Commodities perched for the next big move

Getty/iStockphoto Graphic of upwards trend line on graph
Prices hold firm in wait and see mode, yet a price breakout is imminent

If you have been watching agricultural commodity trade for the past few weeks, prices overall have been relatively quiet, compared to earlier in the summer. But it is not just agricultural commodities that are trading in a holding pattern, the energy markets and some of the softs markets (sugar and cotton), have also been trading in a cautious manner. 

One thing history has taught me, is that the longer a market trades sideways, or in a consolidation pattern, the bigger the price breakout move will be in the near future.

Let’s take a closer look at why the markets are quiet now, and what could spur prices in the weeks ahead:

Traders on the sidelines

No doubt about it, traders are on the sidelines. After the dramatic whipsaw price action that many commodities saw during May and June, traders seem to be content to take a breath, and “wait and see.” Higher initial margin requirements, limit up and limit down days, paying margin calls, and bigger price moves thanks to larger daily price limits wrecked the nerves of some of the most seasoned traders. Further evidence of side line action is apparent as daily market volume has dwindled, and option volatility premium has vanished. However, I have a sneaking suspicion that traders and the funds will come back into the marketplace in droves in the coming weeks as commodity fundamentals will become a bit more “known” versus the floundering price and fundamental action as of late.

Traders watch weather and USDA

This likely speaks for itself. August is the time frame with the soybean crop is made, and corn kernels begin to fill out. The next USDA report is already sneaking up on Thursday, August 12. There is plenty of question as to exactly where the yield on this crop will end up. It is no secret that a good portion of the Eastern Midwest is on target for record yields, the question of yield still looms for the drought stricken Western Portion of the Midwest and the Northern Plains. 

Regarding soybeans, the current ending stocks forecast for 2021/22 is 155 million bushels, with a stocks/usage ratio of 3.5%. USDA is currently using a national yield projection of 50.8pba. If yield comes in the same as last year at 50.2 bushels per acre, ending stocks would project down to 103 million bushels, with a stocks/usage ratio of 2.3%. If yield is estimated to be less than 50 bushels per acre, that would be a reason to justify November futures trading through $14.00 resistance, with an upward potential price target of $16.00 futures. 

In corn, USDA is currently using a record potential national yield of 179.5 bpa. The previous record was 176.6 back in 2017. If we assume the previous record high yield of 176.6 bushels per acre, ending stocks would drop to 1.197 billion bushels with an 8.1% stocks/usage.

The line in the sand for corn is 175 bpa. If yield is perceived to be less than that, then that would justify price action for the December futures contract to trade above $6.00.

Value of the dollar

Remember, the bottom line about the value of the U.S. Dollar, is that when the value of the dollar is lower, it makes it more attractive for other countries to import our commodities due to currency exchange rates. 

Goldman SachsChart showing Goldman Sachs dollar value

This image compares the value of the U.S. Dollar Index, with the S&P Goldman Sachs Commodity Index. Notice how when the value of the U.S. Dollar index is lower, the value of commodities goes higher.

If you are unfamiliar with this index, Wikipedia has done a great job summarizing; “S&P GSCI simply is benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.”

I like to keep an eye on it because it contains/trades/tracks 24 commodities from all commodity sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals. So if you are looking for a one stop snapshot of how commodities overall have been performing, this is the one to watch.

You can see from this chart that something is likely going to happen soon between the value of commodities and the value of the U.S. Dollar. The two indexes are “butting heads” and something seems likely to give way.

Over the past few weeks the value of the dollar has been inching lower. Will the value drop low enough in coming weeks to entice grain export sales to increase? Or will the Dollar begin to work higher, and curb potential export demand? The answer may be here by month end.

Here in the U.S. because of Covid, and the continuing economic recovery efforts, U.S. Fed members remain divided about how the economy is performing. Fed members are at odds, with some suggesting the jobs market is achieving a self-sustaining positive trend, while other members see the U.S. jobs condition as a long way from being fully mended.

Traders look to month end for more economic clues as the Fed gathers at the Jackson Hole Economic Symposium, which will occur August 26-28.

August is set to be an exciting month for trade. Weather, a USDA WASDE report and a big Fed meeting will set the tone for prices. It’s been comfortable to sit on the sidelines and rest, but it is time to get your head back into the game. There is a big market move likely coming.

Reach Naomi Blohm: 800-334-9779 Twitter: @naomiblohm and naomi@totalfarmmarketing.com

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

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