Tag Archives: global demand

Bean Market Fear Shifts from Producer to Consumer

The soybean market has been held just under $15 per bushel since 2012’s US harvest. In fact, it traded all the way down to $11.50 last august before rallying through the harvest. Soybeans are up around 15% so far this year and based on a few factors, it appears that this rally could sustain itself. Currently, the market is sitting about where it is supposed to be; in a period of consolidation near the highs waiting to fall once the spring planting becomes more certain. I’m just not sure how much of a buying opportunity we’re going to get come the late June – July seasonal sell-off.

Continue reading Bean Market Fear Shifts from Producer to Consumer

Grain Market Repeat of 2010

The grain markets are beginning to look like 2010 all over again. The corn, bean and wheat markets all had substantial rallies, with each setting all time highs in 2008. The markets then formed a secondary peak in 2009 before drifting lower to sideways through the early summer of 2010, which ended up being the base for the all-time highs. The most consistent reason for expecting a similar outcome this year is based on the same external factors in play this year like, ending stocks and global demand. However, these factors have already been accounted for. The hidden key to these expectations lies in the market actions of the commercial traders.

The Commodity Futures Trading Commission (CFTC) publishes a weekly report of the each market’s main participants and their actions within the markets they trade. These groups include small speculators like ourselves who hope to profit from our actions in the market as well as commodity trading advisors (CTA’s) who manage pools of money and are professional traders. The CFTC also tracks the actions of hedgers, people who genuinely use the futures markets for their intended purpose of mitigating risk throughout the crop cycle. A new category added over the last few years has been that of index traders. Index traders manage money based on an exchange-traded fund like CORN, obviously an ETF based on corn. Index traders simply track the movement of the underlying asset in their fund. Their actions are seen as adding volatility and speed to the market. They buy on the way up to match the index to the underlying as it climbs and sell on the way down to match the market as it falls.

The final group of traders tracked in the primary report is the commercial traders. This is the group of traders that either produces or, consumes the underlying market. In the case of corn, this would include Fortune 500 companies like Monsanto, Archer Daniels Midland and Con Agra on the production side and Pillsbury, McDonalds and Kellogg’s as end line consumers. We follow this group because of the market research facilities that they employ. They have access to the best models and end line estimates of where they believe the market should be valued. Therefore, when a market becomes significantly over or, undervalued they can take advantage of the difference between where the market is trading compared to where they think it should be trading.

This brings us to our current situation. All three primary grain markets provided clues to the coming rallies based on the surge of accumulation by end line users during the post planting lulls. Fear in the grain markets comes in three phases and each carries with it a build in premium followed by a sell off if the fears are unfounded. The first concern is planting fear. Provided the crops get in the ground on schedule, the market will gradually decline with a sigh of relief. The second is summer drought. Enough said, there. Finally, weather concerns around harvest. Again, followed by a post harvest decline and sigh of relief.

The commercial traders’ net position has grown substantially throughout this spring. In fact their purchases, viewed in the aggregate of the three markets is only eclipsed by their buying in 2010. This tells us two things. First of all, we are starting the season at prices that are generally viewed as under valued by the end line consumers. Secondly, that there is significantly more fear of a future shortage than surplus. Based on the commercial traders’ predictive capabilities, we believe that there is the possibility for a significant rally this summer if weather conditions are not perfect.

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.

Buy Beans Below the Teens

The growing season for U.S. crops is right around the corner and several factors, fundamentally, technically and seasonally are lining up to suggest that the time to buy soybean futures and soybean meal futures may be right around the corner. Last year’s drought placed heavy demands on Brazilian and Argentine crops as well as the beans left over in the bins. The tight supplies have left us with a stock to usage ratio of less than 5%. In fact, the USDA recently stated that this year’s U.S. stock to usage ratio of 4.3% is the lowest since 1965. Typically any ratio below 10% is bullish for U.S. beans.  Meanwhile, the global stock to usage ratio is the lowest since 1996.

