Greg Weldon
May 04, 2007 11:01 am
Grain and oilseed prices rallied sharply on Tuesday, followed through with gains on Wednesday, and have generated enough momentum to warrant a closer look, particularly given the already ‘explosive’ fundamental backdrop.
It’s all about rain.
Record single-day rainfall in New York’s Central Park one day during April exemplifies the weather that pounded amber waves of would-be-grain and kept farmers from planting a variety of crops, most notably corn.
Yep, corn, the grain market already besieged with intensified demand a la the ethanol craze, the price of which had been elevated during the fall to more than $4 a bushel.
Optimal planting for corn is conducted from the middle of April into the middle of May, at which point soybeans take over and are planted from late May into early June.
At issue is the pace of corn planting, given the weather.
I observe the weekly USDA Crop Progress Report revealing the following dissected data details on the pace of corn planting for the week ending April-29th:
Percent of Corn Crop Planted: 23%, and while up from 11% last week, crop planting progress remains far behind the pace of last year, when 48% of the crop had been planted by the beginning of May, and far below the five-year average of 42%
Percent of Iowa Corn Crop Planted: 14% versus 58% last year
Percent of Indiana Corn Crop Planted: 13% versus 30% last year
Percent of Kansas Corn Crop Planted 31% versus 65% in 2006
Percent of Illinois Corn Crop Planted 36% down from 66% in ’06
Overall, despite having doubled in the last week, all-US corn planting remains more than fifty percent behind last year at this time and well behind the five-year average for this time of year.
Moreover, by now corn would be ‘emerging’ already too.
Not so much this year, as noted by the USDA data:
Percent of Corn Crop Emerged: 4%, one-third of last year’s same week emergence of 12% of the crop, and FAR below the five-year average end-April emergence
Subsequently I note the bounce this week in corn prices, evidenced in the daily chart plotting the December contract. Of interest is the fact that the longer-term 200-Day EXP-Moving Average held solid as underlying technical support during the recent decline. Also, a decline in Open Interest significantly eradicated an ‘over-bought’ condition generated by the ethanol craze.
Still, it takes a move above $4 to shift the med-term momentum back to the upside, and an extension through $4.14 to void the head-and-shoulders pattern.
Perhaps the better ‘value’ in corn, comes on a relative basis compared to wheat, as might be suggested within the mega-macro-monthly chart below plotting the corn-wheat price differential. Corn is closer to being cheap, rather than expensive relative to wheat.
Digging deeper I come up with the chart below plotting the daily close of the price differential between soybeans and corn, which may have reached a retracement low in line with the still rising med-term moving average.
So if corn is not expensive relative to wheat and soybeans are rallying against corn, then…
…I might consider that a long-soybeans versus short-wheat strategy is left when corn is stripped out. Hence I observe the chart on display below plotting the price differential between soybeans and wheat
The soybean market is trying to sustain an upside reversal relative to the wheat market, violating the downtrend in place since 2004.
Soybean planting is just beginning, but already the crop’s planting progress is falling behind the curve as noted in the USDA data:
Percent of Soybean Crop Planted: 3%, one-third of last spring’s 9% progress, and below the 7% five-year average.
Percent of Arkansas Soybean Crop Planted: 14%, far below last year’s 31% planted by the end of April.
Percent of Mississippi Soybean Crop Planted: 50%, well behind last year’s planting pace equal to 86% of the crop.
Percent of Ohio Soybean Crop Planted: 4%, one-fourth of last year’s 15% planted, and well below the 5-year average of 13%.
On the other hand, wheat planting has skyrocketed in the latest week, playing a quick catch-up to last year’s pace as evidenced in the USDA data:
Percent of Spring Wheat Crop Planted: 34%, up huge from the one-week ago plantings of 14% of the crop, and within easy reach of last year’s 39% planting progress.
Moreover, the soon to be harvested winter wheat crop is in excellent ‘condition,’ as defined by the USDA Report:
Percent of Winter Wheat Crop in Excellent Condition: 16%, far above last year’s 6% of the crop rated excellent.
Percent of Winter Wheat Crop in Good Condition: 40%, far above last year’s 30% of the crop rated as good.
Indeed, combined, the percentage of the US winter wheat crop rated as either Good or Excellent is 56% versus the year ago 36%.
Thus I examine the chart below plotting the November soybean contract, and observe that the recent price decline ‘fit’ perfectly with the 38% Fibonacci retracement level relative to the 2006-07 bull move. Void of a downside break below $7.52, a rally through $8.28 would be bullish.
Leading the upside charge in the oilseed complex is the soybean oil market, a contract I have spotlighted in a previous dissection of the USDA Monthly Supply and Demand Report. While I would much prefer to see soybean meal leading the way (indicative of solid underlying demand), the upside breakout in bean oil is supportive for soybeans nonetheless.
It would take a move in soybean oil back below 30.90 cents per pound to negate the bullish environment technically, as such would violate the most recent low and the med-term 100-Day EXP-MA.
Even the lagging meal market has bounced, having rebounded after ‘touching’ the longer-term 200-Day EXP-MA in line with a deeper 61% Fibonacci retracement relative to the bull move of 2006-07. It takes a move all the way back above $238.0 to generate significant bullish momentum.
I am closely monitoring the soybean spreads, particularly the nearby summer July contract and deferred Fall-Winter November contract, as plotted in the chart shown below.
