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There appear to be amber
waves of grain and the color of amber appears bullish. More
specifically, there appear to be a number of technical and fundamental
indications that the commodity markets in grain – corn, wheat,
soybeans to name a few – are displaying very bullish indications. As
many recall, the soybean market, along with other grains to a more
limited extent, went through the roof during the past year; the coming
year may perhaps be a repeat in some similar way. Let’s take a look at
these indicators and focus on the corn and wheat markets.
Fundamental
Indicators
In
terms of fundamental indicators, the grain markets in the Northern
Hemisphere have just had a bumper crop in corn and prices have plummeted
to around the 200 level. This year’s immense yield will likely be very
difficult to repeat in the coming year and thus any such expectations
may likely fall short, providing a contrarian indicator. Moreover, with
soybean prices recently at record highs, it may be that many farmers may
choose to plant a heavier concentration of soybeans over corn and wheat,
thus potentially bringing about a lower yield in corn and wheat as a
result. This would mean a lower overall supply and thus potentially
higher prices for corn and wheat.
On
the demand side of the equation, the increased usage of grains and sugar
for use in the production of ethanol will likely continue, especially
with crude oil prices pushing high to upwards of USD $60 per barrel in a
sustained way as it now appears to the case. Ethanol has long been
considered an alternative energy fuel and is being used increasingly
worldwide, especially in Brazil. And even in some locations like North
America, usage of ethanol may likely increase for other reasons than
energy price increases – see our previous article on “Corn
and Sugar – Two Energetic Commodities”. Thus,
ethanol usage may likely push demand for grains to higher levels in the
years to come.
Even
the trend of higher energy prices is putting added pressure on higher
prices for the grains, due to a number of factors:
-
higher
energy prices, and in particular higher natural gas prices,
translate to higher fertilizer and pesticide costs as many
fertilizers and pesticides indirectly require oil and/or natural gas
in some way
-
higher
energy prices translate to higher transportation costs to transport
the grains to the wholesale and retail markets
-
higher
energy prices translate to higher production costs for the farmer
for fuel required in operating tractors and other farm machinery in
planting, harvesting, and distribution phases
Also
on the demand side of the equation are the developing countries like
China, India, the Eastern European countries and others that are rapidly
developing from where eating chicken or other meats may have happened
only a few times a year, to now where it may be happening once a day! In
order to support such consumption of meats, it is obviously necessary to
feed corn and other grains and foodstuffs to chickens, cattle, hogs,
etc…thus demand for the grains is likely to massively escalate from
this added animal consumption perspective, providing a further boost to
prices.
Add
to this the effect of approximately 20 million Chinese moving from the
farms to the city, seeking a higher standard of living, would likely
mean less of the Chinese in the farming industry and likely translate to
some lowering of agricultural output…and this does not take into
account the massive use of depleting groundwater resources in the Asian
continent, including in China, that is now occurring and of which is
substantially used in the cultivation of crops – increasingly
diminishing water resources would likely translate into lower production
and higher production costs.
Above
all, one of the most fundamental indicators in general is the currency
to which most commodities are priced in – the US dollar. If the US
dollar value were to diminish, the prices of commodities would likely
rise to compensate, as commodities are considered to be hard assets with
some sort of enduring value; this is likely now occurring to some extent
on some commodities already – for example oil has been even pointed
out by OPEC in this regard. In fact, the US dollar has lost its value in
recent years. Having depreciated about 35% over the last couple years,
the US dollar still remains very likely to be overvalued, with
particular consideration to continually growing twin deficits of the US
budget deficit and the US current account trade deficit now hovering at
over $1.2 trillion per year. By now, many are familiar with the
artificial propping up of the US dollar by the Asian central banks in
general in order to keep Asian currencies low in value to help support
Asian exports of consumer products to the increasingly debt-ridden US
consumer – should the Asian central banks begin to slow down their
purchases of US dollar-denominated assets or worse yet, begin to
diversify into other currencies or other commodity-related assets (such
as into the Euro, gold, or Canadian resource companies as recent
evidence suggests), the US dollar could begin taking a tumble to much
further depths, thereby likely driving commodity prices in general to
much higher levels. Indeed there appears to be some evidence of this
regard.
