Q4 Commodity Prices & Beyond: Part I

Commodity Demand Shift Since USMCA Approval

In this 1st part of my analysis, let’s take a brief look back at the market in the past week, focusing on where we came from versus where we may now be heading…

WeeklyBloombergGrainIndexSP500BankingIndexMonthlyChartUSDollarIndexMonthlyChart

What have we witnessed the past week?  Record-high U.S. equities, 4-year highs in crude oil, and more important, a shift in President Trump’s trade agenda with the signing of and replacing of the old NAFTA–a new tri-lateral trade agreement, called USMCA.

  • Thus, even with this news, the Dollar is rallying, the S&P 500 Banking Index is “flashing” a potential technical “sell”, and the Bloomberg Grain Index is suggesting more strongly a potential technical double-bottom.

As a result, the market structure has shifted for the Grains & Livestock:  the commodity demand “bulls” are once again trying to buy-into this market, even though last Friday we saw the U.S. Soybean Stocks rise to 11-Year highs & U.S. Corn Stocks rise above trade estimates. In other words, the increased supply is being met with greater expectations of increased demand.

  • I can say very strongly that, in my view, had we not seen the USMCA signed on Sunday night–right on the deadline–the Grains & Livestock would not be rallying at this time. Instead, I believe that they would be falling toward their major lows from mid-September. Instead, we are taking prices higher & charging-up the Stochastics.

Dec18_DailyCornNov18_DailySoybeansDec18_DailySRWWheat

  • Livestock are a bit different, both in terms of some specific fundamental drivers; but overall fundamental drivers are the same as Grains–a push toward greater international trade & less protectionism, have helped encourage “bulls” even thought production levels for U.S. Red Meat are hitting record levels.

Dec18LeanHogsDec18LiveCattle

What’s My Point, And What Does It Mean Going Forward?

My point is simple:  we have in place–fundamentally speaking–the factors which could actually support higher agriculture commodity prices. And if this is the case, while the Livestock Market is already showing risk-premium built-into its prices, the Grain Market is just now attempting to find that elusive 4-Year Cycle Low…as seen in the chart below.

  1. Friday:  USDA Stocks Report Was Negative For Prices By Building Supply. New Lows Were Seen For Grains.
  2. Sunday:  The New USMCA Was Signed By the U.S. & Canada.
  3. Monday:  The Grain Prices Rallied But Were Once Again Held Back By Wheat…This Even Though Stocks Were Hitting Records & The Crude Was Hitting 4-Year Highs.
  4. Tuesday:  The Corn Made Fresh 7-Week Highs & Soy Hit Fresh 6-Week Highs, As U.S. Harvest Weather Turned Wetter. Wheat Floundered…That Is Until Fresh News From Russia Suggested Limits To Wheat Exports From Their Deep-Water Ports. Prices were held-back somewhat as increased U.S. yields & Brazilian production expectations were funneled into the market via reported estimate updates.

It is this timeline of fresh fundamental news that has helped shift the Grains to a higher bias, even in light of the strengthening US Dollar; but the Dollar is not strengthening against the Rouble, the Argentine Peso, the Brazilian Real, or the Chinese Yuan…which is very important. And it is this type of market which makes the paper hedges/bought puts so useful in managing risk. They, in my view, have done their job of helping protect downside yet leave cash upside open for you.

MonthlyBloombergGrainIndexCycleChartWheat_CopperMonthlyChartOverlay

Where Do Prices Likely Go For The Next Week To 10 Days (To Help Guide Off-The-Combine Sales & Re-ownership Strategies)?

As I have been suggesting for many weeks now, IF the SRW Wheat can find a weekly close back above $5.25, further upside in the corn & soybeans should be seen. My initial targets for Dec. Corn would be $3.75, just above my Harvest “Undervalue” Level; and $8.75, just below my Harvest “Overvalue” Level. These are areas I recommend making off-the-combine sales for over-run bushels.

GulfCashCornvsCornFuturesChartUSDAAttache_ChinaCornStocksWeeklyCornContinuationChart

The three charts above have some importance as to where I think further gains in the corn specifically could be made [Keep in mind, even with harvest delays, I am more concerned about selling beans and not buying-back until closer to Halloween-Thanksgiving.], and would be potential target prices for buying-back bushels in the next few days…if wheat closes above $5.25.

  • The 1st chart shows that, even though the corn futures is back to the same price level of where it was back in August, the cash is still about 20 cents below that level. This strongly suggests to me that the better hedge is still in futures, and the better “long” is in the bin. I am not surprised by this feature given that we’re in the heart of harvest; but I would expect this differential/divergence to come-together some if weather turns wetter (see 7-day precip. map below).
  • The 2nd chart is brand new from USDA’s China Attache; it shows pretty clearly that, if the trade wants to look toward Global Corn Stocks instead of US Corn Stocks, the draw-down in supply is substantial and worthy of higher prices in my view. And this is where the wheat, and the wheat-corn spread come into play…in terms of upside potential in the corn. China is to have the lowest Stocks-Use going all the way back to 2006/07 based upon their data, as domestic consumption for ethanol and corn feed substitution directly intervenes with lower production due to weather issues this past summer.
  • The 3rd chart shows the Corn Weekly Chart, and it gives you a very good idea of what strong resistance levels this market is currently plowing-into; it is for this reason that I am recommending buying-into the corn to some degree, but not substantially until we see the SRW Wheat close above $5.25. With Feed Needs covered a few weeks back, I am more concerned about getting a re-ownership position in place for clients that I believe can weather a pull-back of 10-15 cents. This would mean, therefore, an in-the-money corn call, not an out-of-the-money position. Take a look at the option chart below and call me for individual analysis & recommendations; you can see that the “Overbought” Stochastics in this call option is worth watching, and suggests that the Dec. Corn needs to clear those major moving averages in Chart 3 by the end of this week in my opinion.

USCentral_EveningModelRun_GFS_7DayPrecip

Dec18360CornCall

Stay Tuned For Part II…