To date the spread has not implied any supply-side tightness. This is not surprising given the sizable ‘carry-out’ and ‘cover’ in soybeans, via last year’s leftover US crop, and the bumper crop harvested in South America.
This is clearly evident via the deepening state of ‘contango’ seen in the chart. However, a move back through a 25-cent nearby price discount would catch our eye, and might imply a tightening supply-demand dynamic in the physical market, as the US summer-drought risk season approaches.
Also in competition with corn and soybeans for ‘acreage’ is cotton.
Indeed, cotton is still ‘reeling’ from the Supply-Use Report issued by the USDA on April 10th, which revealed a sizable domestic US supply build and large fresh crop planting ‘intent’:
Planted Acreage: 15.27 million acres, up from 2005-06 acreage of 14.25 million, and far above the 13.66 million acres planted in 2004-05, an increase of 1.61 million acres, or up by +11.8%.
Beginning Stocks: 6.05 million bales, up from 5.50 million bales in 2005-06, and almost double the 2004-05 inventory level of 3.45 million bales.
Ending Stocks: 9.20 million bales, up from the 8.80 million bales posted in March, up from 6.05 for the 2005-06 season, and almost double the 5.50 million bale supply left in 2004-05.
The bulge in supply comes as a result of a plunge in domestic US demand:
Domestic Usage: 13.50 million bales, shaved from 14.00 million posted one-month previously in March for this season and down huge from the 18.50 million ‘consumption’ figure posted last year.
But we already know these facts and have for almost a month now.
Indeed, the most recent fundamental input takes on a different tone, beginning with the weekly Crop Progress Report for Cotton, revealing the following data-dissected details:
Percentage of Cotton Crop Planted: 19%, far below last year’s planting progress figure of 30%, and the 5-year average of 25%.
Percentage of Alabama Cotton Crop Planted: 13%, less than one-third of last year’s 42%, and the 5-year average planting of 42%
Percentage of Arkansas Cotton Crop Planted: 16%, down from 37% planted by this time last year.
Percentage of North Carolina Cotton Crop Planted: 10%, significantly less than last year’s 19%.
Percentage of South Caroline Cotton Crop Planted: 4%, or only one-fourth of last year’s 16%, and below the 5-year average of 13%.
Less noticed, but potentially a catalyst for a shift in sentiment, I spotlight the report issued yesterday by the USDA ‘Attaché’ in Australia, which forecast a domestic Aussie cotton crop of less than one million bales, at a puny 700,000 bales for a year-year plunge of (-)36.3%.
Note the USDA text as relates to the Aussie cotton crop:
“If achieved, this would be the lowest level of production since the 1983-1984 drought, and would be well below the historically low 1.1 million bales produced in 2006/07."
If achieved???
Indeed, that is a big if, according to the USDA, and as evidenced in more of its text:
“The effects of long running drought, which began in 2002/03, looks set to continue for the foreseeable future. Abare recently published water storage data showing current water supply at historically low levels."
“In the state of Queensland, which produces over one third of Australia’s cotton, dam levels range from 25 percent capacity, down to 4 percent. In the state of New South Wales, which produces the remainder of Australia’s cotton, dam levels range from 25 percent, to just 3 percent. Furthermore, the landscape surrounding the catchment areas is generally dry, suggesting that good rains are required before increased inflows can even commence.”
Nonetheless, US speculators continue to pile into the short side of cotton, as evidenced in last Friday’s CFTC Commitment of Traders Report (COT). Note the details, as speculators expand shorts while Commercial accounts increase their net long exposure:
Large Speculators expanded gross short exposure by a large +12,601 contracts in just the last four weeks, to 74,221 lots from 61,620 contracts as of the week ending on March-27th.
This represents a huge four-week increase equal to another +20.5% of speculative short positions enacted during the month of April. This has resulted from, and been exacerbated by the breakdown in price on display in the long-term weekly chart visible below.
Indeed, it is nearly impossible to become technically bullish on cotton against the backdrop defined by a secular breakdown, as defined by the violation of the uptrend line in place since the 2001 low and the directional downside reversal seen in the long-term 52-Week EXP-MA.
But aggressive traders with a high tolerance of risk might contemplate a counter-trend strategy as I observe that short-selling from funds on the back of early April fundamental data has driven Cotton prices to historically low levels relative to soybeans, as evidenced in the mega-macro-monthly ratio chart shown below. The current ratio level has only been reached on four other occasions in the last 34 years and on each occasion, cotton has rallied.
In fact, during the 1986-87 episode, cotton prices rallied from below 30 cents per pound (29.8 cents), to more than 80 cents per pound (80.5 cents), in just twelve months beginning in August of ’86. This while the 1975-76 episode witnessed a rally in cotton from below 40 cents (37.8 cents) to more than 90 cents per pound (93.9 cents) in less than twelve months.
Can anyone say Out-of-the-Money 12-month Call Options???
Or perhaps cotton relative to corn, as per the mega-macro-monthly chart on display below revealing the ratio spread between the two, with cotton as cheap as it has been in decades, is in line with the 1975-76 experience in which cotton prices more than doubled.
At the end of the day, I continue to favor soybeans over corn, and maintain bullish focus within the soy-complex on the bean oil market.
Also I might be interested in holding a speculative, counter-trend long position in cotton, with limited risk via options or spreads.
And I might envision another round of food price inflation to result, keeping the US Federal Reserve on edge about consumer price pressure, and preventing them from carrying out the easing that short-term Deposit Rate swaps imply will be enacted by year-end.
