July 10, 2014
As written for CQG.
Very often commodity prices take the stairs up and the elevator down. Recently, grains have taken the express elevator. The prices of soybeans, corn, and wheat have plummeted over recent weeks.
New crop November soybeans were trading at $12.4625 per bushel on June 26. Yesterday they closed at $11.0375: a plunge of 11.4% in the span of eight trading sessions.
New crop December corn was trading at $4.4775 on June 27. Yesterday corn closed at $3.98: a downward spiral of 11.1% in seven trading sessions.
Finally, September CBOT wheat, which was trading at $7.515 on May 6, closed yesterday at $5.51: a drop of 27% in two months.
So far 2014 is looking like a very good year for the grains if you are a consumer. The planting season is going well with the weather cooperating for all crops so far.
The US is the number one producer and exporter of corn and soybeans. Planting, growing, and harvesting conditions in the US tend to drive price. Nearby soybean inventories are fairly tight, compared to historical levels. The high cost of soybeans relative to corn has caused farmers to plant more beans this year. When it comes to corn, inventories remain high from last year’s bumper crop, causing farmers to plant less corn this year. In fact, the least amount of corn has been planted this year since 2010. While one might think that less planting could support the price of corn, ample inventories have weighed heavily on the corn price.
When it comes to wheat, unlike corn and soybeans, the US is only one of several major producing countries. Wheat production comes from Canada, Australia, South America, Ukraine, and several other countries around the world. Thus far, worldwide supplies have weighed heavily on the price of wheat futures contracts.
This Friday, the US Department of Agriculture will issue its monthly WASDE report. In the report, the USDA will outline its projections for this year’s crop. Usually, the monthly report is followed by volatility in grain markets as traders and hedgers use the fundamental data to adjust positions. While the USDA will make projections on crop size, acreage, and yields, they are simply projections at this point in the crop cycle. Analysts expect the USDA to issue a positive report with ample crops projected across this board. At the end of the day, only Mother Nature knows what weather conditions will be in the US and around the world this growing season. This month’s report follows a period of extraordinary volatility in grain markets. It is possible that the current technical state of the grain markets will be more important than the much awaited USDA report.
Each grain market has its own particular supply and demand fundamentals. Today, however, they all share one thing in common: As the charts of soybeans, corn, and wheat illustrate, the action in each market has resulted in very low stochastics and relative strength indices. On a technical basis they are all brutally oversold. Daily historical volatility dramatically increased as these grain prices fell off a cliff.
Perhaps the oversold conditions will be alleviated by much needed relief rallies in each grain. Watch the action in grains next week. It is possible that price corrections higher are on the horizon. This could turn out to be a great contrarian play for the summer of 2014. Short-term options are expensive due to the increased level of volatility, but they may offer a limited risk/high reward contrarian play in grain markets.