By Matt Mattke
The late April to May rally in the entire grain complex rejuvenated the bullish psychology for a lot of market participants. Many ending stock projections for corn and soybeans for the coming year are striking fear into people that we may possibly run out of corn and/or soybeans if there is a poor crop.
With poor crops, we do not deny that grain stocks could get down to very low levels. But first, we cannot base feed marketing decisions on weather events that have not yet and may not ever occur.
Also, supply and demand numbers can be tweaked to make any argument. A couple bushel change in yield here, a few more or less million acres here, and demand up or down here, and the ending stocks projections can vary greatly to fit the person’s bias.
Therefore, in this article we are not going to inundate you with a mess of fundamental data. We are going to outline what we are seeing from a technical standpoint that argues a return to $2.50/bushel corn futures, $6.50/bushel bean futures and $3.50/bushel wheat futures.
The first chart below is a daily combined grains continuous chart. It is derived by adding the front month corn contract price, the front month soybean contract price, and the front month wheat contract price. This collective price essentially creates an index. A number of things stand out to suggest that a cyclical top has been reached, and that this bounce since the December lows is a rally in an overall longer-term bearish market.
One, we see a massive double top. The first high was reached in March, and the second run at the March high that failed was in June. A double top was confirmed once the “neckline” at the April and May lows between the two tops was broken through to the downside. Since the December low, grain prices have rallied back in an A-B-C correction pattern that re-tested the “neckline” resistance and failed. This occurrence is almost text book in nature and suggests the completion of a bear market rally.
Two, volatility measures are still historically high. In the second chart, and in the bottom box within the second chart, there is a volatility measure. Volatility has come down since mid 2008, but is still historically high. A look back from 2009 to 1978 shows that major bull runs start from low volatility. Any rallies that occur at high volatility levels don’t last and are not long-term bull rallies.
Three, past rallies in grains were exhausted after an $8.00 to $10.00 move on average. Since the December low, grains rallied $8.11, and then pulled back.
Bottom line, do not get complacent about the downside on grains. If you have purchased any feed inputs for fall 2009 to fall 2010, you must get put option coverage in place immediately. Put options protect the feed you purchased against a drop in prices. At the time this article was written (June 25), corn futures are at $4.04/bushel, soybeans at $10.08/bushel, and soymeal at $309.50/ton. Remember, these prices are still historically high, and put options would be beneficial in the event that corn does go to $2.50 and soybeans to $6.50, which would mean $180.00 soymeal.