I look to weekly continuation charts for warnings of possible changes in price direction. USDA’s June Grain Stocks and Acreage reports; evidence of poor crops in the former Soviet Union, Canada and parts of Europe; the emerging La Niña’s possible effects on South America; and a disappointing U.S. corn yield added to corn’s price trend reversal, setting the stage for a perfect storm in which global demand outstrips global supplies. While this storm could be similar in scope to the first energy-related perfect storm, this time it is all about food/feed/fiber rather than energy.
It is supply and demand that ultimately defines the worth of a commodity. Technical indicators can give clues that a change in the prevailing market trend is in the making well before conventional wisdom would suggest. Market turns seem to occur when least expected and often in a fundamental environment that seems to defy logic. So it was this summer (see the buy/sell signals where the red and blue lines cross in the chart).
The commodity bubble of 2007/08 was led by energy and really began in late December 2006. However, it was the surge past $4.50 (weekly gap higher) in late 2007 that accelerated the uptrend to the top made in June 2008. Ironically, the collapse was met with a down-gap also in the $4.50 area. This gave rise to a proposition that there was little that could be done with $4.50 corn; prices above $4.50 would require a significant recovery in the global economy or a shortfall in production somewhere.
Notice how, for the past two years, while politicians were dealing with global economic calamities of one sort or another, corn futures were repeatedly turned back near $4.50 in the lead futures contract. Corn marked time sideways between $3.00 and $4.50 as if waiting for the pre-2009 demand to resume. During this sideways trend and in spite of decreasing exports and feed usage, ending stocks changed little as corn demand was barely met with increasing production. It was as if we were living on borrowed time. Then came the summer of 2010.
As the momentum indicator in the chart shows, trend-changing signals evolved long before the fundamental reasons were revealed. Especially in June 2009 and again in July 2010, the important thing was not to be concerned initially with how high prices would go, but rather where they would "not" go.
Familiar Signal. Current indicators look alarmingly similar to 2007/08. Energy demand can be tempered by price explosions, but food will trump energy over time. The shortfall in world food and feed wheat production has been tempered somewhat by ample stocks of wheat but increases demand for U.S. corn. The stock rebuilding phase in 2011 will require a reversal in output to above-normal globally. We can ill afford a shortfall by any major producing country in 2011.
If USDA’s October Crop Production report lowers yields and harvested acres, the market will begin—with urgency—the difficult task of discovering a price where demand shows signs of being curtailed. Technical analysis suggests that June 30 was just the beginning.
Jerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact him at firstname.lastname@example.org or (312) 896-2090.
Top Producer, October 2010