A brief review of our primary El Nino forecast shows considerable agreement that this year’s El Nino effect will be similar if not, stronger than the El Nino event of 1997. You can read the summary of the meteorological information in our first piece on this topic, “2015 El Nino and the U.S. Grain Markets.” This week, we’ll look at the anticlimactic chart evidence that suggest the media may create a bigger threat than reality suggests is warranted. Headlines draw readers. Readers support advertising. Headline writers get paid. As a trader, definitely not a writer, my goal is to profit from projected price action. It may not be glamorous. It may not draw readers. But, this is the primer you need for the next 18 months of global grain trading.
The grain markets finally got moving this year once the crops got in the ground. Since March, the soybean market has seen four moves of more than 7.5%, all of which were completed in three weeks or less. Soybeans have increased their volatility substantially while remaining range bound between $9.20 and $10.60 per bushel. With both the USDA’s Crop Production and the World Agriculture Supply and Demand report coming out Wednesday at noon, we’ll take a look at who is in control of the soybean futures market and how their actions in the market telegraph their expectations of tomorrow’s crucial reports.
The USDA releases its planted acreage estimates on Tuesday, June 30th. This report typically sets the tone for the coming marketing year. David Hightower’s analysis has been posted to our site and we defer to him in terms of the fundamental supply and demand numbers. We’ll pick the individual markets apart through the actions of the commercial traders, the actual producers or end line users of these grain markets. Given the depressed levels many of the grain markets have been experiencing can this report actually do further damage?
Monday began with an official COT Sell signal in the U.S. Dollar Index that we published in TraderPlanet. This trade was actually a follow up to the previous week’s piece also published in TraderPlanet.
We combined these into one post including the annotated US Dollar Index chart in – The USD Index – A Speculative Bull Trap?
This week started off with our Chicago wheat futures analysis for TraderPlanet in which we discussed looking for a selling opportunity near the 50% retracement level at $6.05 just through the resistance at $5.80. Tuesday, the market traded to $6.10 before selling off down to $5.70. Tuesday’s reversal also triggered the entry for our COT Signals Mechanical system.
The wheat trade came straight from our nightly discretionary COT Signals which has a 30-Day Free Trial.
Tuesday we discussed the growing glut in the crude oil futures market because we noticed how actively commercial long hedgers are locking in future supplies. We still see this as a trading opportunity.
Finally, our main piece focused on the Diminishing Effects of Global Quantitative Easing. This is where we left off in Hand Quantitative Easing to Germany. We did not expect Japan and now, China to come in and throw gasoline on the fire the way they have but the fact is, we now have three major regions kicking in QE programs since late September compared to the US enacting three programs over the course of four years.
The corn futures market has rallied about 15% off of its lows while following its typical seasonal harvest pattern. We had some serious concerns about how oversold this market had become and wondered if it may even breach the $3.00 per bushel level. Obviously, the market hasn’t fallen below $3.00 and the market’s decline was fully supported by long hedgers looking for bargains below $3.60 per bushel. Long hedger support and the oversold nature of the market put us on the buy side for the recent rally which you can see on the chart below. However, as the market has rallied, so to have commercial traders’ expectations changed.
The Commitment of Traders reports showed that commercial corn producers sold more than 350,000 contracts equal to 1,750,000,000 bushels or, about 12% of this year’s crop as estimated by the October 10th USDA WASDE report between February and April. The average price for these forward hedges was around $5.00 per bushel. The summer’s perfect weather has led to record production and this has caused the market to sell off all the way down to $3.20 per bushel. This sell off has brought out the consumption side of the commercial trader equation and our math suggests that they’re just getting warmed up as you can see on the chart below.
The soybean versus corn spread has received a great deal of justifiable attention this year and the current spread between the two markets is still near its all time highs. The last statement however, generates as many questions as it answers. We’re going to look at some of the difficulties in quantifying this spread trade, place it in its historical context and walk through the math so that the next time someone mentions this, you can determine if they’re comparing current crop soybeans versus corn or, if they might as well be talking about apples and oranges.