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Note: A possible short-term trade for the grains this week would be to buy soybean meal, soybeans or corn near the close on Monday, or early Tuesday morning. Hold the trade with appropriate sell stops until late Wednesday or early Thursday morning. The logic behind the trade is that as the USDA August 10 crop report nears, any selling pressure will dissipate and because of the current bullish scenario, the grains will tend to rally prior to the report. One word of caution: any profits should be protected by long puts if the investor decides to carry the position into the crop report. If the trade is not profitable by Thursday, all positions should be liquidated prior to the report.
Soybeans:
For the week, September soybeans gained 8.00 cents and the new crop November contract gained 27.00 cents. The Commitment of Traders Report showed that managed money liquidated 10,665 contracts of their long positions and also liquidated 1,580 contracts of their short positions. Commercial interests liquidated 17,086 contracts of their long positions and also liquidated 27,883 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 26.90:1 which is higher than the previous week of 23.77:1. Although there was liquidation by managed money longs and shorts in the latest reporting period, the reason the ratio increased is that the decline in the number of short positions represented a significantly greater percentage of total short open interest than did the decline in long open interest. In previous reports, Open Interest Analyst highlighted that soybeans had undergone healthy liquidation and the latest COT report confirms this. The fascinating aspect of the latest report is during the reporting period of July 25-July 31, soybeans advanced, 61.25 cents, or 3.84%. This is bullish because soybeans were able to advance despite the liquidation of open interest.
The average of five crop analysts for soybeans projected 36.06 bushels per acre and total production of 2.716 billion bushels. In July the USDA projected 40.5 bushels per acre and estimated production at 3.05 bushels.
From 1973 through 2011 there have only been three instances when the soybean contract high of the front month had been made in August. Those three years include 1983 (August 16), 1991 (August 2) and 2002 (August 12). The overwhelming number of contract highs (20) have been made in June and July.
Soybean meal:
For the week, September soybean meal gained $3.80 and the new crop December contract gained $15.50. The Commitment of Traders Report showed that managed money liquidated 5,539 contracts of their long positions and added 35 contracts to their short positions. Commercial interests liquidated 4,777 contracts of their long positions and also liquidated 11,812 contracts of their short positions. Like soybeans, the latest COT report confirmed our previous reports that positions were being liquidated. During the COT reporting period of July 25-July 31, soybean meal advanced 23.40, or 4.75%, which is bullish considering the liquidation. As of the latest report, managed money is long soybean meal by a ratio of 26.15:1, which is down from the previous week’s ratio of 28.69:1. The current reading is the lowest ratio since the tabulation of the COT report on June 12, which showed that managed money was long by a ratio of 25.88:1. This was referenced in the June 17 Weekend Wrap.
On June 12, the date of the COT tabulation, soybean meal closed at $$407.80 and on the tabulation date of July 31 September soybean meal closed at $515.70. In other words, managed money is long at the same approximate ratio on July 31 (26.15:1) that it was on June 12 (25.88:1). The only difference is soybean meal is trading $107.90 higher on July 31 than it was on June 12.
The long to short ratio of soybeans in the COT report tabulated on June 12 was 20.29:1 and September soybeans closed at $13.64. On July 31, September soybeans closed at $16.56 3/4 and the long to short ratio was 26.90:1. On a performance basis from June 12-July 31 soybean meal gained 26.46% while soybeans gained 21.46%. In other words, based upon the COT history from June 12 through July 31, and the bean price advance, soybeans are under performing relative to soybean meal. Not only has soybean meal outperformed soybeans during the past week, it has consistently outperformed during most periods longer than two weeks. On a year-to-date basis, September soybean meal has advanced advanced 60.06%, versus 34.88% for September soybeans.
Corn:
For the week, September corn gained 11.50 cents and the new crop December contract gained 14.25 cents. The Commitment of Traders Report showed that managed money added 18,861 contracts to their long positions and liquidated 2,675 contracts of their short positions. Commercial interests liquidated 9,466 contracts of their long positions and added 1,903 contracts to their short positions. As of the latest report, managed money is long by a stratospheric 43.59:1. This is a massive increase from the previous week when the ratio was 29.16:1. Managed money has piled into corn at a rate that could be characterized as somewhat alarming.
