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October 30, 2020
In the last two weeks, agricultural commodities have generated fundamental hopes for record exports and higher prices. But the technical landscape painted a picture of increased concerns for a short term top.
Nearby corn futures hit $4.22 testing the $4.23 resistance point on long-term charts and had an outside range with a lower close versus previous week. That’s a bearish technical signal.
Likewise soybeans had an outside range down after testing $11 and failing. Many technical traders are turning negative thinking that a short term top is in and markets could sell off as much as $9.83 soybeans and $3.40 corn.
Those numbers are probably unrealistic given the fundamentals that we face. However, as we all know, anything is possible in politics and commodity markets.
The spike in COVID-19 cases around the world has sparked a risk off attitude as France, Germany, Chicago and other locations move to restrict activity. This threatens commerce, the amount of driving people will do, fuel consumption, ethanol consumption -- and as a result, the markets have reacted violently. The Dow Jones fell from 28,700 down to 26,000 or about 10% in value. The crude oil market fell from $42 to $35 or about 17%.
Whether the concerns are valid, they are strong enough to create serious market volatility. Adding to the risk off and fear of ownership is the upcoming U.S. election. Many political and economic analysts are concerned about a contested and protested election, the latter being more significant.
If social unrest were to be witnessed, it would add to the reduce-risk (‘risk off’) approach to the markets.
Reality tells us that a risk off approach to the stock market is warranted; however, food prices would likely be inflationary as transportation logistic concerns would restrict potential supplies, demand would go into hoard mode which cleans out current supplies, and the Fed would do everything to provide liquidity in the market, creating cash flow for inflation.
Thus, selling the Dow makes sense but maybe buying agricultural commodities on a break would be a correct approach.
Our trading advice has been to sell the Dow and we will continue to do so on any bounces at this point, until we see support hold.
Our advice for producers has been to take advantage of strong cash markets and move inventories while replacing every bushel with a lower risk option that will allow you to benefit from an inflation run and not hurt you too bad in case the risk off attitude intensifies.
We believe that watching the technical chart points and acting on a buy signal in grains is appropriate and we fully review these points on a weekly basis in our free video. If you would like to sign up for that go to our website or call one of our reps.
The ultimate driving force for agricultural commodities is supply and demand. The supply curve continues to shift to the left as USDA makes long needed revisions that we have been talking about for over a year. The demand curve is shifting to the right as revisions are finally taking place.
We have been saying for over a year that feed usage was way understated and revisions have been made there. But now major new crop revisions are yet to come. The World Ag Outlook Board continues to insist that China will limit their corn imports to 7 million tons of corn from all sources. Yet, FAS has already reported 11 mmt sold from the U.S. alone.
Worldwide, it is generally thought China has bought 13-15 mmt and will end up buying 25-30 mmt when all is said and done. It will probably be a long time before USDA would admit that. However, a revision to those numbers would push our corn ending stocks below 1.5 billion bushels and would justify prices in the $4.20 to $4.40 range. Additionally all of our demand studies for corn suggest long-term demand growth exceeds short-term production. In 2016 world corn ending stocks were 350 million metric tons. Just four years later that shrunk 15% as consumption exceeded production. Current USDA projections are 300 million metric tons and we suspect that will fall below 300 in upcoming reports.
Thus, as this dynamic continues, the implication for a tighter ending stocks number being carried over into next year suggests that the 21/22 U.S. corn carryover could fall towards 1 billion bushels.
Soybeans are very similar as recent USDA stocks estimates have been revised from 1.009 billion bushels to now expecting stocks at 290 million bushels. Yet prices are still within the range we have been at since 2014.
If the expected revisions happen, the market appears to be poised to eventually take out the 10-year moving average.
Make a note of this: A close above 1085 on nearby soybean futures and 423 on nearby corn futures would confirm a break out that has historically been very rare. The last two times futures have displayed such a breakout, there was a continued rally for a one to two year duration.
Export demand markets continue to lead the bidding process as they try to fill commitments made for a near or at capacity load out schedule. That has not been the case for about six years. The hurricane caused a sharp change in barge freight this week and river markets collapsed. However, this should be temporary, and we expect a turnaround within a couple of weeks.
Ethanol demand continues to amaze with fairly decent margins. Crushers continue to process beans as GACU’s continue to show expansion of feed needs. And finally, U.S. prices remain very competitive as can be seen by the chart.
So if you sold near the high, you might see this break as an opportunity to place some lower risk re-ownership positions. If you are concerned that you missed your opportunity to sell, we do not think you did because the cash market needs grain.
As long as your farm is profitable, use this sell off as leverage to negotiate an even stronger basis than previously offered. Then sell the grain and re-own less risky option positions. If the supply/demand picture plays out, and the feds continue to provide a liquid fiscal and inflationary policy, you will probably see further rewards.
Reach Bill Biedermann at 815-404-1917 or [email protected]
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. AgMarket.Net is the Farm Division of John Stewart and Associates (JSA) based out of St Joe, MO and all futures and options trades are cleared through ADMIS in Chicago IL. This material has been prepared by an agent of JSA or a third party and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading information and advice is based on information taken from 3rd party sources that are believed to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. The services provided by JSA may not be available in all jurisdictions. It is possible that the country in which you are a resident prohibits us from opening and maintaining an account for you.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
Hedging strategist, AgMarket.Net
Bill is a well-known speaker, presenter and commodities advisor. In addition to trading commodities for 40 years he has testified before Congressional hearings, CFTC hearings, served for the U.S. State Department AID and co-founded one of the largest IB Brokerage and Agricultural Economic Research firms in the U.S. Bill graduated from Illinois State University with majors in Agricultural Production, Ag Economics and Ag Education and farmed from 1973-1988.
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