Grain futures began on a weak note after Labor Day, as anxiety about the sovereign debt crisis in Europe resurfaced. Rumors circulated that 4-5 European banks could be in danger of failing. Keep in mind that major banks in the U.S. have exposure to the debt crisis as well. Meanwhile, uncertainty regarding the crop size trumps concerns in Europe. The corn crop continues to deteriorate as conditions fell two points to 52 percent in good-to-excellent condition. The crop size will be clearer in next week’s USDA report. Exports are off to a slow start for the season with inspections at 24.1 MB. The trend following funds are becoming more enthusiastic as they added 185 MB to their long position increasing it to 1.355 BB. The longs of the index funds grew 70 MB to 1.825 BB.
December corn’s decline from the contract high at 779 appears to be a correction. The market fell below last week’s low at 737.5 to 731.25 on Thursday. The pullback should be close to ending, but it may last a couple of more days and we could back off to 725. Meanwhile, the pattern on the weekly chart shows that once the setback is complete, a rally to 810 is likely, which should be a major top, possibly a multi-year high. A more bullish pattern points to prices climbing to 870. However, reaching this level will be more difficult because of the break below last week’s low. Cycle analysis leans to a top occurring on September 26th or October 5th. Advancing beyond 779 is contingent upon holding 706 as breaking this level turns the trend down. Next week, the odds are 89 percent that December futures will be lower.
After a lower start this week because of the sell-off in the financial markets, soybean futures stabilized from ongoing concerns about the size of the crop. The crop rating continues to deteriorate as conditions fell one point last week to 56 percent in good to excellent condition. Export inspections for the first week of the marketing season were 9.1 MB. Last week, the trend following funds added a stunning 270 MB to their long position increasing it to 745 MB. This is short of the record long position of 800 MB set in November 2010. While this seems bullish on the surface, the majority of their position was established between 1400-1420 basis November futures. The price level paid suggests the funds can ill afford much of a setback. Their move sticks out like a sore thumb and could be the undoing of soybeans. The longs of the index funds stand at 830 MB.
November soybeans peaked last week at 1465, which was a long-term target mentioned in previous commentaries. The market fell to 1408.25 on Tuesday followed by a recovery to 1434.75 the following day. Right now, the market is at an important juncture. The short-term pattern shows the potential of trading higher to 1505. However, a close below 1445 at the end of this week constitutes a lower weekly close and reduces the chance of it happening. In this event, one of two scenarios is developing. The first is that an intermediate-term top has occurred in which there could be a pullback to 1370 or 1350. Meanwhile, the other option is that a major top, possibly a multi-year high has developed and that we are headed much lower. The pattern that is unfolding may not tip its hand until after the crop report. Next week, the odds are 70 percent that November soybeans will be lower.
Wheat futures continue to coattail the direction of corn and outside markets. Spring wheat harvest continues to lag at 68 percent complete compared to 81 percent for the five-year average. Meanwhile, moisture is needed in the southern Plains to facilitate planting later this month. Export inspections were 21.1 MB and slightly above the average needed to reach USDA’s projection of 1.1 BB. The trend following funds liquidated 50 MB of their short position last week reducing it to 150 MB. The longs of the index funds stand at 1.035 BB.
December wheat has been trending lower since peaking last week at 805.5. The market is encountering seasonal pressure and could work downward to 720 with a bottom developing on September 15th or September 19th. From a seasonal perspective, wheat futures usually bottom by the middle of the month and are followed by an upswing until mid October. This means that once the pullback is over, there is a chance of climbing past 805.5 to 855. Next week, the odds are 70 percent that December futures will be lower.
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