October 27, 2011
By: Craig Haugaard, Grain Origination Manager
Have you ever felt like the only fire hydrant in a dog pound? That is pretty much the way that commodity bulls felt yesterday as everything seemed to go against them. First, we have the ongoing mess in Europe where countries like Greece make our politicians look like the epitome of self restraint. European leaders were meeting in Brussels to figure out how to prop up banks, bail out Greece and prevent the debt crisis from spreading. When it appeared that they couldn’t even agree on what to have for lunch to say nothing of the real issues in front of them the euro plummeted and that sent the dollar higher and put pressure on our commodity markets. On a fairly unrelated note every time I think of Greece and its leadership I get this mental picture of the president of Greece in front of the rest of the European leaders, hat in hand while the EU spokesman, who in my fantasy looks like Ricky Ricardo, says “You've got some 'splainin to do!” Anyway, as the rising dollar sunk commodities, the price of corn sunk low enough to hit sell stops which pressured it even lower. For the session we saw the funds sell off 12,000 contracts. After the close European leaders reached an agreement and as a result the dollar was down sharply in the overnight trade and commodities rallied. I think the main lesson that we can learn from this is that the dead Italian, Leonardo Fibonacci, continues to do a great job of nailing this market. As you know if you have been reading my prattle for any length of time at all, the Fibonacci retracement numbers have been working great lately and they did once again on the corn market. We ran in to stiff resistance right where the numbers said we should and then when we unable to really break through I suppose it was inevitable that we would eventually head lower. Now, unlike the French army, I am not ready to wave the white flag, after all I still have my Chinese corn dog strategy. Speaking of that I was taken to task a little bit by a few of you yesterday for being incomplete in my estimation of the good that this plan will do for America’s farmers. It was pointed out that the corn dogs could be fried in corn oil which would use more bushels although in China they are more likely to use soybean oil but either way it is a win for the USA. I was also told that I should have done a little more work and figured out what this was going to do in terms of increased demand for pork. Obviously we will feed those pigs corn before we turn them into corn dogs and thus the impact of the Corn Dog Spring will be much larger than I had initially calculated. So, where do we go from here? Let’s make the assumption that the recent spike up to $6.65 ½ is the new resistance level there where is the support? Again, turning to our old buddy Fibonacci we see that we should have support in the December futures at $6.30 with additional support at $6.19 and $6.08. If I was a betting man here is what I wouldhave bet on before the recent news from Europe. I would bet that we would trade lower and in fact get down to the $6.08 level and then since we were in the neighborhood decide, what the heck let’s try $6.00. Somewhere down there In I would have bet the Chinese would step in and say “We rike this price.” They would then buy a bunch of corn and send the market into a demand driven rally. Let’s further imagine that the USDA looks at this and then raises their annual export projections by 100 million bushels. At the same time the light bulb will come on and the USDA will say, “Holy cow, ethanol margins are pretty good and the grind is better than expected” while raising that number by 125 million bushels. Finally, let’s just imagine that the yield reports that have been coming out as of late are more than antidotal and in fact the USDA drops the national average yield by 1.5 bushels. If that happens we are looking at a carryout of 409 and the bull is doing the happy dance again as the futures prices head back to the kind of prices we had on July 10th of this year. To think that it all started with the humble corn dog. The the European mess now "fixed" (We will see how longf that lasts) I am not sure we will sink to the $6 level but I believe the rest of my scenerio could very easily play out. The following chart is of Chinese, South Korean and USA pork consumption levels over the past decade or so. Obviously, the potential demand from China continues to be exciting.
SOYBEANS: 23 higher
I don’t know where to start with beans today. Let’s start with the good stuff. There is a tendency for the USDA to lower the projected bean yield in the November report if they have already lowered it in the October report. In October we slipped from 41.8 bu/acre in the September report to 41.5 bu/acre in the October report. Just for grins let’s assume that they drop the national average yield again in the November report, down to 41 bu/acre. If we leave the other assumptions unchanged that would give us a carryout of 123 while a 40.5 bu/acre national average yield would leave us with a carryout of 86. Even my slow cousin Jimmy could figure out that those numbers would be bullish. On the other hand the trade is very cognizant of the fact that the exports thus far have been anemic and that fact coupled with the pressure from the strong dollar had the funds selling off 16,000 contracts during yesterday’s session. This has pushed two of my three indicators into the bearish column. If we assume, as we did with corn, that the high of October 14 will be the high for the time being and we are going to retreat I would look for Fibonacci driven initial support in the January futures at $12.09 with more substantial support at $11.63.
Wheat took a beating along with the rest of the commodities yesterday. It looks like we are still getting the stuffing kicked out of us in the export market as Russia sold a chunk of wheat to Egypt yesterday at prices that were $30/MT cheaper than the next best offer. Also in that part of the world I see that Kazakhstan is projecting that they will be exporting 15 MMT of grain this year. The USDA has them factored in for 9 MMT so if true this would be quite an increase. I spent a month in Kazakhstan in 1996 and as jacked up as things were then I have a hard time imaging that they will pull this off but I suppose things could have changed considerably since I trod their streets. I look for the Minneapolis futures to continue to trade within the recent range but expect wheat to be higher today based on the weak dollar.
The information contained above was taken from sources which Wheat Growers believe to be reliable, but is not guaranteed by Wheat Growers as to accuracy or completeness and is made available for information purposes only. There is a risk of loss when trading commodity futures and options.