Demand for soybeans also continues to increase. Chinese hog farming represents a large portion of the soybean demand through their use of soybean meal as feed. The USDA expects that China’s hog production may reach more than 60% of the world’s total in 2013. In fact, Chinese soybean imports have increased six-fold since 2000 to meet the growing demands of their own domestic usage. U.S. exports are already 25% above last year’s levels and currently stand at 93% of the USDA’s export expectations of the U.S. crop in 2013 for the marketing year ending this August. China’s imports have led the way and are up 13% year over year.

Seasonally, soybeans tend to sell off and make an early spring low sometime in February. This is followed immediately by a rally into Memorial Day as planting related weather concerns force the market back and forth between, “too dry” or “too wet.” The late February low also coincides with the South American harvest, which is currently in full swing. The South American harvest sell off is similar to the September harvest sell off we get here in the U.S.

The final piece of seasonal analysis is the analysis of the seasons themselves. Last year’s drought has not been sufficiently squelched by winter snows. Soil moisture in the leading soybean producing states is running dangerously low. Nine of the most productive states are sitting at 20% of normal soil moisture. This is the mirror image of last spring when only 20% of the same area was below normal moisture levels. The world cannot afford a drought in the U.S. in 2013.

Moving to the more technical nature of the market the commercial traders have been net buyers of beans since November. Their net position has doubled and they’ve only been net sellers twice in the last 15 weeks. Commercial traders have been early buyers in each of the last three years. Each of the last three years has given us an early rally, as well. Deeper research reveals the importance of this. Commercial traders have come into the year on a positive note one third of the time over the last 30 years. Soybeans have had meaningful early rallies in seven out of the ten years that commercial traders have started the year on a bullish note.

The USDA has raised its 2013 forecast to a range of $13.55 – $15.05 per bushel. These estimates are based on the November soybean futures, which will be this year’s planted crop. November soybeans are currently trading at $12.70 per bushel. The November beans have formed a triple bottom on the daily chart near $12.55. This would imply the market wants to trade lower and see what happens under the $12.50 area. Technically a test or, penetration of $12 would provide an ideal bottom to start looking at the buy side for the November soybean futures contract. Breaking the $12.50 level would accomplish two things. First, it would flush early and weak buyers out of the market and allow the positions to reset themselves. Secondly, it would create an oversold condition that, combined with positive commercial trader momentum could be used as a springboard to get long on the bounce higher.

There are far too many bullish global factors to ignore the buy side of soybeans in 2013. The fundamental factors of growing global demand in the face of record low current inventories will magnify any weather related issues. The soybean market typically overshoots its targets and suggested price ranges. Therefore, buying soybeans $1.50 below the bottom of the USDA’s price targets may very well net a profit in excess of the USDA’s high side of their forecast at $15.05.

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.

Commodity Market Bubbles

Defining a market bubble has become a bit like the moral right’s hunt for pornography. They can’t quite quantify it but they’re sure it’s evil, it must not be tolerated and they’ll know it when they see it. Of these four qualifications, twenty years of chart study at least allows me to agree with the last statement. I’ve studied market bubbles from Belgian tulips to the Hunt brother’s cornering of the silver market and actively traded the tech bubble on the way up AND down. We traded the economic collapse of ’08, an inward bubble, as well as the commodity bubble that immediately preceded it. We’ve analyzed them mathematically through standard deviations and statistical analysis. We’ve read university studies, which focus on the psychological aspects of the markets’ participants and we’ve watched politicians blame it all on the speculators. Out of all of this, there are a few things that help us understand where we are now, and that is the key to investing.

There is a difference between an individual market bubble and a rising tide floating all ships. A summer drought or a winter freeze may push grains or orange juice into bubble mode through crop damage. However, those are individual market issues. An economic policy that devalues the Dollar in the face of growing global demand is the tide that floats all ships. The U.S. commodity markets remain the global commodity pricing mechanism. Therefore, all commodities priced in Dollars will continue to climb as long as our economy flounders, regardless of speculative trader participation.

