Market Outlook: Past rallies point the way; is soybean use real?

November 2, 2010 09:20 AM

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> This corn price rally’s top close could range from $4.50 to $7.76 based on the size of previous rallies. If it matches the percentage increase in previous rallies, it could range from $5.22 to $8.03.

How High Might Corn Go?

A study of corn’s past four bull markets shows the current one moving earlier and faster than any of the previous ones, reports Bill Fordham of C&S Grain Market Consulting. “The gains so far have already surpassed some of the previous advances in either cents per bushel or percentages,” he says. Using cents and percentage moves of previous bull markets, he comes up with the potential high market close in the lead option:

Rally Year 1987-88 1995-96 2003-04 2007-08
Cents 5.35¢ 6.13¢ 4.50¢ 7.76¢
Percent 8.03% 7.34% 5.22% 7.99%

“The high close next June could be into new all-time, record-high levels,” Fordham says. “Developing supply–demand numbers and money flow in the months ahead will create a wild and treacherous corn market as demand is rationed.”

Dollar Value and Exports

U.S. wheat, corn and soybean inspections in the third quarter of 2010 were the highest since the 2007 record year, at 25.75 million metric tons. That is 8% above this time last year and 6% above the five-year average, USDA reports.

U.S. exports have benefited from the recent weakness in the dollar, which dropped below
80 on the U.S. Dollar Index in October—the lowest it’s been since December 2009—making our products cheaper to importers.

But perhaps some caution is in order regarding the dollar’s downtrend: “Governments are all pushing their currencies lower to generate exports,” says Jim Rogers, internationally recognized commodities guru. “Everyone is pessimistic about the dollar. I would not sell [the dollar] right now. It’s generally better to be a contrarian when sentiment is strongly on one side.”

Soybean Factors

Corn is the leader in the markets right now and soybeans are following, says Bill Fordham of C&S Grain Market Consulting. Acreage in 2011 may be the key: Given USDA’s October reports, the trade believes we need 4 million more corn acres, 4 million wheat and 3 million soybean.

“The 2011 November soybean/ December corn price ratio is 2.21—too high to attract enough corn acres. In 2009, when the market was buying corn acres, the ratio bottomed at 1.97,” Fordham says. The ratio can change by corn rising or beans dropping. Also at play are the profits offered by wheat–soybean double-cropping versus corn. And cotton prices are up, possibly stealing some soybean acres in both the U.S. and South America.

Meanwhile, USDA reduced world ending stocks from 63.6 million metric tons (mmt) in September to 61.4 mmt in October—a stocks–use ratio of 24.33%. This compares with 54.8 mmt and a stocks–use ratio of 23.7% last October.

“The 12-month increase in world soybean use was 20.8 mmt over a year ago. World wheat use is up 15.2 mmt and coarse grains are up 20.7 mmt,” Fordham observes. “That’s a total use increase of 56.7 mmt or 2.8%, while total production of those three products is down 21.25 mmt or 1.1%.” This strong usage is reported in the face of a widely shared deflationary mindset, Fordham says. “I can’t help but wonder whether USDA’s numbers are correct,” he adds.

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