If you have not heard about the Drought of 2012, you have been on another planet! The news media has recently taken an interest and are reporting the effects the drought will have on increased food prices. When they take notice, it usually means a top is not far off. Meanwhile, the corn crop continues to deteriorate. Last week, the crop rating fell 9 points to 31 percent in good-to-excellent condition. Only 7 percent of Missouri’s crop is in the good-to-excellent category. According to Ag Watch’s yield model, the national yield average for corn is 137.4-136.2 bpa. Meanwhile, the trend following funds are bullish as they added 95 MB to their longs last week increasing them to 620 MB. However, the index funds are reducing their exposure to commodities as they reduced their long position 40 MB to 1.875 BB.
December corn traded to 799 on Thursday from where there was a reversal lower. Be aware that we are long in the tooth in the rally from 506 and the sentiment index shows that 95 percent of traders are bullish corn. This is a dangerously high reading. In the past, when a level over 90 has been reached, it has turned out to be a disaster for the bulls, especially for those getting long late in the game. Right now, a break below 755.75 is needed to confirm that the advance from 506 is over. Otherwise, a rally past 799 projects the advance continuing to 810 with maybe a shot at 842. In this event, prices could stay up until next week or late this month. Next week, the odds are even as to whether December futures will be higher or lower.
While dry weather may be close to running the course for affecting corn, soybeans are a different story as the crop is setting pods. This is the stage of development when rainfall is most important. The soybean crop deteriorated 6 points last week to 34 percent in good-to-excellent condition. Only 10 percent of Missouri’s crop is in the good-to-excellent category. Last week, the long position of the trend following funds fell 5 MB to 1.095 BB. However, the longs of the index funds dropped 110 MB to 665 MB. This is the largest weekly reduction by the index funds since the CFTC included the supplemental report in Commitment of Traders Report. This indicates that when buying by the trend following funds runs its course, prices will have little support. Keep in mind that the rally in 2008 was sponsored by both the trend following and index funds.
November soybeans rallied straight out of the gate on Monday but took a breather Tuesday. Prices resumed the trend higher on Wednesday and have since risen to 1673.75. At present, the wave pattern shows this being a short-term top with the market climbing to 1700 with maybe a shot at 1740. Right now, a decline below 1575 is needed to turn the trend down. The cycles indicate a top occurring late July-early August. Currently, the sentiment index has a reading that shows 93 percent of traders are bullish soybeans. Next week, the odds are 80 percent that November futures will be lower.
Wheat remains a follower of corn and soybeans, although there are concerns of dryness in Russia. Be aware that because of the drought this year, chances are that grain producers will plant more wheat this fall in order to recoup their losses quicker. In other developments, harvest moving along at 80 percent complete compared to the average of 65 percent. Spring wheat deteriorated one point to 65 percent in good-to-excellent condition and compares to the rating of 73 percent a year ago. Last week, the trend following funds reduced their short futures position 40 MB to 15 MB. Meanwhile, the longs of the index funds fell 30 MB to 955 MB.
December wheat paused briefly in its rally on Tuesday but has since resumed the trend higher. Prices could stall at any moment, but the wave pattern shows the chance of climbing to 962. Be alert for a top developing during late July. A decline below 880 forewarns that the trend is turning down. Currently, the sentiment index shows that 93 percent of traders are bullish wheat. Like corn and soybeans, this is a dangerously high reading. Next week, the odds are even as to whether December wheat will be higher or lower.
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Comments and suggestions are provided for information purposes only. Information contained herein is obtained from sources believed to be reliable but not guaranteed to its accuracy or completeness. Readers using the information contained herein are responsible for their own actions. No presentations can be made that recommendations will be profitable or that they will not result in losses. This information is neither an offer to sell nor solicitation to buy of the commodity futures mentioned herein. The writer may be trading in the commodities mentioned.