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In this report, I have completed a historical analysis of the 1983 and 1988 drought markets for corn and soybeans. From this, I have extrapolated a couple of scenarios regarding possible price levels and time frames for the current market.
Soybeans:
For the week, August soybeans gained $1.62 3/4 and the new crop November contract gained $1.33 3/4. The Commitments of Traders Report showed that managed money added 448 contracts to their long positions and liquidated 355 contracts of their short positions. Commercial interests added 18,202 contracts to their long positions and also added 18,711 contracts to their short positions. It is apparent based upon the latest numbers that the increase of open interest in beans during the reporting period (July 11-July 17) has been due to commercial interests adding new positions. Although managed money was not active in making new commitments during the recent COT report, the long to short ratio inched up from 30.84: 1 last week to 32.4: 1 in the latest reporting period.
Soybean meal:
For the week, August soybean meal gained $68.90 and the new crop December contract gained $50.90. The Commitment of Traders Report showed that managed money liquidated 429 contracts of their long positions and added 910 contracts to their short positions. Commercial interests added 7,485 contracts to their long positions and also added 2,566 contracts to their short positions. As of the latest report, managed money is long soybean meal by a ratio of 49.9: 1. Similar to soybeans, the major action in the soybean meal report occurred in the commercial sector.
Corn:
For the week, September corn advanced 84 cents and the new crop December contract gained 55.50 cents. The Commitment of Traders Report showed that managed money added 15,738 contracts to their long positions and liquidated 7,812 contracts of their short positions. As was the case of soybean meal and soybeans, the bulk of new positions in the report occurred in the commercial sector. Commercial interests added 24,966 contracts to their long positions and also added 50,243 contracts to their short positions. In the nonreportable category, there is a very large short position of 84,898 contracts and 3,503 contracts were added to short positions in the latest report. Managed money speculators are now long corn by a ratio of 10.2: 1, which is up from last week’s reading of 7.15: 1. However, it is below the record ratio of 13.54: 1, which occurred in the COT report of April 26, 2011.
Wheat:
For the week, September wheat gained 95.50 cents and the December contract gained 85.75. The Commitment of Traders Report showed that managed money added 7,327 contracts to their long positions and also added 853 contracts to their short positions. Commercial interests liquidated 1,251 contracts of their long positions and added 8,566 contracts to their short positions. In the nonreportable category, there are 39,073 short positions held by small traders and they added 661 to this total in the latest report. Currently, managed money is long wheat by a ratio of 2.06: 1, which is slightly higher than last week’s ratio of 1.96: 1.
Analysis of corn and soybeans for 1983 and 1988 (drought years)
In order to determine “what if scenarios” for the current move in corn and soybeans, I reviewed data for these two commodities during the droughts of 1983 and 1988. All four of these markets had steady upward price movements with very shallow corrections along the way. This makes it very difficult for speculators to feel comfortable getting on board the move. The other characteristic that typified three of these markets: soybeans during 1983 and 1988 and corn during 1988 was once they topped out, they headed lower with very small intermittent rallies. In other words, the typical behavior of supply driven markets is a steady upward climb in price with shallow corrections, then a steady downward move in prices with shallow corrections. As difficult as it may be to establish long positions at higher prices, speculators have to guard against over optimism because of the supply shortage narrative. After the current market tops out, the slow erroding decline that was characteristic of the two drought markets, may make traders complacent with their long positions if the 2012 markets undergo the same slow decline. One message is clear from the four markets examined: once they top out, there is not a retest of the high.
The exception to a steadily declining market occurred in corn corn during 1983 when it topped out on August 16 at $3.76 and the low occurred just three days later at $3.45 3/4, which held through September 9, 1983. Based upon my examination of the four drought instances, the corn decline during the summer of 1983 was anomalous compared to the other three instances listed below. However, there is one similarity between the corn market of 1983 and 1988. Both took nearly the same amount of time to make their upward move: 31 trading sessions during 1983 and 32 sessions during 1988.
During 1983, the low in soybeans occurred on June 29 at $5.89 and then rallied to $9.60 on September 13. From September 14 forward, soybeans worked their way steadily lower with intermittent rallies, and by October 28, November soybeans were selling for $8.22 after being as high as 9.68 1/2 six weeks earlier. The percentage gain during the soybean rally for the drought of 1983 was +62.5% and the rally took place over a period of 53 sessions.
