Grain Markets in Flux

by: Dan Carty

Last weekend brought us snow in key parts of the country and this snow/moisture intensified the turn in the grain futures markets Wednesday (and continued it Thursday) driving the complex down. The selling was very extreme in the wheat market as the front month contract dropped to limit down at one point (remember it being limit up a few months back?). This action was not isolated, as the Corn and bean markets crashed lower as well. It was an overall very ugly day for the grain bulls.

One thing to consider in regards to this dive though is this: It seems like everyone was looking for a reason to exit this market! Amazingly I did not read one bearish story on this complex over the past month but this Bloomberg article told only a bearish story! Further, the bears at the moment are making claims that certain weather conditions will “definitely” hurt the wheat, bean and corn markets.

However, if one looks into these conditions a bit closer, that may not be the case. For example, wheat is generally protected by layers of snow. However, if the snow melts too quickly, the crop could be damaged by the excessive moisture and given the level of snow over the past few weeks, this is a higher than normal probability which would in turn put pressure on supplies (raising the relative level of demand in the process). If you look around through these bearish articles, this fact is not even considered.

So am I putting up a bullish defense of this market? By no means! In reading through the Ethanol Supply and Demand numbers from the Renewable Fuels Association [RFA], the divergence between supply/potential supply and current demand/potential demand is widening. According to the report from the RFA, expected demand in 2007 will be greater than 5 billion gallons. However, the current industry has the capacity to produce 5.3 billion gallons AND new ethanol plants with the potential to add 6 billion gallons of ethanol to the market are in the pipe. Is this a safe supply and demand balance? Furthermore, if you add in the diving crude price to this equation, all of a sudden the demand for ethanol fuels lessens against rising supply.

Technically, things do not look much better. The chart of the DJ AIG Grains index has had another window down this week (the second from the previous highs). This is very bearish. Selling pressure is now rising for this index which could forecast more problems ahead for the complex. Also, the net index is about to turn down for Grains Index which indicates weakness ahead for the index. Furthermore, the collapse in the price of oil combined with a stable dollar at the moment, does not provide support for the index (the two tend to follow each other when such occurs) either.

DJIA Index

Here is a rundown of each of the grains I follow.

Wheat
The weekly chart of March Wheat looks very bearish as it has entered the old trading range that existed before the major breakout earlier this year. The monthly chart has a window down at this point but since it is early in the month, it is too early to call if this will hold till the end of January. The Net Index turned over last Friday (as I went short) and is now falling back though reluctantly it appears. Short term the grain looks overdone though one could have said the same yesterday when it tumbled to limit down. I am holding my short in the contract with a buy stop above to close.

Corn
Corn’s Net Index turned over last week (as I went short) and has fallen rather aggressively since. The contract has support a bit lower but looks like it is forming a rounded top. The daily chart has an enormous double top on it setting up projections down near the 330s. On the long term monthly chart, a doji was formed last month followed by a substantial break this month from overbought – a very bearish development. Short term, I continue to hold my shorts with a stop above. Market looks overdone on the downside but nothing to indicate I should cover my short.

Corn Futures Chart

Soybeans
Soybeans was a leader for a short time over the last month but now is being dragged lower by the weakness in the wheat and corn markets. The contract on the weekly chart seems to be consolidating within the 663/702 range with a bias to the downside. One could draw a trend line along the tops and bottoms to create a pennant so continued selling could be a problem. Longer term, there was a doji last month but nothing major in terms of damage has been done thus far. Short term, the next index is actually moving higher which could provide support for beans going forward. I was stopped out of a long position yesterday looking to re-enter on the long side in the days ahead (thus I am flat).