The Perfect Bullish Storm in the Grains for 2010?
From my first day on the floor of the CBOT in 1992, the phrase I heard the most from veteran traders was, “All I want is a drought and beans in the teens.” Much like the lament of every die hard Chicago Cubs fan hoping that this year will be the year the Cubs finally win the World Series, every grain trader who experienced the 1988 drought year longed for another.
As we look to possible scenarios for the grains in 2010, in addition to the usual hope for a drought, we have at least four other factors which could produce much higher prices in the grain complex. The first item to consider is crop production in South America. We have the potential for weather issues along with the omni-present factor of political unrest between farmers and government entities.
Every analyst on the planet is calling for higher inflation, fueled by the tremendous stimulus package which the US created to stave off collapse in the financial markets in 2009. The best way to take advantage of inflation is by owning physical commodities. So, anticipation of inflation is the second bullish item to watch for in 2010. Third, we have the technical picture on the weekly charts for the grain complex. Since the 2008-2009 meltdown, the grain complex has been quietly building a new base of price support on the charts. A break-out above significant resistance levels, which I will outline in this article, would trigger fresh buying, necessary for a sustained rally. The fourth bullish factor is the influence of the buying activity on the part of the large index funds. These funds re-balanced once already in 2009, establishing new longs in corn and beans after taking profits in the metals and stock index rallies in the second half of 2009. These funds are expected to once again add new long positions in the soybeans and corn futures at the start of 2010. This re-balancing will be a powerful force supporting prices in the grain complex.
Next, let us examine the technical picture for soybeans, soybean oil, soybean meal, and finally corn. If you over-lay weekly continuation charts of these four contracts, you will see striking similarities. First let us look at soybeans. The July 2008 high at 13.40 seems like a distant memory in the wake of the market sell-off which reached its zenith in March of 2009. At that time, we had lows in the Dow Jones Cash at 6440 and a low in the S&P500 Cash at 666. Soybeans finally found support at the 8.00 level, which was tested both in Dec 2008, and March 2009. This 5.40 cent down move gave us a 50% retracement target at 10.70.
Fast forward to today’s high tick at 10.52 ¼ posted in SF. 10.52¼ is just 17¾ cents away from the that target level at 10.70. If you have read any of my previous articles, I am a firm believer in the significance of 50% retracements as a technical tool across all markets. It is a simple, clear target which 99 percent of traders will have on their radar, be they bullish or bearish. The 50% retracement level is a magnet for price action simply because so many market participants are aware of its existence. The recent rally we have seen in the soybeans has been interesting. SF fell to a low at 985 on Dec. 23, 2009. Between Dec.23rd and today, Dec 31st , we have witnessed a 67 cent rally, from low tick to high tick.
What sparked this rally? First, there were reports of a single large trader or fund who exercised thousands of 10.00 calls just before the Christmas break. This put a lot of options traders in the position of having to cover unwanted shorts. The second piece of that rally, was speculation that perhaps the index funds were getting an early start on re-balancing. We will know this first week of January if indeed, the funds are finished buying, or if they have more buying on tap . In any event, fresh longs with deep pockets would also add to a longer term bullish outlook.
Next we must look at the soybean products, beginning with soybean oil. The July 2008 high was at the 68.0 level. The December 2008 and March 2009 low down at the 32.0 level looks like a double bottom formation. Over the last 9 months we have basically traded sideways to higher in bean oil, with support at 34.0 and resistance at 42.0. This basing pattern is potentially bullish. A break out to the upside with a significant settlement above 42.0 would open the door for a move to the 55.0 level.
The second bean product to examine is the soybean meal. I recommend watching meal closely if you are trading the beans, due to the strong tendency for the meal to act as a leading indicator. The soy meal July 2008 high was at 390.0 . Support in Dec 2008 and March 2009 was reached approximately at the 240.0 level. That was a 4-month, 150.0 point down-draft. From that low at 240.0 we saw a nice rally back to the 330 resistance area. Over the past 3 months, meal has also been in a sideways to higher trade, with good support at the 300.0 level and resistance at the 315.0 level. A decisive settlement above 325.0 opens the door for a rally up to at least the 355.0-365.0 area.
Finally we have the corn futures. As we watched the crude oil melt away from the $150 a barrel level last year, we also watched corn prices deflate. The media hyperbole about alternative fuel sources which was so prevalent during the election cycle has faded away as well. We saw crude oil drop as low as 60 dollar a barrel and even had some analysts calling for the 50 dollar level. With increased tensions in the Mid East recently, we have watched crude gyrate from 70 dollars up to 80 dollars in about a two week time frame. If anything should pull those prices higher back to the psychologically important 100 to 150 dollar area, that would most certainly result in new calls for bio diesel, and ethanol. Substantially higher oil prices will bring back fervent interest in burning food for fuel.
Technically, in July 2008 we had a high in corn at 7.00. Like all the other markets, corn futures fell sharply to its support at the 3.60 level in March of 2009. Between March 2009 and July 2009, corn traded in a one dollar range between 3.80 and 4.80. Our recent September low at 3.20 came with harvest pressure. However, since those lows were recorded, there has been a basing pattern with support at 3.80 and resistance at 4.25. A strong settlement above the 4.25 area would open the door for a test of the 2009 highs at 4.80.
Finally, the one true wild card will be the weather this Spring and Summer here in the USA. Oddly, this is the first year in a long while I haven’t been bombarded with warnings of El Nino or La Nina. Other than former Vice President Al Gore, no one is mentioning the word drought. Quite frankly, the fact that its not being widely anticipated may be the single best indication that we actually have a good chance of experiencing a severe drought. A combination of all of the factors I have outlined here would be unusual, but certainly not out of the realm of possibility. A mix of supply disruption, inflation, continued heavy buying from the large index funds, combined with a break-out on the charts would produce the perfect bullish storm.
