Are the Funds Willing to Push the Grains Higher?
Mar 15, 2012
The S&P500 will take another run at psychological resistance up at the 1400 level. If you look back to the late winter and early spring of 2009 you will see it was the last time the S&P500 ever traded in the 1400 range, right before the big US stock market crash. What I find different this time around is the fact we are NOT being lead higher by the "inflationary" stocks like Potash, Mosaic, etc.., but instead by the rah-rah "tech" and "banking" sector stocks. If you remember back to the US stock market rallies of the past few decades, it seems the banking and tech sectors were definitely in play. Therefore I believe this rally is going to attract a ton of market participants and should be able to sustain some longer-term growth.
My concern though as of late has to do with the steep sell-off in Treasuries, Currencies, Gold, Silver, Cotton, etc., I am worried that we could start to see some "allocation" type trades or ripples in the commodity markets, eventually evoking a short-term "risk-off" type environment (not today, but possibly coming around the corner). As I mentioned yesterday, the "bullish" fundamental story in soy should help keep it insulated to some degree, but both wheat and corn could prove to be more vulnerable to harsh "outside" market influences. As more investors become comfortable with the current stock market rally we may see more liquidation in alternative type riskier asset classes (i.e. gold, cotton, treasuries, etc...), let's just hope the Ag markets don't get caught up in the "reshuffling" of the cards.
Any type of QE3 confirmation would help to ensure the "outside" market winds will stay behind our sails. My fear is that as each day goes by we move one step closer to the US Presidential election. My guess is the Fed will not want their hand in the election process and therefore will do everything in their power to stay out of the limelight. The takeaway is, either the Fed makes a move in the next couple of months or QE3 will be off the table. Traders will get nervous about future growth and worry that any government stimulus premium that has been added to the markets will quickly be removed. The "outside" markets will shift and we will in turn be sailing directly into a headwind. If the US stock market can keep traction and continues to move higher, the commodity markets might find themselves fighting a money-flow battle on that as well. What you need to is this, if QE3 goes down in the next few months this "risk on" rally could really start to gain momentum and push the Ag markets even higher. If QE3 is shelved we may start to fight much more serious headwinds, and the AG markets will be left trying to support the current prices on their own fundamental merits. In simple terms, there will be a lot less fund horse power available to help us push this increasing "price rock" up the hill.
Remember last year's analogy I used once corn prices pushed through $7.50. Commodities is a zero-sum-game, meaning for every buyer there has to be a seller. Go ask the Hunt brothers some time about what this means if you doubt may analogy. You can be absolutely dead right your theory or analysis, but if there is no one else in line to buy then price will NOT be going higher. Another way I like to look at it is like this: we started with a medium sized snowball back when soy prices were trading at around $11.50. We started pushing the snowball higher back in late December. As you can see from the chart below we have been steadily moving up the mountain. Keep in mind, as we move higher the snowball becomes much larger and much harder to push up the mountain side. In order to keep it moving we need new man-power and more guys jumping into help. This additional man-power comes not just from traditional specs, but more importantly from the "funds." As you can imagine the funds are able to bring a lot of helping hands to the party, helping us push the snowball further up the mountain. The problem is once the snowball gets extremely large and the price-mountain starts to become extremely steep we can not afford to loose a single helping hand. Understand what I am saying here, if some one gets spooked, or catches wind of a party somewhere else that looks better and leaves us high and dry, then pushing the snowball further up the hill will become next to impossible. Just understand we have to have new manpower jumping on board to keep pushing us higher. At these prices it is imperative we have to have the helping hands of the "funds." If they get spooked by NO quantitative easing or a shift in the strength of the US dollar, our traditional "fundamental" Ag traders may find themselves steam rolled and left simply scratching their head as nothing changed fundamentally from a bean or corn perspective.