The corn market of 1988 made its low at $2.11 1/4 on the May 13 and proceeded to rally to $3.64 on June 28. Once topping out on the 28th, corn fell steadily lower to $2.64 1/2 on July 29, 1988. The percentage gain during the corn rally for the drought of 1988 was +72.5% and the move occurred during a period of 32 trading sessions
The soybean market of 1988 made its low on April 22 at $6.69, then rallied to $10.93 1/2 on June 23, 1988. After topping out on the 23rd, the market fell steadily lower and by July 29, 1988 closed at $7.46. The percentage gain of the soybean 1988 rally was +63% which occurred over a period of 44 trading sessions.
Corn and Soybean Price Scenarios 2012:
Corn 2012: The corn rally began on June 25, and through July 20, corn has rallied for 19 trading days. This amounts to a rally of approximately 49.5%. If corn were to match its rally of 72.5% in 1988, the target price for September 2012 corn would be approximately $9.50 1/2. If the rally extended for another 12 trading days (31-32 rally days 1983 & 1988) the target date for a market top would be August 7-8 using the 1983 or 1988 time frame.
Soybeans 2012: The soybean rally began in earnest on June 29, but if we use the same start date as corn (June 25), there have been 19 trading days through July 20. Since the 25th, soybeans have rallied 21.5% through July 20. If soybeans were to match its performance for 1983 (62.5%) or 1988 (63%), the current soybean rally has another several dollars to go. The price projection for September soybeans based upon a 62% increase from $14.26 (closing price on June 22) is $23.10. Even if the June 1 low of 13.00 1/2 (lowest price for soybeans since late February 2012) is used as a very conservative baseline price, a 62% increase from $13.00 projects soybeans at $21.06.
Conclusion:
Based upon my price and time analysis of the major weather rallies for corn and soybeans, it appears that they have much more firepower on the upside. Based upon the data from 1983 and 1988, it is likely that corn will top out earlier soybeans. The prime growing season for soybeans is just ahead of us, and if the crop is damaged as we move into August, there will be a severe additional negative impact on crop yields. Unlike corn, the demand for soybeans has been robust and over 37% of the new crop, which is still growing, has already been sold. In addition, there was a massive shortfall in the Brazilian crop, and the new Brazilian crop will not be harvested until late in the first quarter of 2013. As a result, the United States will be the supplier of soybeans to the world for at least the rest of the year.
Crude oil:
For the week, September crude oil gained $4.33. The Commitment of Traders Report showed that managed money added 2,215 contracts to their long positions and liquidated 5,294 contracts of their short positions. Commercial interests added 3,582 contracts to their long positions and also added 9,282 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 2.72: 1. To put this ratio in perspective, when crude oil hit its low last October 4th at $74.95, the COT report showed that managed money was long crude oil by a ratio of 2.48: 1. Looking back over the past several months, the current ratio is at the very low end of the range indicating a relative lack of bullishness by managed money, which in itself is potentially bullish. The problem with the recent advance is that it occurred under heightened international tensions with Iran, which calls into question the staying power of the current price. As I have pointed out in previous posts, open interest action has been bearish even though prices have moved higher during the past four days.
Gasoline:
For the week, September gasoline gained 15.72 cents. The Commitment of Traders Report showed that managed money liquidated 2,993 contracts of their long positions and added 1,961 contracts to their short positions. Commercial interests added 7,660 contracts to their long positions and also added 4,591 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 5.60: 1.
To put the current ratio in perspective, the COT report tabulated on July 10 showed that managed money was long by a ratio of 7.26: 1, on July 3 the ratio was 5.85: 1. The ratio was 5.46: 1 on June 26, which included June 21, the day that September gasoline made its low at $2.3737. The COT report, tabulated on December 20, 2011, showed that the long to short ratio of managed money was 7.50: 1. During the compilation period for the December 20 report, January 2012 gasoline made a low of 2.4732 on December 16, yet the ratio was still at an elevated 7.50: 1 My point is: the gasoline market is at major lows with respect to the COT report for managed money, which indicates that gasoline is far from over bought based upon this measurement. Gasoline’s performance has been improving during the past several days, which is indicative of a market that is turning around after a two-month slide. Gasoline generated a short-term buy signal on July 16, and shortly I expect an intermediate term buy signal to be generated, which would confirm the rally.
Copper:
For the week, September copper lost 5.60 cents. The Commitment of Traders Report showed that managed money added 796 contracts their long positions and liquidated 2,255 contracts of their short positions. Commercial interests added 190 contracts their long positions and also added 1846 contracts their short positions. As of the latest report managed money is short by a ratio of 1.05: 1.
