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Commodity highs finally formed?

Ray Grabanski 11/18/2010 @ 12:36pm President, Progressive Ag www.progressiveag.com

Last week we commented on the disappointing reaction to the USDA November report, and how it had showed the first indication that the bull market was tired.  Since then we have formed a weekly downside reversal in corn and wheat (both last week) that indicated a potential top had finally formed in these two markets.  This week soybeans have found tremendous price weakness such that we've dropped $1.50 from the most recent high in only 5 trading days! 

That kind of price weakness is also indicative of a market top.  It might not only be the grains that are showing that prices are looking tired.  Cotton, sugar, and coffee are also markets that have been booming as of late, and they also are showing some potential signs of topping after even more bullish price action than the grains (in fact, new all time highs in 2010 - above 2008 highs!)  The CRB index itself, an index of all major commodities used in a modern economy, has the potential of forming a double top at last Tuesday's price highs.  That could become significant for all commodities as speculators might be bailing out of commodities faster than a sinking ship! 

We posed the question last week: Could it be then that most of the bullish news is finally in the marketplace?  Is $13 soybeans, $6 corn, and $8 wheat high enough prices to allocate the short supply of grains for the 2010 marketing year?  We soon found out that indeed, it has likely marked the highs of the grains.  But what we also found out was that it also might have marked the highs of commodity prices in general - not just the grains - and that we might be looking at drifting commodity prices from here.

It's hard to imagine the reasons why commodities would decline in price now from recent highs, as nothing has changed fundamentally from the past few weeks.  In fact, we currently have the tightest stocks estimates of the year for US wheat, corn, and soybeans.  We also now have the smallest corn and soybean estimates of the year following the Nov. USDA report, with soybeans ending up as a disappointing 'average' trend crop year, and corn slightly below trend.  But this is much smaller than was expected all year, and yet prices have already drifted sharply lower from the Nov. 9 report day, when prices hit their peaks. 

It makes little sense that prices would drift lower now, when we might need high prices to continue to ensure that we allocate the short crop over the entire year, and entice more acreage to be planted next year of all the crops we are in short supply (which includes almost all of them).  Yet, prices are drifting lower, and that is starting to look ominous for the grain markets.  After all, we probably formed our market tops in 2008 for a decade or more, and now we've had our first challenge to these prices just 2 years later on another short crop potential (and still large demand).  As time goes forward, our demand might be allocated by the high prices, and it often takes a long time to get that demand back again once it is lost. 

So while prices went much higher than anyone expected this year, it may be possible that prices will drift much lower on this short crop year than anyone expects as well.  While its usually true that short crops have long tails, it might also be true that this tail is finally starting to wag in the grains.  Another marketing gut check for those who still haven't acted on this recent rally; it might be time to get something done!

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