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The low-price
cure?
By Darrell
Jobman
“The cure for low
prices is low prices,” according to an old market axiom. That being
the case, grain prices could be on the way to recovery in 2006, at
least from a technical viewpoint after post-harvest lows for corn
futures prices fell well below $2 a bushel to the lowest levels
since 2001 and threatened to take out the 2000 low of $1.74. Prior
to that, you have to go back to the mid 1980s to find prices that
low (see “Buying opportunity?”).
Fundamentally, the
prospect for significant price rallies in grains or soybeans may be
wishful thinking, however, following U.S. corn crops of more than 11
billion bushels and U.S. soybean crops of more than 3 billion
bushels two years in a row. Another market saying is that big crops
tend to get bigger in the monthly crop production reports from the
U.S. Department of Agriculture (USDA), and that was certainly the
case in 2005. The November USDA production estimates of 11.03
billion bushels for corn and 3.04 billion bushels for soybeans could
turn out to be even bigger when USDA releases its annual production
summary Jan. 12.
The situation is
far different from the 2003 season, when a widespread August drought
reduced crop output, and the carryover stocks/use ratio, one of the
best gauges of overall market conditions, dropped to only 9.4% for
corn and 4.4% for soybeans. As a result, nearby corn futures reached
$3.35 a bushel and soybeans topped $10.50 in April 2004.
The 11.81 billion
bushel corn crop and 3.12 billion bushel soybean crop in 2004
changed that picture in one season as supply overwhelmed usage. Even
though usage has increased substantially, carryover stocks from two
large crops in a row are expected to increase the stocks/use ratio
for corn to 21.4% and soybeans to 11.9% at the end of the 2005/06
season.
Historically,
prices do not spend a lot of time below $2 a bushel for corn, $2.50
for wheat or $4.50 for soybeans. The bearish influence of big crops
and huge supplies is already known to the market, and the funds
already have large short positions. Bearish pressure could still
come from the rising value of the U.S. dollar if it discourages
exports, large crops in Brazil and elsewhere if they materialize,
the worry that bird flu could become more than a media mania and
reduce demand for grains, and the bull run in commodity prices
generally that may be hard-pressed to extend to a fifth year.
But with record
energy prices and the passage of the national energy policy
encouraging the development of renewable fuels, ethanol production
will increase substantially in the next year, taking a larger share
of the U.S. corn crop. And the Continuous Commodity Index, which
appeared to be topping in the fall, shot up to new 24-year highs as
gold and copper took over leadership from energy to continue the
commodity bull run off of 1999 and 2001 double-bottom lows around
183.
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BUYING
OPPORTUNITY?
Corn rarely spends much time below $2 per bushel. |
That
maintains a favorable environment for all commodities
including grains as investors look for assets to place
money.
In
addition, traders looking for a market strategy in 2006
might ponder two things: Can the corn market get any more
bearish than it was during November when prices drifted down
to new contract lows day after day? A market usually looks
the most bearish at a bottom. And can U.S. crops be huge
for a third year in a row? It will have to rain in the
Plains for the hard red winter- wheat crop to do that, and
there will almost certainly be some weather scares along the
way, no matter what size crops are produced. |
Source:
TradingProfits.com |
Assuming the bears
have enough power left to push current prices still lower during the
traditional “February break,” which actually often occurs in
January, and a seasonal uptrend occurs after that. Traders with a
longer-term investment view might (1) initiate a scale trading
program, buying at each 10¢ or 20¢ lower and selling on rallies, (2)
buy and hold December corn or wheat or November soybean futures
outright, (3) buy call options for the same months, or (4) for the
more venturesome, sell put options.
Darrell Jobman,
Senior Market Analyst for www.TradingEducation.com, is an
acknowledged authority on the financial
markets and has been writing about them for more than 35 years.
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