This would very likely include the prices of grains.
Technical
Indicators
Aside
from the above fundamental indicators, there are a number of technical
indicators that can be looked at that appear to provide very bullish
indications for the grains.
One
key technical indicator is the Commitment of Traders Reports (COT) for
the grains. The COT Report graph is derived from position numbers of
three key trader groups provided by the Commodities Futures Trading
Commission (CFTC). The CFTC classifies the three types of traders as
follows.
-
Commercials
- Producers and end users of the commodity or futures market they
participate in are referred to as commercials. This group is the
reason the commodity and futures markets exist, to allow
"commercials" an opportunity to defer or hedge the risk of
doing business. The commercials are shown in blue in the graph. The
commercials represent the smart money group that will often get
aggressively net long or short prior to major trends.
-
Large
Speculators - Defined as those traders who hold a specified
number of contracts or greater in a given market, but are not
commercial traders. The CFTC sets the minimum number of contracts
that can be held before the speculator is required to report that
position. Any speculator participating in a market that is required
to report to the CFTC is known as a non-commercial or large trader.
The large speculators are shown in green in the graph.
This group follows trends and usually mimics the market price
movement.
Below
we show the COT for both corn and wheat.
Charts Courtesy of www.freecotcharts.com
As
can be seen from the COT Report graph, the commercials net position has
grown in the last few months to a net long position that is the largest
in years. This is an extremely bullish indicator for the next few
months.
It
can be seen in the COT Report graph that for other times when the
commercials went to a relatively high value of net long position, the
peak of their position holding coincided with the low in the prices for
the immediate time period but that then proceeded to rally to higher
prices. For examples - see the commercials net long position peak around
mid October 2003 followed by rising prices for the next several months.
Thus
this powerful technical indicator is now appearing to indicate a
strongly bullish scenario for grains prices in the upcoming few months.
Let’s look at some additional technical indicators for any confirming
indications.
Two
other technical indicators confirming the bullish outlook are the RSI
(Relative Strength Index) and Slow Stochastics Indicator, shown below
for corn for example.
Chart Courtesy of www.refco.com
Both
the RSI and Slow Stochastics indicators are confirming that corn and
wheat are recently in the general oversold area, indicating that prices
are relatively low and oversold with a tendency now to rebound in the
coming months.
Other
confirming indicators are the Moving Average Convergence Divergence
(MACD) and associated MACD histograms. The MACD histogram depicts the
difference between the two moving averages in pink. Generally the
histogram indicates that when the spread is below the zero line but
starts to move upward towards the zero line, the downtrend is losing
momentum and may provide an change indicator in pricing trend. The MACD
histogram works well on the weekly graph, which is depicted below. These
are depicted below for both corn and wheat.
Both
the RSI and Slow Stochastics indicators are confirming that corn and
wheat are recently in the general oversold area, indicating that prices
are relatively low and oversold with a tendency now to rebound in the
coming months.
Other
confirming indicators are the Moving Average Convergence Divergence
(MACD) and associated MACD histograms. The MACD histogram depicts the
difference between the two moving averages in pink. Generally the
histogram indicates that when the spread is below the zero line but
starts to move upward towards the zero line, the downtrend is losing
momentum and may provide an change indicator in pricing trend. The MACD
histogram works well on the weekly graph, which is depicted below. These
are depicted below for both corn and wheat.
Charts Courtesy of www.refco.com
Although
the current MACD graph does not yet depict the faster average to be
moving higher than the slower average, the MACD histogram appears to be
slowing and perhaps just about reversing – this is a potential
confirming indicator, and potentially sets the stage for the indicator
to turn strongly positive at some time in the very near future. Further,
from the much larger size of the histogram relative to other previous
histogram sizes, the indicator appears to show that a fairly large rise
in prices may be around the corner.
In
sum, the above fundamental and technical considerations reveal a
potentially bullish wave of the grains markets around the corner.
Monthly data from the US Treasury reveal a
sharp deceleration of foreign demand for dollar-denominated assets —
$61 billion average net purchases in July [2004] and August [2004]
versus a $76 billion average in the prior 10 months. (http://www.morganstanley.com/GEFdata/digests/20041025-mon.html
)
© 2004 The Bonneuil Report
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