The March Prospective Planting report by the USDA really
sets the tone for the growing season. The United States is the world’s largest
producer of corn and soybeans and this report basically tells the world what to
expect our production to be. This report will also tell us what we can expect
our crops to be worth on the global market. The importance of this cannot be
overstated and the errors in its accurate prediction have been growing wider
with each year. In fact, this report has produced limit moves in six of the
last seven quarterly reports and it appears that the small speculators may have
bet too much counting on a bullish report.
This first drew my attention on Monday while analyzing the
Commitment of Traders report. Small speculators and managed money, both categorized
as speculators, now hold a record net long position. I was surprised that so
many traders were willing to risk positions heading into such a major report
with only the seasonal bottom to support their efforts. The combined thought of
the pending Prospective Planting report along with a market that has rallied
nearly 13% on the year leads me to wonder how much higher this market can go
without a pullback.
Global demand continues to grow even as we set new annual
production records due to increased acreage and yields. The stock to usage
ratio, which reflects how much we have left in reserve, is currently around
18.5% on the global market. This is a 13-year low. The main reason for this
decline has been surging demand from developing countries. Chinese soybean meal
consumption has increased nearly 300% in the last 10 years to around 48 million
tons annually. This goes back to the very basic and primal desires of a better
diet, better clothes and finally, better shelter. By comparison, China’s
population has increased only 17% over the same period. Therefore, the change
in diets is based on the wants of an economically empowered society rather than
a mushrooming population.
The Chinese story is nothing new. The real question is, “How
do we trade the grain markets around the report?” Morningstar Data for
Commodities now provides a treasure trove of data for market research anoraks
like myself. My work with Morningstar consultant Shiv Arora has unearthed some
intriguing data kernels. The window we analyzed in corn, soybeans and wheat is
the five days pre and post report over the last 15 years. We then broke this
data down into statistical modules that allowed us to determine frequency,
amplitude and validity of the raw data recorded.
We will start with the soybean market. There is a 60%
probability that the market rallies 2.78% in the five days preceding the
report. Based on last week’s closing price of $13.65 per bushel, we could see
the market above $14 before the report. The post report effect tends to give
back the anticipatory rally and then some. This is a classic case of, “Buy the
rumor. Sell the fact.” Given the large speculative position and the increased
volatility the markets have been experiencing over time, I expect the post
report decline could be much steeper if the small speculators and managed money
should be forced out of their positions.
The behavior in the corn market is just the opposite. It
tends to sell off ahead of the report by an average of 3% with a much higher
degree of certainty of 73%. Savvy traders can use this to their advantage in
anticipation of a post report rally. The corn market rallies an average of 60%
of the time by an average of 7%. These calculations provide us with a
pre-report target buying opportunity around $6.26 per bushel and a post report profit
target of $6.70.
Finally, the wheat market doesn’t derive any benefit from
the coming report. The wheat market averages a 6% decline 63% of the time
before the report and follows that with a post report decline of 2% a little
more than half of the time. The takeaway here is that wheat is best purchased
around a target of $6.00 after the
report when the market makes its seasonal bottom around the first week of
Next week we will look at some of the fundamental factors at
play in this year’s grain markets like one of the warmest winters on record as
well as the global demand issues. We will recap the Prospective Planting report
and see how our statistical analysis fared.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.