No Grain, No Gain: Grain Markets Keep Falling

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Includes: CORN, SOYB, WEAT
by: Jeff Malec

Summary

6 to 9 week down trends across the major grain markets.

The downtrend wouldn't be as impressive if invested in ETFs.

Can you imagine if the stock markets were off by such dramatic amounts in a three-month period.

We've sort of been sitting on this one, not wanting to jinx it… but we can't keep it in any longer - the grain markets are in one beauty of a down trend. It started back in May in Corn and Wheat, as short signals started to get triggered and we hoped it would be the start of a months long move instead of just a week or two; and it's actually accelerated over the past 3 weeks, with Soybeans getting in on the down move.

The major media outlets are even starting to catch on to the fact the grain markets are at multi-year lows. But it's not the multi-year lows that's catching out attention; it's the steadiness of the move, the three out of every four days being down, and the lower lows and lower highs.

Here's the beautiful 6 to 9 week down trends across the major grain markets:

(Disclaimer: past performance is not necessarily indicative of future results)
Charts Courtesy: Finviz

And what those moves look like in percentage terms, for those so inclined.

(Disclaimer: past performance is not necessarily indicative of future results)
(Note: We used front month contracts for all markets)

What about those who look to capture such moves outside of the futures markets? Many choose the commodity ETF's designed to track back to the futures contract. This doesn't necessarily mean you'll get the same performance. In this case, if you happened to be trading this move going short the grain ETF's CORN, SOYB, and WEAT -- the downward trend wouldn't be as impressive, with the ETF's not down as much as the front month futures; with the average difference of futures to ETF's coming out to be around 4.5%.

(Disclaimer: past performance is not necessarily indicative of future results)

We're still talking about big down moves; imagine if the stock markets were off by such dramatic amounts in a three-month period - we would have bedlam on our hands, the VIX spiking like crazy, and people flooding towards alternative investments. But this is just little old grains, where nobody much cares about 30% sell offs, unless you're an investment strategy with exposure to grain markets and methodology for capturing such outlier moves, like ahem, Managed Futures.

And here's where things get interesting - because this move is both technical and fundamental, both systematic and discretionary managed futures programs are participating. The systematic managers who aren't too large to access the grain markets have seen a near textbook volatility breakout trade, with prices breaking below their March and April price bands, the continuing in a classic down trend. Meanwhile, many fundamental traders were betting on just such a down move due to their analysis of the supply environment and estimates on crop yields.

You see, while it is a technical breakout lower - the impetus of the move has been crop report after crop report showing great growing conditions and increasing estimates for yields, via the Wall Street Journal.

"The USDA has estimated this autumn's corn harvest will total 13.935 billion bushels, surpassing last year's record crop, while soybean output also will set a record."

"In the past week, up to six times the normal amount of precipitation fell in parts of Iowa and Illinois, the biggest U.S. growers of corn and soybeans, further improving growing conditions. About three-fourths of the nation's corn and soybean crops were in good or excellent condition as of Sunday, according to the U.S. Agriculture Department."

Each of the Ag trading managers we track (Global Ag, Rosetta, and M6) are up over 5% for the month {Past performance is not necessarily indicative of future results} while many multi-market programs are also participating, but to a lesser extent due to their spreading of exposure across a broad portfolio; making this just the sort of move the doctor ordered for the managed futures space. The only problem now is that we've likely jinxed it. We're notorious for discussing a trend and it reversing just after. We talked about the breakout higher in Crude Oil on June 12th, for example; and Crude is down -6.60% since then {Past performance is not necessarily indicative of future results).

But even if we do put a bit of a sports illustrated/NFL Madden cover curse on the grain down trend… it's been long enough to this point for moving averages to have moved lower and stops brought down, meaning whatever happens next - this is likely to go down as one of the best trades of the year for managed futures. Not that we wouldn't mind seeing the markets fall another 30% to make this a really big trade.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.