Commodities | Aug 02 2012
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By Jonathan Barratt
Trading can be an extremely frustrating pastime. After thumbing through our grain reports from a few months ago we see we had been bullish looking for a solid move to the upside in both wheat and corn. We managed to get a small profit on these positions, however also managed not to be on the bulk of the recent move opting for a pull back from which to enter new positions. Bad move. We never had a chance, it is often on moves like this that you just need to bight the bullet and take on a position, albeit small, as the market will be extremely volatile. Keep an eye on @bulletintweets for entry levels.
We ask ourselves, do the recent 60% gains witnessed over the last month suggest prices have just run too far? Perhaps not. The corn and soybean contracts remain close to contract highs and weekly crop conditions reports from the USDA continue to show weakness so we feel that prices may still have a long way to go. This is the dilemma: more bearish news on conditions, expectations of warmer weather and no rain in sight with record highs. The chances are high that this run will continue and somewhere along the line we can expect a few more limit moves. It all hinges on the weather at the moment, no rain or forecast for rain translates into higher prices.
Corn
Corn is trading at its most recent highs, managing to hold onto recent gains. As a gauge to the crop condition report in May, 70% of the crop was in fair to good conditions with the prospects of record yields, while as of this week it stands at just 24% with no chance of even coming close to last years returns. This remains a concern given if we get no rain, yields for this year’s season will be alarming low. Current ending-stocks are at a 38-year low so it will not take too much to see continuing dry weather keeping prices bid.
Remember the US is the largest corn exporter in the world. To put this into perspective, the US exports approximately 40.6 million tonnes; the next largest is Argentina at 16million tonnes and they had a severe drought last year. The downstream effects of high prices will have an effect on inflation. Technically, as prices remain at highs it tells as that people are not yet ready to take profits and so we should expect higher highs. On momentum indicators: it is very hard to take any lead from these.
Wheat
The wheat market continues to follow corn, however we are hearing that dry conditions in the Balkans will see reduced yields and this will help underpin prices. As we have mentioned it is all about the weather at the moment and the forecast in the US is for scattered rain, albeit nothing major, and meteorologists are suggesting that the drought will expand to into the Delta soy, cotton and rice growing regions. Wheat is trading at highs not seen since Jun 2008. New support levels come in at US885 and then US825. Resistance stands at US950. We have a small long as we feel the conditions are not going to get much better for the foreseeable future.
Soybean
It’s remarkable to see soybean prices remain just a fraction off their most recent highs. This week’s crop conditions report from the USDA lost a further 2% and came in 29% as the Midwest grapples with the most expansive drought conditions in 50 years. The condition rating for soybeans this week was the worst since 1988. During that drought the market moved from US6 a bushel to U10 a bushel. Taking this into today's dollars would equate to a move from US13 to US21 and we are currently at US16.70. Technically we are tracking sideways which suggests a base is trying to form. This would be healthy for the market that wants to trade higher.
Produced by Jonathan Barratt direct from the trading desks of Commodity Broking Services, Barratt's Bulletin provides expert analysis of commodity markets, global indices and foreign exchange movements. Click here to take a no obligation 21-day trial to Barratt's or to learn more visit www.barrattsbulletin.com. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
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