It’s Up, Up and Away for Grains
This month has been an incredible one for the grain markets, and in the 30 years I’ve been working in the industry, I haven’t seen anything like it. Record highs have been reached in corn, wheat and soybeans and just one glance at the charts shows just how powerful the bullish trends are in these markets. The market got caught by surprise by the relentlessness of increasing world demand at the same time a number of factors have conspired to cut back on supply.
Unlike the grain markets of the 80s and 90s when any supply disruption was rather quickly resolved by increased production in the next growing season, the markets now are likely to stay extremely agitated. World carryover is low and the stocks/usage ratios are almost shockingly tight with no real relief in sight. Many exporting countries are restricting exports of wheat and vegetable oil so as to dampen food inflation and prevent consumer unrest in their domestic market. Indonesia, Argentina, Kazakhstan, and who knows whose next are currently attempting to manipulate markets this way. A tough winter in China with possible crop damage and a looming acceleration in food demand due to the 2008 Summer Olympics is adding to the near-emergency scramble to lock up supplies. Demand generally is probably going to keep increasing at a greater rate than supply on a worldwide basis, unless the U.S. Congress backs off ethanol subsidies. I think this is extremely unlikely on short term basis until we get more havoc worldwide due to food inflation. Let’s look at a few market specifics.
Wheat
Both Chicago and Kansas City wheat futures traded their maximum 60-cent price limit on Monday, February 25, and Minneapolis wheat traded up its 90-cent limit. Limits were expanded to 90 cents in CBOT and Kansas wheat, removed for the March Minneapolis contract, and moved up to $1.35 for other Minneapolis spring wheat contracts. The surge began in Sunday night trading, a timeslot we’ve seen tremendous volatility lately. Because global wheat stockpiles are forecast to hit a 30-year low, wheat obviously remains in a bull market. While severe one-directional moves like this are usually followed by sizable corrections, trends can go further than you think. Just because Chicago wheat never traded to $9 or $10, doesn’t mean it can’t—and did, hitting $12 a bushel this week. And the Minneapolis March wheat contract soared above $20, an amazing, historical move.
What goes up does eventually come down, and I do believe the built-up energy will eventually peel off. However, we may continue to see more new contract highs first. As we head into the North American planting season, there is a tremendous fight for acres. We need more corn production, more soybean production and more wheat production, so I see these markets likely to stay lofty as long as demand remains high.
Soybeans and Soybean Oil
For new-crop soybeans, it’s basically up, up, up. Look for some kind of continuation formation to develop. On a short-term 10 minute chart, you can see the break into the Martin Luther King holiday in January, which was tied to the stock market’s collapse that day. The S&P 500 broke to 1255 and we saw sympathy selling in a number of other markets. You can clearly see the wedge pattern in the soybean futures as the market consolidated, then the subsequent gap breakout to a new contract high. Until the government backs off ethanol programs, I can’t see these longer-term bullish trends derailed in soy yet, although we are seeing bouts of short-term profit-taking kick in.
Soybean oil has also been on a tear. This market has been aided by weather issues, but there are a number of fundamental factors keeping prices high. In China, there are rumors of shortages of vegetable oil in some shops, and given the Olympics are coming up in Beijing this summer, they will have to bid for it and pay whatever price they have to. We have seen some pullbacks in soybean oil prices, but I think you have to be ready to reload when corrections occur within overall powerful trends like this.
Trade Strategies
I caution that it’s problematic though to get involved at these levels—you just don’t know when that big correction will hit. Remember your basic trading rules in markets like this--don’t try to pick tops, and look to trade with the trend. I’d consider vertical bull spreads in this type of situation in grains, which is a way to get a more defined risk parameter but still take advantage of the trend. You buy a call and sell a call at a higher strike to finance the trade, then hold on tight. On an intermediate-term basis, watch the acreage reports for signs of an easing in the supply/demand situation, or for a break in the financial markets that causes sympathetic selling in commodities. But for now, I don’t expect the bullish trend in grains to be derailed soon.
James Barrett is a Senior Market Strategist at Lind Plus, Lind-Waldock’s broker-assisted division. If you have questions about this topic or others, he can be reached at 866-419-7698 or via email at jbarrett@lind-waldock.
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