I am certainly not saying we have reached the end of rainbow, but I am having a hard time getting overly bullish on fears that the "funds" could pull out their troops at any time. They just do not seem to be 100% convicted or sold on the Ag markets (remember, they have gotten burned as of late in Ag's). There is definitely money flow picking back up and coming into the markets, but we are no where close to seeing the environment we had last year. Until I am certain we are going to have the helping hands show up to push this baby higher, I will be apprehensive to bet on an explosive upside move. I can tell you if we see confirmation of further quantitative easing and weakness in the US dollar, there is a strong chance soybean prices could eclipse last year's high of $14.68^4, and possibly even make a run towards the '08 highs of $16.63. The fundamental story is ripe, now we just need to make sure the funds are going to jump on board. This is why I have been carefully monitoring and reporting on every move in the "outside" markets as of late, and will continue to do so in order for us to get a more clear picture.
Smart traders continue to talk about the strong upside "potential" in soybeans. Be extremely cautious if you are "long corn vs short soybeans," from where I sit, you could be in for a very rocky ride. As I have been mentioning the past couple of weeks the trade all of a sudden seems to be excited about the "protein" story.
Analyst continue to stick with the theme of lowering South American production. The latest reports circulating show "Agroconsult" reduced their production estimates for Brazil from 69.9 million metric tons down to 67.1 million. With lower production out of South America, US soybean prices may have limited downside risk until more is know about the upcoming US crop. Along these same lines, I thought it was interesting to hear Rabobank predicting India may soon flip form a net exporter of 4mmt of soybean meal per year, to a net importer of 4mmt in just the next five years. There is no doubting the "fundamental" soybean story is gaining momentum amongst the more traditional players.
Corn on the other hand seems to still be a mixed bag of nuts. I should note that even though weekly US ethanol production fell to a five-month low in yesterdays report, output of 892,000 barrels per day is still more than I figured we would be producing considering the poor margins and record 22 million barrels in excess supply. What is important is the fact we are still using over 95 million bushels of corn per week to produce ethanol, which is allowing many of the bulls to argue the current 5.0 billion bushels of corn the USDA is estimating may still be too low. Now we have a large group of traders who believe the ethanol number is too high because of the improvements in the grind and the ability for producers to more efficiently produce ethanol. On the other side of the fence we now have those who believe the USDA number is too low and must be raised higher, due to the continued strength in production. My bet is the USDA leaves the number "unchanged."
In what I consider somewhat of a turn around, highly acclaimed and well followed Iowa State meteorologist Elwynn Taylor went on record saying he believes the odds favor a much better than average corn yield this growing season. He also went on to reportedly say he truly believes the odds of the US having above trend line yields this season are now better than 60% in both corn and soybeans. His logic seems to be that "La Nina" appears to be turning into to "El Nino," which has the strong potential to bring much higher yields and lower prices than the previous two seasons.
Despite the fear of more corn bushels being produced in the US this season, the trade seems very certain about "limited" downside risk in new crop corn. I would have to agree for the time being, but I have also learned through the years to respect the markets and never...say never. The crowd continues to talk about huge upside potential now in new crop soy, and very limited downside risk in new crop corn. I continue to urge you to pay close attention to this shift.
Wheat may gain a little strength from continued "weather" concerns in Western Europe and North Africa. "Strategie Grains" out of Europe has now cut their soft wheat production estimates by 1.6 million tons to 131.1 million. Supposedly there are extremely dry conditions spreading through Spain, Portugal, France, parts of the UK, and in ares of Norway. As I mentioned last week, we need to throw this on our radar screen, if the drought continues to intensify it will become a much bigger headline. Here at home however wetter conditions in several key wheat growing areas should help to improve overall wheat conditions. Net-net very little news to report in the wheat world, it should continue to remain a follower.
*The economic calendar of events is fairly quiet for the rest of this week, so I would suspect the grain and soy markets will be able to trade on their own merit. The theme out of the gates is certainly higher as continued bullish interest in soybeans will pull the markets. With better than expected export sales the soybean market should remain strong. The May corn contract will likely take another run at the dreaded $6.66^6 resistance level, which it has had problems with on several occasions as of late. I continue to remain conservatively bullish giving the edge obviously to soy, but I am NOT chasing rallies, and I refuse to get wildly bullish until I see more confirmation of a weaker US dollar and overall increased "fund" support across the commodity sector. Producers should continue to hold waiting for higher new crop prices.
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