Near-term Row Crop Markets Price Prospects
Jan 25, 2013
Old crop corn contracts appear to be losing patience. There are two main fronts. First, there is an absolute necessity for export demand to start showing some sign of gaining traction. Old crop weekly export sales, once again posted sub-par volume (5.1 Mil Bu). The abysmal export sales pace begs the question of what is going to emerge as a catalyst to change the dynamic. If South American FOB offers continue to track .50-.70 cents under the Gulf, keeping freight differentials covered, the focus shifts availability of Brazilian supply. It’s necessary for any substantive shift to foreign end-users returning to source US corn to become evident within the next 4-6 weeks. If not, the ability of price to maintain current price levels will be increasingly strained.
Secondly, corn grind for ethanol continues to vex the market. The trade’s attention this past week has centered on shuttering of capacity. However, those headlines are history. The story going forward is whether or not the worst is behind slumping ethanol production. However, a glimmer of recovery in this demand sector was presented with the EIA reporting on Thursday a modest increase in ethanol production. If margins are more likely than not to be in a bottoming plateau, as I believe is the case, then a general recovery from break-even to profitability should evolve. Perhaps gradually, but a signaled recovery is all that is required.
These are the two demand line items that remain front and center stage for the market. And if positively realized will contribute to a fundamental resiliency to restrain values from "leaking" lower. Overall, physical supply remains far too tight for bears to aggressively push prices to extremely lower levels. So, a wholesale collapse does not appear in the cards - nor does a stellar rally. A best case near-term scenario would have March corn work up into the $7.45-$7.50 Bu level over the course of the next 4-6 weeks. Support appears in the $6.90 Bu area – about $.12 Bu above the pre- Jan 11th crop reports low.
Note: Lotsa trade chatter about corn and the 50 day moving average – it’s above the 50 DMA, it’s below the 50 DMA. For the time being, this is one technical indicator that has receded as a meaningful technical pivot point.
At this juncture, producers retaining ownership of old crop production still have a viable marketing window. In regards to making new crop sales right now – that appears premature. The observation is made fully aware that a formidable array of resistance is aligned in the $6.00 Bu level vicinity in the Dec 2013 corn contract.
The soybean market continues to display more strength than what it is generally being credit. That’s my humble observation. Consider the pervasive trade heebie-jeebies regarding the impending massive South American soy crop. However, soy strength is being continually reinforced by a strong old-crop export pace, the robust domestic crush pace, and uncertainty surrounding the still unfinished crop in South America. In no small measure, add into this mix some very real question marks regarding logistical ability of the soy crop to be shipped in a timely fashion once the SA export pace ramps up in the March/April time-frame.
Now setting aside old-crop soy fundamentals for a moment, the technical picture provides a glimpse of both the challenges and potential pricing opportunities ahead. Presently, March soybeans are trading within a "descending triangle" chart formation. This formation is defined by a descending trendline originating from a high of $15.45 Bu posted on Nov 1st and a secondary high posted at $15.01 Bu posted on Dec 17th. In the past week prices, rallied up to $14.6075 Bu and tapped against the established down trend resistance on Tuesday, Jan 22nd. The subsequent price retreat was modest – a break of 45 cents Bu to $14.15 on Thursday, Jan 24th- roughly a 3% decline.
The second element of the formation, the area of support, is in place at approximately $13.50 Bu. This is a level of price support that extends back to June 25, 2012. It coincides with the upside "breakout" that marked the start of the drought rally of 2012. In the intervening 7 month period this $13.50 Bu level in March soybeans level has been tested and successfully held on a handful of occasions. Most recently, on Jan 11th – the day USDA released a quartet of major reports. Noteworthy, this most recent test was accompanied by a huge spike in volume. High volume sessions accompanied by price/trend reversals are significant reference points. The volume surge serves to reinforce the $13.50 Bu level as one of major support.
Trendline resistance presently at $14.52 Bu and support at $13.50 provides a large window in which prices can navigate. So, this classic chart pattern defines the major price parameters to expect near-term. However, the range in which price can maneuver within this pattern will progressively narrow. Consequently, a breakout of the range is assured – whether up or down. An upside breakout projects the next major resistance at $15.00 Bu basis March. A violation of the $13.50 Bu area, points to values to gravitate to the next major area of support at $13.20.
March 2013 Soybean Contract
With due consideration of known fundamentals, a move through resistance at $14.52 Bu is a more plausible scenario than a descent beneath $13.50 Bu. Bottom-line for producers is that patience should be rewarded. And while you wait, it is wise and advised to get some short-term risk insurance on in the form of short-dated soybean put options.