In the July 22 Weekend Wrap, Open Interest Analyst noted in the reporting period of July 11-July 17, managed money was long by a ratio of 10.2:1. In the Weekend Wrap of July 15, which reflected the reporting period of July 4-July 10, we reported that managed money was long by a ratio of 7.15:1. In other words, during four COT reports, the number of longs relative to shorts in the managed money category, has has increased from 7.15:1 on July 10 to 43.59:1 on July 31, or an increase of over 600%. During the span of July 10-July 31 corn advanced 88.00 cents or 12.25%.
On July 22, Open Interest Analyst provided research on the corn and soybean markets for the drought years of 1983 and 1988. This week, we decided to research the 1974 market, which had one important characteristic in common with the current market. Corn made an all time high for the front month December contract at $4.00. The all-time high (as of 1974) occurred on October 4, 1974 and this high was not surpassed until the front month March contract made a high of $4.10 1/4 on December 19, 1980. To the best of our knowledge, the previous all-time high price for corn occurred in January of 1948 at approximately $2.70 and by August of 1955, corn was selling for less than $1.36 per bushel.
Corn made an interim high of $3.76 3/4 on July 30, 1974 and then fell to $3.22 1/4 or a decline of 11.30% on September 4, 1974. The market then proceeded to rally from that low to the all-time high high of $4.00 made on October 4, 1974 or a rally of 18.15%. The time frames for the correction and rally are very close: It took 26 trading days from the high on July 30 1974 to the low on September 4, and the rally from the low on September 4 to the high on October 4, 1974 took 23 trading days. In our July 22 analysis, we stated that the target date for corn for corn to top out would be August 7 or 8. This projection is based upon the analysis of the 1983 and 1988 markets, in which the rallies lasted 31-32 trading days. In the July 22 analysis, we posited that the drought based rally began on June 25. Counting from 25th, leads us to the August 7-8 time frame for an interim top. There are only 6-7 trading days separating the July 30, 1974 interim top to the projected August 7-8 interim top.
Based upon the 1974 scenario of a correction of 11.30% from the interim top and then a secondary rally with a higher top being made 48 trading days later, we are projecting the following: If the July 20 all-time high of $8.28 3/4 holds for the coming week, a correction of 11.30% provides for a downside target of approximately $7.37 around Labor Day. A rally of 18.15% from the low gives us the projection of $8.70. Using the 1974 model of time (48 days) that it took from the initial high to the secondary high, we are projecting September 26 as a potential date for corn to make a new all-time high.
In the July 22 Weekend Wrap, we projected a high for corn at $9.50. This was based upon the 72.5% rally in the 1988 corn market. Using the metrics for the 1974 and 1988 crops, the projected upper end of the trading range would be $8.70 to $9.50.
To continue a bullish stance, longs have to ask themselves four questions: (1) How much of the bad news is already is baked into the current price? (2) What will be the market reaction if stats come in somewhat higher, or somewhat lower than currently projected? (3) How much time will it take for corn to reach our projected highs of $8.70-$9.50 considering that managed money is “all in” on the long side of the trade? (4) To what degree will stratospheric prices crimp demand in the short term, which could dampen upside enthusiasm by longs. See gasoline commentary about corn usage.
Wheat:
For the week, September wheat gained 11.50 cents and the December contract gained 14.25 cents. The Commitment of Traders Report showed that managed money added 2,782 contracts to their long positions and also added 3,178 contracts to their short positions. Commercial interests liquidated 1,751 contracts of their long positions and added 2,540 contracts to their short positions. As of the latest report, managed money is long by a ratio of 2.23:1, which is a slight reduction from the previous week of 2.30:1. During the latest reporting week of July 24-July 31, wheat has advanced by 1.08%, and of the four grains listed in this report, wheat was in last place.
Performance for July 20-August 2 (open interest unavailable for August 3)
Percentage Decrease Open Interest (net increase/decrease July 20-August 2)
Soybean Meal -1.69% -24,784
Corn -1.70% +1,744
Soybeans -4.01% -75,502
Wheat -7.49% -366
Fom the time that the above for markets topped out on July 20, the only market that has had an increase in open interest was corn. Although this is not negative it is clear there has been almost no liquidation since corn topped out on July 20 at $8.28 3/4. There has been a healthy amount of liquidation in the soybean complex and in our view, soybean meal is in the healthiest condition and is the best performing. Wheat has performed very well considering the size of the decline and that it has the lowest long to short ratio of the other three.