Quantitatively, the only current market that may be headed towards the psychological bubble area is, silver. A recent survey of commodity bubbles, both up and down does provide us with some clues towards the identification of a bubble. Typically, we see moves in excess of 100% in less than six months. The primary focus is rate of change. Bubble markets have large moves over a very short timeframe.

The psychological aspect is the history of human nature. Trading bubbles have been reproduced over and over in academic labs. According to a study done at the University of Zurich, human beings do tend to learn from their mistakes. They found that subjects burnt by a bubble are two thirds less likely to be burnt by the second one. Unfortunately, several other studies on the human decision making process have concluded that once people have acquired enough information to make an informed decision, more information only increases their level of conviction – not their accuracy. We are just beginning to see an entirely new wave of market participants. Therefore, psychological aspects of trading will have to be learned again and again.

The growing global demand is just in its initial stages. We have seen the first leg of the new global commodity price norms. Old world Europe is struggling and China and India are both reining in inflation as best they can. A near term slow down will prove to be a huge buying opportunity in the commodity markets by new participants in Asia and India who have seen their incomes grow three fold over the last ten years and have money that must be invested to keep pace with their domestic inflation. They are already pushing the trading volume of overseas commodity markets to new volume records. Much of this has to do with the typically small contract sizes they trade, which broadens their appeal. Their volume is further enhanced by political systems that won’t allow their people to invest outside of their country. This eliminates cross hedging, which does minimize price fluctuations relative to value. Thus, a whole new population is beginning to fuel the bubble and subsequent burst cycle of their markets and financial education.

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.

Lost in the Confusion

Lost in the Confusion

 

Amid the roar of the financial chaos and their ability to affect,
seemingly every market, one sector has been quietly building a base and should
be renewing buying interest. Remember back in late May and June during the
wettest spring ever when the concerns of crop planting were making the local
news? The ensuing run up in grain prices soon had everyone beating the drum of ethanol’s
demand on corn prices and the cost of bread, chips and cereal.

Since the grain markets peaked in July, many of them have
sold off considerably. Soybeans have fallen from an all time high of $16.47
down to $11.00 per bushel. Corn and wheat are also off 30 – 35%. The main
reasons for this sell off has been the exceptional growing conditions helping to
make up for the wet spring as well as the typical seasonal pattern the grain
markets have of selling off once the crop has been planted. Further pressure
was added this summer by the rise in the U.S Dollar and the global demand
reduction associated with increasing purchase costs as a result of the exchange
rate.

Soybeans and wheat continued to decline this past week amid
the global uncertainty of the financial markets and a general flight from
derivative based investment. However, corn made its low of $5.00 per bushel
more than a month ago. Also, the corn market failed to make new lows amid the
financial panic. Technically, corn need only close above $5.67 to setup a
genuinely bullish breakout of a double bottom.

Fundamentally, while the corn crop has grown well, the late
planting has had an effect on the maturation process of the crop. The saying
being floated by the corn pundits is, “Looks good from the road but not in the
field.” This year’s crop will be especially vulnerable to an early frost or
cool late summer as the late planting is affecting the finishing of the crop.
Lastly, and most importantly, the global corn crop began this year at one of
the tightest stocks to usage ratio on record. Basically, this means that there
was less of the previous year’s corn crop still available in the pipeline at
the beginning of this year’s planting season.

It appears in the USDA grain reports that given the acreage planted, the projected
yield and demand for this year’s crop will do little to ease this issue. While
we move to global “on demand inventory,” it’s important to know that commodity futures
supplies are static. Government’s can print money. Stock exchanges can forbid
short selling and banks can be bailed out. However, neither the U.S. Federal
Reserve nor the European or English Central Banks can create more corn. Those
who have been losing sleep over the next financial market, “Breaking News
Bulletin,” may wish to consider something more grounded.

 

Andy
Waldock

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