All the grains are wanting to move higher. I have anticipated strong prices this year, but the strength behind the grains is stronger than I ever anticipated. I am beginning to suspect that this funds driven rally is wanting to completely ignore the fundamentals and move ahead of the normal weather markets. Corn made a strong move today, breaking and closing above its previous high. Corn should visit $4.20 by the end of the month.
I don't write about wheat much, but July wheat showed signs of life today as well!
Soybeans are headed back to earth, and easily crossed the 23.6% retracement. I am expecting a move to the trend line area near $10 as a minimum.
Now we are still a month away for a pure weather market scenario, and that will trump anything anybody has to say about technical trading. Between now and then though, I think the best gauge for what will happen will be with the dollar. The dollar has bottomed, and I am expecting a strong rally with the dollar between now and the Brexit vote next month on June 23.
It is not hard to imagine soybeans actually moving much lower between now and then. I would say say there is a 30% chance we could see a full 50% retracement, and a 10% chance we could see a 61.8% retracement. If soybeans move back to the $9.50 level, there is a reasonable chance I may recommend lifting hedges. This will re-set sentiment in the soybean market to allow for what I expect to be a weather rally to take soybeans to new highs.
If you sat through a crop insurance meeting with me this year, I explained how despite the extreme bearish fundamentals and sentiment felt throughout the farm community that I was expecting a very strong rally. This was just the process of extreme short positions held by speculators unwinding and short covering. The speculators drive the market, not the farmers nor commercials.
Each week, the Commodity Futures Trading Commission (CFTC) releases information on the long and short positions of three groups of traders in a couple of dozen different futures markets in a report known as the Commitments of Traders. Large speculators by and large take the opposite positions of commercial hedgers. Commercial hedgers positions are nearing extreme levels
The chart below shows the net number of contracts (longs minus shorts) held by large commercial hedgers. The green dotted line is 1 standard deviation above the 3-year average; the red dotted line is 1 standard deviation below the 3-year average.
I am expecting an event similar to that which happened in May of 2012. Perhaps it is me talking the position which I have held since this rally began that a pull back prior to a summer weather rally would occur. So far, that scenario looks to be a very real possibility.
As I expected and wrote about in the last post, the dollar is in a sustained move higher. With the FED threatening an interest rate hike next month, and the upcoming Brexit vote looming, the dollar should have enough strength to tag or break its intermediate trend line. This should keep pressure on grain prices.
Soybeans have finally run out of buyers and is in the midst of a correction. With all the bearish soybean news, (higher dollar, higher planted acres, low export demand), soybean prices have been incredibly strong. I think this correction will push soybean prices lower until sentiment gets back to bearish levels and more buyers materialize. That should coincide with the timing of our summer weather markets in late June. At a minimum.....a minimum, soybeans will pull back to the 23.6% Fibonacci, but realistically, a pull back to the previous consolidation area of $10 would be much more realistic.
Corn took out the resistance line I wrote about in the last post. Corn looks to me to be trading a lot closer to fundamentals than the soybeans are. Informa cut corn acres by 220 million acres in their last estimate. With a rising dollar, I think corn will remain in this price range until the weather markets begin. The summer 2015 high should be a reasonable target.
The CRB Index is now up to 185. Don't forget, we are still in the early stages of a commodity bull market. Surprises will be to the upside.
So much for an exhaustive phase for soybeans. Soybeans blew through all resistance levels yesterday to prices not seen since July of 2014. The bulls are clearly in control.
Any sort of meaningful retracement to exit hedges will be recommended, but the $9.40-9.50 level is now in the history books as an actionable place to do so. With no news to trade on except for planting progress for a few weeks, a dollar rally could bring the soybeans back down to earth.
Corn also posted large gains, only to bring it back into the same range it has traded in for most of this year. I am keeping an eye on the downward resistance line as that should mark the beginning of a rally of sorts for corn, probably back to the $4.10 level as a minimum.
The dollar is rebounding and likely moving higher. That was the premise for believing commodities would be held in check temporarily until the markets began trading on weather scares. It appears to me that the grains are not going to pay attention to what the dollar does. Bullish strategies will be my primary focus from here on out.
Outside myself, I know of nobody who was forecasting higher grain prices. Commodities as a whole were coming off of a horrendous down cycle which took commodities to their lowest levels since 1973. Commodities were also in the timing band to mark a 3 year cycle low. The CRB chart below clearly shows that a strong rally with higher highs and higher lows are in place with all commodities.
Despite bearish fundamentals, I knew fund buying (short covering) would fuel a huge rally, but I was not expecting such a strong rally to begin while the crop was still in the bag. The timing and the magnitude were both unexpected. The baby bull is underway!
We are now in what I would categorize as an exhaustive phase of this baby bull with soybeans. The baby bull has already caused many farmers to abandon all common sense and believe the market is ready to push higher from here. I contend that the market is exhausting or running out of buyers at this stage. It is still early May for goodness sakes and planting conditions remain nearly ideal. The Buenos Aires Grain Exchanged estimates Argentine Soybean cumulative yield above last years record. Patience is required to make good marketing decisions from here on out. I doubt seriously that there is enough bullish news or sentiment to break soybeans above the resistance area set back in December of 2014.
Soybean prices will also be capped below the 200 week moving average for the time being.
If we achieve a full 50% retracement on soybeans, I will be doing something which I rarely do, which is to recommend lifting hedges. I expect that will be in the mid to late June time frame.
As I had mentioned in the last post I made over the weekend, the dollar made its drop to the 92 level and now appears to be making a reversal candle.
If this reversal candle holds true, I think we will have a pretty decent rally which will last well into June. This will put a lot of pressure on commodities into that same time period which just happens to coincide with the weather market. This will probably push grain prices to levels which will give us our next major pricing opportunity.
Now what if it turns out that this is not the bottom in the dollar? I see no support below 92 until the dollar reaches a longer term support area in the 88 price area which reaches back to 2009. This could mean more pain for a few days if you are having margin calls to meet. If you have sat on your hands and not priced any grain, then you would receive a gift from the market gods.
Either from 92 or from 88, the rally which will follow this dollar low will come fast and furious. It will apply a lot of pressure on the grains. Of course, the news will be focusing on a how well the planting has progressed, or some unknown problem which has developed in South America, but have no doubt..... just as the dollar collapse has driven soybean prices to unforeseen highs and kept corn prices propped up, the rally in the dollar will be the driver of the grain market as prices fall.