The corn crop has deteriorated significantly during the past few weeks with comparisons being drawn to the drought of 1988. While there are similarities, the difference between 2012 and 1988 is that large investors consider commodities an asset class, which has lead to greater involvement by the funds creating price distortions, such as the sell-off seen this week. Last week, the trend following funds added 165 MB to their long futures position increasing it to 785 MB. Meanwhile, the index funds sold 15 MB trimming their longs to 1.860 BB. They have been reducing their exposure to commodities since April. In the meantime, the corn crop continues to deteriorate falling 5 points last week to 26 percent in good-to-excellent condition. Ag Watch’s yield model puts the national average for corn at 126.1 bpa. The crop report on August 10th, using field survey results, will give a more accurate assessment.
December corn traded to 800 on Monday followed by a swift sell-off to 745.5 Tuesday. Prices have since recovered to 796. One pattern under observation shows the market rising to 810 or 820 and topping on August 2nd before the advance from 506 is wrapped up. However, for this to occur, we need to surpass 800 by the end of the week. Otherwise, the chances are the rally from 506 is done and a pullback lasting ten days to two weeks could unfold with the potential of backing off to 745.5 or 725. Once the correction is over, a rally to a new high, possibly 845 or maybe 880 is expected that will complete the advance from 499. As it stands now, we will probably not see a major top in corn until September. Historically, corn futures are higher 63 percent of the time during August. Next week, the odds are 70 percent that December corn will be lower.
The soybean crop is deteriorating, but the forecast for rain and looming debt crisis in Europe caused a sharp downdraft in prices this week. Nothing has changed in Greece, but problems in Spain are mounting casting doubts as to whether the Euro Zone can survive under its present structure. However, the European Central Bank has reassured that it will do whatever it takes to preserve the Euro. Keep in mind that China’s economy is slowing and at risk of slipping further if the situation in Europe worsens. Meanwhile, the crop in the U.S. is on the ropes falling 3 points last week to 31 percent in good-to-excellent condition. Thirty-six percent of the crop is setting pods and in its most critical stage of development. In other news, the long position of the trend following funds rose 10 MB to 1.105 BB, just under the record of 1.125 BB. The longs of the index funds were up slightly to 670 MB.
November soybeans peaked on Monday at 1691.5 and were caught in a downdraft falling to 1536 Wednesday. Currently, one short-term wave pattern shows there may be a chance of rising to 1705 or higher before the rally from 1244.75 ends. However, for it to happen, a serious recovery must get under way by the end of the week and no later than Monday. Otherwise, there is a strong likelihood that the advance from 1244.75 is over with prices at risk of falling below 1536 to 1497 or 1468. Historically, soybean futures are higher 53 percent of the time during August. However, when they are stronger in July, there is a 55 percent chance they will be lower. Next week, the odds are 60 percent that November soybeans will be higher.
While there are concerns regarding the crops in Russia and Australia, wheat is mostly following corn and soybeans. While global stocks are adequate, they are contracting. Harvest is progressing at 82 complete with spring wheat harvest 12 percent done. Winter wheat seedings are expected to jump this fall as producers attempt to recoup losses caused by the summer drought. After being short wheat futures since February 2011, the trend following funds are currently long 55 MB. The index funds are long 945 MB.
December wheat topped at 953.25 on Monday followed by a sharp decline to 864.25 Tuesday. Unless the market makes a serious attempt to climb beyond 953.25 by the end of the week, the chances are the rally from 649.25 is over with the potential for a correction lasting ten days to two weeks. Prices could back off to 864.25 again or even fall to 837. However, the longer-term pattern points to a move higher to 987, which should wrap up the advance from 629.5. This could develop at the end of August or the first week of September. During August, wheat futures are down 58 percent of the time. 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.