Gold:
For the week, August gold lost $9.20. The Commitment of Traders Report showed that managed money liquidated 5,271 contracts of their long positions and also liquidated 6,340 contracts of their short positions. Commercial interests liquidated 795 contracts of their long positions and added 3,841 contracts to their short positions. As of the latest report managed money is long gold by a ratio of 3.86: 1.
Although I have repeatedly pointed out that open interest action relative to price has been poor, and that the price action of gold has been abysmal; gold is entering a period of seasonal strength, which tempers some of my bearish inclinations. With the United States economy clearly slowing down, the possibility of Federal Reserve action, whether it is QE3, or some other program is increasing. This could be the catalyst that lights a fire under gold. Another point that cannot be emphasized enough is that the long to short ratio among money managers is at major lows. For example, last year on September 6, 2011 gold reached a high of $1923.70, and the COT report, which was tabulated as of September 6, 2011 showed that managed money was long by a ratio of 27.9: 1. On December 29, 2011, February gold made its bottom at $1523.90 and the COT report tabulated on January 4, 2012 showed that money managers were long by a ratio of 10.66: 1. Based upon the low ratio of longs to shorts, it is clear that gold has fallen out of favor with money managers. Anyone who has traded gold options knows, volatility can increase rapidly and with current gold volatility (GVZ) priced at the lower end of its trading range, gold options are cheap. For example, GVZ closed at 16.88 on July 20, but its 50 day moving average is 20.96 and the 200 day average is 22.12. One good possibility for a trade is to execute a straddle ATM. I would suggest employing options beyond October because this will give the straddle enough time to work.
Silver:
For the week, September silver lost 6.7 cents. The Commitment of Traders Report showed that managed money added 341 contracts their long positions and also added 1,226 contracts to their short positions. Commercial interests added 280 contracts to their long positions and also added 608 to contracts to their short positions. As of the latest report, managed money is long by a ratio of 1.28: 1. Stand Aside
Euro:
For the week, the September Euro lost 83 points. The Commitment of Traders Report showed that in the leveraged funds category, speculators liquidated 4,206 contracts of their long positions and also liquidated 5,915 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.78: 1. Stand aside.
S&P 500 E mini:
For the week, the September S&P 500 E mini gained 6.45 points. The Commitment of Traders Report showed that leveraged funds liquidated 19,874 contracts of their long positions and also liquidated 12,579 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.43: 1. Although I am not in favor of being long the S&P 500, (prefer Apple) despite the index being on a short and intermediate term buy signal, there are two factors that suggest a rally could be in the offing. As reported last week, the ratio of shorts on the New York Stock Exchange is the highest it has been since last September. Additionally, the latest sentiment report by the American Association of Individual Investors shows that the number of bulls is extremely low and the percentage of bearish or neutral sentiment is at very high levels. It is unusual to have such a high degree of bearishness when the index is at the upper end of its recent trading range.
AAII Survey
Week Bullish Bearish Neutral
Last week 22% 41.8% 36.0%
Previous week 30.2% 34.7% 35.1%
3 weeks ago 32.6% 33.3% 34.0%
Odds and Ends:
It appears that the Russell 2000 cash index’s 50 day moving average (776.73) will soon cross below its 200 day moving average of 773.18.
The Dow Jones Transportation Index’s 50 day moving average (5083.96) will soon cross below the 200 day moving average of 5068.75.
The USDA announced on Friday that the current cattle herd is the lowest in at least four decades.
“A new report shows the U.S. with the fewest cattle in at least four decades as a widespread drought forces ranchers to sell off animals.”
“The National Agricultural Statistics Service said Friday that the number of cattle and calves in the United States totaled 97.8 million had as of July 1. That’s 2 percent less than a year ago.”
“It’s also the lowest number since the agency began a July cattle count in 1973. The agency now estimates the size of the nations heard each January and July.”
“Kansas State University agriculture professor Glyn Tonser says cattle numbers been declining for several years, but that sped up last year with the drought in the Southwest. Many ranchers sold animals then, and more are selling this year amid widespread drought.”
The implications of a multi-decade low in cattle numbers are enormous. First, the massive decline in feeding requirements will negatively impact corn usage. There is no question that corn prices will stay elevated until the summer of 2013, which will prevent the rebuilding of herds any time soon. Second, after the completion of the liquidation cycle, the supply of animals available for slaughter will be reduced to the extent that a major new bull market will begin. I will monitor the trading activity in the cattle market during the coming months and alert subscribers when I see an opportunity to get long.
Wishing all of you the best of trading.
G.
