Charts Act as Price Scouts
The last three months have given the market a lot to think about as it attempts to discover the fundamental value of things we produce (animals, grains, oilseeds) against a backdrop of uncertain global economics. A price chart is a scout for what may be coming and can allow you to keep your wits while the market seems confused. To be proactive in marketing, a technical understanding is just as important as the fundamentals of supply and demand.
Technically Speaking. The weekly December corn chart visually tells the story of the market first curbing usage and, currently, buying it back. In 2008, there was nothing that could be done with $6 corn: It couldn't economically be fed, burned or exported. The market top in the second week of June '08 had taken corn too far and provided the first sell signal in many months.
The subsequent downside move reflects the demand destruction. In one marketing year, corn demand fell precipitously—1.2 billion bushels (feed down 725 million; exports down more than 500 million). That's the equivalent of nearly 8 million acres!
Note the multiple weekly down-gaps all the way to Dec. 1, 2008. The breakaway gap at $5.77 led to the midway gap at $5.01, predicting the next leg down of $2.01 ($7.02 minus $5.01) to $3.01. That's about 38¢ lower than December futures at this writing, but equal to the contract low made in December 2006.
Going further, the rally to the January 2009 high at $4.71 was repeated in early June, during a period of acreage and weather uncertainty. About the same time we were hearing the most bullish news of the year (similar to June 2008), we saw the first sell signal since the buy signal in December 2008.
Depending on how you read the most recent post-June down-gaps, you may see this as either a fulfillment of the original $3.01 target or a new measuring device. The next price target could be $2.76, made by December 2006 futures—where the three-year bull market started.
Ag Is Vulnerable. We are in an environment of deflation, where deleveraging cash is king. To assume that agriculture will escape the restructuring that has relieved the equity, housing and energy markets of all the gains made since December 2006, at a minimum, is naive.
Hope of a reversal in the trend seems left only to production reduction via weather or a sizable reduction in USDA's October planted/harvested acres.
I will begin reducing coverage in futures/put options when corn trades $3.02 and below, or before Oct. 10, whichever comes first. I won't plant corn of that price variety in 2010, and I doubt you will either unless input costs are reduced significantly.
Jerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact Jerry at email@example.com or (312) 896-2080.
Top Producer, Summer 2009