“Building a bottom in grains and oilseeds” by Harold AGJ Davis

 The MontrealAnalyst.com finds that Harold Davis of www.prairiecropcharts.com in Winnipeg creates accurate and timely research focusing on the world commodities’ markets. We should keep in mind that strong commodities markets usually occur with negative industrial stock markets! 

“Chartists like to say “the bigger the base, the bigger the rise”.  Judging by the extent of base building over the past eighteen months, wheat, corn and soybeans could enter major bull markets within the next year.

In the midst of abundance characterized by bulging granaries around the world, it is difficult to imagine that the five year bear market in grain and oilseed prices could possibly come to an end. Yet low prices are always caused by an obvious preponderance of bearish news and, this time, despite forecasts of large food stocks extending into the future, current Chicago wheat and soybean prices are not too far below the lows made in September 2014 while Chicago corn is above them! When prices stop falling, they do so for a reason. What could it be?

Sometimes the explanation is as simple as proximity to the cost of production. At this time of year, many North American farmers are trying to decide which crops to plant in spring. Unfortunately for many, the business plan calculations that multiply average crop yields by expected selling prices then subtract depreciation, input, and capital costs (farmers call this “penciling out”) are producing negative numbers.

Many are staring at prospective losses. In consequence, planted acreage might decline or this year’s crop yield may suffer as farmers attempt to reduce variable costs by applying less fertilizer, herbicide or insecticide. Supply could tighten. Going into 2017, farmers’ financial calculations might even be more treacherous if interest rates begin to rise.

This hardship will not be limited to the North American farmer. Many costs like fertilizer and diesel fuel are similar around the world. Moreover, foreign governments’ policies and farm support programs differ widely and, these days, burgeoning budget deficits may limit the range and scope of responses. Safety nets are not always secure, and program cutbacks may migrate from cities to the countryside.

To find other and more forward looking reasons for grain and oilseed prices to rally, remember that bullish news is often bad news for someone else. For instance, India, the world’s second largest wheat producer, is suffering from a nine month rainfall deficit that is bound to hurt the winter crop. South Africa, a major regional corn producer, is experiencing a severe drought. Late rains in Argentina are damaging the quality of the wheat crop at harvest and milling wheat prices have begun to rally. Apparently, El Nino does mean something after all. Finally, the USDA expects the global rice trade to decline by 2% in 2016, and Thailand has announced a 16% production cut.

Lurking in the background, a change in the behaviour of market participants is also a definite prospect. For more than a decade, the ultra-accommodative monetary policy pursued by central banks has supplied a generous helping of low cost liquidity to hedge funds. A common vogue among these professional speculators has been to trade the price correlations between related stocks, currencies and commodities. This activity served to increase the correlations, thereby reinforcing the theoretical justifications, and attracting even more money to this style of “investing”. The results have been quite astonishing and somewhat suspect.

For example, the price movements of the Canadian dollar now mirror the changes in crude oil rather than reflect the changing fortunes of a broad and complex modern nation. However, with the Federal Reserve embarked upon a path to raise interest rates in response to normalization in the US economy, massive speculation utilizing borrowed money may become less attractive. As a result, commodities could enjoy more independent price movement based on their own unique supply/demand balances, rather than some theoretical Wall Street asset class generalizations such as inflation/deflation or “risk on/risk off”.

In order to spot the trend changes when they occur, start by noting that corn violated its major downtrend months ago. Therefore, it is technically already in “neutral”. Wheat and soybeans should be scrutinized for breaks in their patterns of lower highs. When they occur, those breaks should encourage shorts to buy-in in order to unwind their bearish positions. Once buy signals are given, remember that grain and oilseed prices can surge very quickly.”

Harold AGJ Davis is the Author and Analyst at www.prairiecropcharts.com