (the third time since the rally began last June).
For corn, a monthly downside reversal is in the process of being formed in March, if corn closes at this level or lower that will be a reality. The dollar also formed an upside reversal last week, with cotton also forming a weekly downside reversal last week. The combination of the heavy downside selling in grains along with selling in other commodities (energies, softs) and stocks suggests a possible top in grains has finally been formed. Interestingly, the cattle did not participate in this weekly negative formation, as we formed new highs in cattle the week of March 7 (albeit hogs were not higher last week).
The possibility of a top in markets cannot go unnoticed and unrecognized, as once again in bull markets a decision has to be made as far as selling additional grains. This time there may be more extenuating circumstances indicating a potential top has been formed. The negative reaction after the USDA report is part of it, with USDA basically saying the world grain supplies got better last month for the first time in many months, with improved crops in Brazil (corn 2 mmt and soybeans 1.5 mmt), Argentina (wheat +1 mmt, and soybeans
unchanged), and Australia (+1 mmt wheat). Overall, corn supplies were increased (slightly smaller demand with slightly smaller supplies), wheat increased +4 mmt, and soybeans also slightly improved supplies (+1.5 mmt). USDA also for the first time dropped wheat US exports 25 mb, hiking ending stocks a like amount.
The market reacted negatively, as it appears we finally may have started to limit our demand, and that might just carry us out to the new crop harvest.
USDA also didn't hike ethanol corn use this report, as they were doing, which might indicate that ethanol use finally may be fully estimated.
This forces Pro Ag to target the next rally as a selling point, with stops once again above previous highs in grains. Wheat needs to rally the most to trigger a sale, while corn probably needs to rally the least. For now, lets target a 30% recovery of recent losses to advance sales of corn, wheat, and soybeans.
The sale may involve multiple year sales, selling a portion of 2011, 2012, and 2013 grains.
These sales may need to be heavy sales, with a good portion of a crop year sold all in a short period of time. If we get a recovery in grains, it may not last long as a lot of players might be targeting a rally to get things sold. It's always tough to admit that a market can top at any point in time, and it certainly is early for the grains to top as typically their highs are in May/June, not February/March. But again, this rally of 2010/11 was led by softs, not grains (like in 2008), with softs rallying in many cases to 2x their 2008 highs. So if the commodity markets were led higher by softs in 2010/11, maybe it's the softs that are going to serve to top the market?
However, one benefit of the market top in February/March for grain and cotton producers is it made the crop insurance decision an easy one - simply selling the crop through the put option price protection of the Revenue price insurance.
As of Tuesday, March 15, spring wheat prices had already dropped 15% from their February averages, while corn and soybeans had dropped about 7.5%. That is enough to give strong hints that the harvest price option was not needed, and the put option values of the crop insurance was well worth the premiums of 80% and 85% enterprise unit coverage! That made that decision an easy one!
Ray Grabanski is President of Progressive Ag, a marketing and risk
management firm for farmers located in Fargo, ND. For questions or
comments, or if you are interested in more information about
Progressive Ag services, call 1-800-450-1404.