Ray Grabanski: Price direction?
Grains bounced back nicely from sharply lower trade in early March, with prices rallying back sharply on Thursday and Friday to move to 60% retracements of losses suffered in early March. The break seemed to flow from better than expected crops in Brazil (corn and soybeans) and Argentina (soybeans and wheat). Also, improving conditions for planting and winter wheat in the FSU (especially Ukraine) is giving hope to the wheat markets that we can rebuild stocks across the world. Russia and Ukraine might even be back in the export markets in 2012!
While the fundamentals of the grains seemed to improve in the world production scene, doubt was cast upon the US ability to attract enough acreage of corn and soybeans to produce the 2011 crop needed to meet demand, and back we bounced! We gained almost 60% of the recent losses back in just over 2 days, with the market set to start this week on a fresh technical bullish formation, with upside weekly reversals in all grains to start the week.
But so far, the week has been disappointing, with little to no gains in the old crop months while bear spreading seemed to dominate, meaning new crop months were higher but old crop remained about unchanged. Then we saw slight losses on Wednesday which as of this writing looks like a bad precedent for midweek. One has to wonder what the rest of the week will bring?
Are we at a point where commodities have finally done about all they are going to do? We had downside weekly reversals the second week of March in most commodities (including the CRB index and cotton, as well as numerous softs) which looked like the world would then end for the bulls.
But the grain rally late last week (mostly Thursday and Friday), and the resulting upside reversals formed on weekly charts, carried the day for commodities, avoiding a straight down descent. Now there is still a question as to the direction of grains for now. Are we in just a bounce back rally, doomed to fail at the 60% recovery in corn/soybeans and 40% recovery mark in wheat? Or are we due to run to new recent highs in the grains, and thus re-establishing the bull market of the past 10 months? And will grains carry other commodities to new highs? Or will the other commodities drag the grains lower?
These are key questions heading into the March 31 acreage and stocks reports. This report might be the linchpin that unloads another rally higher, or dooms the grains to have already formed their highs for the year 2011 (and perhaps the next 3-5 years). If we've attracted enough acres, or allocated the short supply out through demand rationing, we may have done enough with prices for the year. On the other hand, the failure of the market to attract appropriate acres at current prices will force a panic in the market, urging more desperate measure (read higher prices) to solve our impending problem.
Perhaps we'll get our indication of what the marketplace expects this report to show in the coming weeks, when we learn if the market will indeed form lower lows and lower highs in wheat and soybeans, and fail to run back to new highs in corn prior to the report. That could signify the potential end to our bull market - and what fun it has been to date since last June. As of today's writing, new crop corn 2011 is within pennies of its Dec11 highs, Dec12 and Dec13 corn is at or slightly above its recent highs. Multiple year hedges will lock in significant profits for multiple years for most farmers, and these numbers are looking more and more tempting all the time. Perhaps its time to extend some coverage out a ways?
Wheat, corn, and soybeans all have similar profitable price levels offered for the 2011, 2012, and 2013 crop years. For corn, it's even tempting to sell some 2014 crop corn at $5.60 or better.
Sometimes the best opportunities come in bunches - perhaps that is the case now as well.
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