Weekly Outlook: Grains, Soft Commodities

The recession is official and it appears we have been in it for just about a year, but what does that really mean? If in fact the current recession has now lasted 12 months it has gone longer than the past two recessions in 2001 and in 1990-91, each lasting eight months. We recognize that no two recessions are alike and this one to date has been brutal with credit crises, record job losses, falling home prices, a roller coaster ride in commodities and a declining stock market, leaving no where to hide. Those who keep cool heads, make rational decisions by diversifying, and not letting greed or emotions get involved in their investment philosophies will come out ahead. As opposed to evaluating one’s portfolio on a quarterly basis we would suggest checking on a monthly, or in some instances, a weekly basis to make sure you are situated the way you want to be.

Grains

USDA crop report, Thursday 12/11

Corn: Lower oil prices and a continued decline in equities had Index funds liquidating long positions in the agriculture markets. There is little fundamental news for the grains to trade on and the path of least resistance will remain down until fund liquidation is over. I believe the direction in crude oil and the dollar is the key and once oil bottoms and the dollar rolls over, the grains should find a foundation. Specific to corn, March came under pressure last week losing 57 cents. After a break of 3.50 which had previously served as support, the flood gates opened. Prices got within 5 cents of $3 on March, but with basis tightening we should be close to a turn higher in prices. We suggest waiting for a bottom to build a position in futures, but for now would be comfortable with the delta neutral futures and options strategy that we mentioned in recent weeks in the May contract as well as selling puts 50 cents under the market to help finance out of the money calls. 3.00 should serve as support with resistance at 3.45. We expect on a move higher for the gap at 3.28 3⁄4 to be filled in quick fashion.

Beans: China announced they will double their imports of soybeans for their strategic reserve inventory from 1.5m.t. To 3.m.t. This alone was not enough to keep January beans from falling 95 3⁄4 cents last week losing 11%. Some of the weakness could be attributed to improved crop conditions in Brazil. Like corn, beans too follow outside markets as Index funds are reducing their long soybean position. We are not entirely against May calls and a similar delta neutral strategy like we have suggested in corn and cotton in recent weeks for traders looking to gain exposure. Support comes in at 7.75 with resistance at 8.20 followed by 8.40. Regardless of how the week ends, which will largely be guided by movement in outside markets and the USDA report, we expect the gap at 8.05 3⁄4 to be filled.

Wheat: March CBOT wheat lost 85 3⁄4 cents last week with prices now below $5.00. On a weekly closing basis, the last time the first digit was a four was 18 months ago. We see support at 4.70 and resistance at 5.15. KCBOT was 78 1⁄4 cents lower last week, but prices remained above $5.00 for now. Support comes in at 5.00 with resistance at 5.45. As we have said in previous weeks we see no reason to have any exposure in wheat, the only viable play is the March spread: KCBOT against CBOT. The spread settled at 27 3⁄4 last Friday premium to KCBOT. We still feel this spread will get to 50 cents and recommend a current close only stop loss at 15 cents.

Softs

March cocoa was $140 lower last week, but as we said last week we would suggest buying dips that hold the 20 day moving average on a closing basis, which is currently 2075. Arrivals in the Ivory Coast have been coming in about one-third below last year's pace. There has also been talk that the quality of the beans may come in below average due to the dry weather. Support exists at 2095 followed by 2044; at present we have a target of 2400.

March sugar was not so sweet last week losing 131 ticks or 11%. As long as prices this week hold support for the week at 10.44, the same level that held 7 weeks ago, we will continue to advise clients to buy May futures and options. Currently we like the idea of owning 12, 13 and 14 strikes. The month of December is historically kind to coffee, but that is not how the month started.

March coffee fell over 12 cents to a new contract low. The USDA estimated 08-09 world coffee production at a record-high 138.4 million (60 kg) bags with implied use of 133.3 million bags. That put 08-09 ending coffee stocks at 39.6 million bags, or 29% of annual use which, the USDA says, is historically "tight." Brazil's crop was pegged at 51.1 million bags, up from 37.6 million bags the previous year. Vietnam's crop was estimated at 17.0 million bags, down from 18.3 million bags the previous year. We see support at last week’s low at 102.15 with resistance at 110.50 followed by 113.00 then 115.50. As for trades we are pricing our 15-20 bull call spreads for clients in May.

March cotton was 6 1⁄2 cents lower last week or 13.5% as prices are making their way back to 40 cents. As we said in previous weeks you should be able to get May below 40 cents and then start to build a long position. For traders who could not wait and wanted exposure, we had recommended to get short futures while simultaneously buying calls, we would be looking to cover shorts this week. On a rally, you can start over or look to sit on the calls for the next few months and ride the move north.

Parts of central Florida reported frost last week but it is not likely that the citrus crop suffered any significant damage and temperatures are expected to gradually warm up from here. January fcoj was down less than 1 penny last week but we were stopped on client’s longs at 72.00. 71.00 did hold and we may take another go this week with a tight stop. Pay close attention to the spike in volume on 12/1 which was 4 times the average volume in recent weeks; it is not uncommon to see volume spikes on a change in trend. To view our full commentary which includes the sectors of energies, livestock, currencies, financials, grains, softs, and metals, subscribe to our 4 week free trial by visiting this link.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.