The Grains Review For the week of October 24, 2011

By Matthew Pierce

Coming back from the weekend we see no “resolution” concerning the EU debt situation but that doesn’t seem to be a bitter pill to swallow. All markets are mixed to modestly higher after Chinese PMI numbers offered support. There is some sentiment that the Chinese contraction pattern has reached its apex offering a positive undertone to Asian markets helping commodities rally back from Friday’s losses. Going back to Friday markets had options expiration that proved that the highest open interest is where it will settle. In corn the market rallied early trading above $6.50 only to run out of steam about midsession when the almost inevitable decline back to $6.50 began. This was the highest open interest by far offering the best amount of action and traders saw just that. In the final minutes of the trade I saw a brief move under $6.50 where it closed the day. Beans could not fall far enough to hit any strike of interest with the $12.00 just too much to lose without reason. Wheat was also stuck between a few low volume strikes with the cereal months there trading sparingly. Spreads were very active with corn spreads favoring the bear side most of the session widening by about 2-cents leaving the day around 10.75. I will look for this trend to continue this week as the trade continues to realize we are not out of corn…not now anyways. SX-F saw a nasty turn wider for those riding the bull wave there. This appears to be a profit taking move but there was no movement overnight with this spread sitting 8.75-9 starting the week. I look for this to tighten again but watch bean basis at the Gulf and along the central US river system for direction. Crush demand should be present due to meal demand with the Meal spreads still working in favor of bulls. SMZ-H closed the overnight at 4.50 showing a small recovery for bulls from Friday’s wider move in sympathy with beans. Look for the bull side to win this week as continued problems exist with protein in early crushed beans. In wheat traders saw a session that followed corn but showed relative strength due to help from KC and Minny due to protein concerns and planting woes. Bull spreads in KC worked well on Friday only to give up overnight…but we shall see. I think any producer that releases old crop stocks following the recent weather shift to desert like conditions on TX and OK should be questioned. Releasing anything before the new tax year is another questionable move but each to their own. There is likely to be a real serious problem with HRW stocks come spring so I will look for bull spreads to lead the way into that timeframe.

Looking at the week ahead, things should start off like a lamb, higher but without conviction ahead of further information out of Europe. Wednesday now appears to be the day to get that input so look for a mundane first half of the week. No major weather situations early in the week with recent rains in Morocco helping stabilize their ground for planting. As we progress look to the S. plains with any abatement in rains there helping both flat price in KC and spreads. Minny bull spreads should start to light up again in November but there is nothing on the demand side to get them moving dramatically this week. Crude is modestly higher with a positive undertone following the Chinese demand sentiment shift so this should help commodity sentiment across the board.

I will look for a higher tone in agriculture with bear spreads winning in corn and CHI wheat, bull spreads winning in beans, meal, KC and to a smaller degree bean oil. Flat price will see a pop back to Friday’s levels with corn needing help to break and sustain for a move to the 100-day MA. Wheat momentum is determined by KC and their weather so look for rainfall totals over KS, TX and OK late this week. Beans will rally early in the week with meal outpacing bean oil as long as crude does not explode. The path of least resistance is to the upside across the commodity sector due to shifting sentiment, not changing reality. There is nothing exciting to start the week so do not get married to early gains. Look for a choppy week with serious swings all over the floor.

***chart courtesy

Gecko Software’s Track n’ Trade Pro
Past performance is not necessarily indicative of future results.

The Weekend Commodities Review

Energies

Crude oil has become so closely tied to the global economic outlook that the demand side pressure is seemingly outweighing the supply side premium. That means a strong dollar and weak global demand outlook should push oil prices below $90. Gasoline and heating oil should follow suit while natural gas remains a long term buy with straight calls to capture upside volatility.

Financials

The stock market has developed a downtrending channel after setting a relative high set back on May 2nd. This pattern suggests a move to 1307 on the S&P, although I believe the momentum to the downside should increase rapidly and the channel is likely to fail by a more aggressive bear move over the next couple of weeks. The outlook on the global economy is finally starting to catch up with what I have been discussing for months – the recession’s bailout-induced pause is over and the global economy is in real trouble. Look past Greece and other European nations. Look beyond the Japanese disaster. Early monetary tightening will make the world cringe, and the reversal in those monetary policies will not only destroy investor confidence but will launch the U.S. dollar back into a bull market. The Fed may not have made all the right moves, but not following the bandwagon by raising rates will likely be viewed as a brilliant contrarian move. Bonds remain bullish amid a stock market decline and flight to quality. The dollar should see choppy price action until we break 80 on the index, afterwhich the long term bull trend will be reestablished. The pound, euro, Canadian and Aussie dollars are all bear plays. I would not chase the dollar higher, but remain long term bullish. The yen should see some gains with the BoJ holding steady on rates, indicating the post tsunami rate cuts are over and the economy is stabilizing. The Japanese yen remains a buy regardless of the dollar’s next move and I continue to standby my forecast that:

The Japanese Yen futures will hit 140 before 80 or I will quit writing the Weekend Commodities Review…forever.

Grains

Grains unexpectedly rallied last week amid concerns over continued bad weather in both the main wheat and corn growing regions. Crop progress reports remain critical as we approach the end of planting season for corn. It is possible that grains will receive a temporary boost from funds pulling out of oil that are seeking other commodity investment, but I believe this would be short-lived. Overall I believe supply-side concerns will weasel their way into the picture for one or two week stints, but the demand side of the equation (think global economy, China, U.S. dollar strength) is where I expect the fate of grains in 2011 to be determined. That is also why this pop should end up being a great hedge point for farmers to grab and for specs to develop short plays for the summer season.

Meats

Cattle is clearly in a freefall and the market appears prime for volatility expansion and intensified selling pressure, the likes of which have not been experienced since the Mad Cow collapse. The cattle on feed will likely only help the liquidation event continue. Hogs also broke recent support and remain a sell.

Past performance is not indicative of future results.

**Chart courtesy of Gecko Software’s TracknTrade

Metals

Gold and silver have shown signs of support, but the recent action is likely nothing more than congestion after a strong slide. There is a bit of conflict on a fundamental level as panic out of the euro should pressure gold, but the fear of economic slowdown might help support a brief flight to quality into metals, especially factoring in the recent drop giving relative value to this sector. This is expected to be a blip on the screen of a continued plunge in this sector.

Softs

Coffee broke through key support and is setting the stage for a mega collapse in coming weeks. There is nothing fundamental holding this market up if the global demand outlook declines. The cocoa market is similarly setup to fail after sustaining historically high prices for an extended period and now seeing the combination of Ivory Coast exports hitting the world and a global economic panic. Cotton’s channeling is likely short-lived and more downside should be expected. OJ’s momentum increase off trendline support should be viewed as a potential turning point – meaning the market jumped off trendline and now as it comes back to test that trendline it could have the momentum to breakdown through that support and fail. Sugar’s congestion is not entirely unexpected after such a prolonged pullback, but I do believe new lows are fast approaching.
____________________
James Mound
www.MoundReport.com
info@moundreport.com
(888) 744-8866

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