Crude oil:
For the week, September crude oil gained $1.27. The Commitment of Traders Report showed that managed money liquidated 965 contracts of their long positions and added 3,310 contracts to their short positions. Commercial interests added 10,212 contracts to their long positions and liquidated 1,141 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 2.82:1, which is slightly lower than the previous week’s ratio of 2.99:1.
Gasoline:
For the week, September gasoline gained 13.43 cents. The Commitment of Traders Report showed managed money was liquidating 2,252 contracts of their long positions and adding 3,283 contracts to their short positions. Commercial interests liquidated 12,999 contracts of their long positions and also liquidated 16,225 contracts of their short positions. Liquidation, especially in the commercial sector, highlights the daily open declines reported by Open Interest Analyst during the past week (s). As of the latest report, managed money is long gasoline by a ratio of 8.47:1 which is down substantially from the previous week of 16.10:1.
Ethanol plants are being shut down and use of ethanol at previous years’ levels is not economically viable. This may be the impetus for the current rally in gasoline. Although stocks of gasoline are below year ago levels, so is demand. The Renewable Fuel Standard requires that 13.2 billion gallons of ethanol be produced this year, which translates into corn usage of 4.7 billion bushels. The average of five estimates from reputable crop analysts project a total corn crop of 10.466 billion bushels, down from the July USDA projection of 12.97 billion bushels. In other words, if ethanol production continues in accordance with the mandate, approximately 45% of the corn crop is going to go into gasoline tanks. This has enormous political ramifications and is complicated by the potential for inflation in food and fuel.
Copper:
For the week, September copper lost 5.50 cents. The Commitment of Traders Report showed managed money liquidating 1,175 contracts of their long positions and also liquidating 2,147 contracts of their short positions. Commercial interests added 2,805 contracts to their long positions and also added 3,041 contracts to their short positions. As of the latest report, managed money is short copper by a ratio of 1.22:1, which is a fractionally lower than the previous week’s ratio of 1.24:1.
Gold:
For the week, December gold lost $13.40. The Commitment of Traders Report showed that managed money added 12,233 contracts to their long positions and liquidated 8,815 contracts of their short positions. Commercial interests liquidated 2,922 contracts of their long positions and added 7,153 contracts to their short positions. As of the latest report, managed money is long gold by a ratio of 4.32:1, which is 50% higher than the previous week’s ratio of 2.80:1.
Silver:
For the week, September silver gained 31.3 cents. The Commitment of Traders Report showed that managed money added 936 contracts to their long positions and liquidated 3,779 contracts of their short positions. Commercial interests liquidated 1,914 contracts of their long positions and added 1,184 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.56:1, which is a bit more than 30% higher from the previous week’s ratio of 1.17:1.
Euro:
For the week, the September Euro gained 65 points. The Commitment of Traders Report showed that leveraged funds added 1,852 contracts to their long positions and liquidated 13,671 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.24:1, which is down approximately 10% from the previous week’s ratio of 2.49:1.
S&P 500 E mini:
For the week, the S&P 500 E mini gained 6.50 points. The Commitment of Traders Report showed that leveraged funds added 32,248 contracts to their long positions and liquidated 49,949 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.05:1, which is down from the previous week’s ratio of 2.36:1.
American Association of Individual Investors (sentiment survey)
Last Week Two Weeks Ago Three Weeks Ago
Bullish 30.5% 28.1% 22.2%
Bearish 34.9% 43.1% 41.8%
Neutral 34.6% 28.8% 36.0%
The American Association of Individual Investors survey shows that investors do not believe in the rally thus far. The bearish number of two weeks ago morphed into a significantly higher number in the neutral category. Investors that are bearish and neutral significantly exceed those in the bullish camp. This indicates that the rally is likely to continue.
Open Interest Analyst thinks the “risk on” environment of last week was in part based upon the widely quoted hypothesis that the Federal Reserve will begin its quantitative easing program in September. As a policy, we do not engage in fortune-telling and restrict our projections to hard data from which we extrapolate the likelihood of a given price move. Trying to decipher what the Federal Reserve will, or not do, is not our game, and we leave this activity to the those who read palms and crystal balls. Having said that, investors should be aware the market may be discounting a potential policy announcement by Federal Reserve Chairman Bernanke at the late August meeting of central bankers in Jackson Hole. In our view, any further rally between now and the meeting in Jackson Hole will serve to discount the announcement, whether it is released in August or September, if at all.
