Grain Markets coming to Grips with Reality

There are two factors that are now finally becoming begin to seriously take hold among those who kept insisting that grains would experience a bounce higher. The first of these is the sheer size of the upcoming harvest. The latter is the strength in the US Dollar.

Early harvest results are rolling in and they are impressive! With forecasts calling for warm and mostly dry weather, harvest progress will continue as the combines move north. As the actual results are known, traders are realizing the old adage that, " a big crop gets bigger".

All three grains/beans are lower this morning with beans looking like they are accelerating down. I am most interested in seeing this afternoon's COT reports on the corn because I want to see if any of the large specs ( hedge funds and other large reportables) are still net long corn or if they have whittled down those positions any.

My concern for corn is very simple - IF, and this is a big "IF", that just-mentioned group remains as sizeable net longs, corn is in danger of having more downside than many are currently thinking. The reason? Those guys are going to have to get out of those losing longs.

Now, even if they are spread against wheat, and so far that spread has been performing admirably with wheat fundamentals even more poor than those of corn, lifting those spreads entails a lot of corn selling that will be hitting this market at some point.

Here is a picture of the spread:

As you can see, it has been a most profitable strategy. If the spread moves too much in favor of corn however, livestock feeders will switch over to wheat. The spread has not moved much over -$1.20 with some resistance near -$1.40 so one wonders how much more upside this spread has.

Here is the wheat chart: Talk about ugly! It hit a 51 month low this week. Even at that, the thinking is that US wheat prices are still not low enough to attract solid export business due to the global glut and the stronger Dollar.

And now for corn - again, one ugly chart; however, beauty is in the eye of the beholder and for livestock and poultry producers, this chart is a thing of wondrous beauty!

That brings me back to the commodity complex as a whole. This week's FOMC statement and its hawkishly construed message, has sent the Dollar higher and the commodity complex as a whole, lower.

With the index moving lower one can expect to see both copper and silver heading down and that is exactly what both are doing. Copper is clinging to support near and just above the $3.06 level while silver crashed and burned through the $18 level. If silver cannot recapture that level quickly, a test of $17.50 - $17.35 is its next stop. Below that and things get very ugly as it could easily fall below $16.00.

As for gold, as you can see on the chart, it is clinging for dear life to the bottom of the support band noted. Based on what I can see from this chart, there is little in the way of further support until one gets back down to the former double bottom low near $1180. There is only what I view as "psychological" support near round number $1200 but I suspect that will not hold if the Dollar index runs past 85.50. If gold does manage to get down to near $1200, Asian buying will no doubt be active but it will be insufficient to sustain the metal if Western interests become aggressive sellers. Along that line I am closing watching reported GLD holdings and to some extent, the action in the gold mining shares, which incidentally, look very heavy at the moment.

We have a cattle on feed report due out this afternoon which will give us some further insight into the state of the US cattle herd. One wonders how long cattle are going to be able to buck the general selling trend being seen across the rest of the commodity complex, especially with high-priced US beef rapidly pricing itself out of the export markets. Feeder cattle also continue to defy gravity as cheap corn and abundant pasture spurs buyers to pay these outrageously expensive price for available animals. That being said, these kinds of prices, given what the board is showing for spring and summer cattle prices, are essentially guaranteeing losses to feeder buyers. One wonders how long that can continue. For now cattle bulls, especially in the feeders, are vigorously defending their positions. They seem intent on not surrendering and have the money to back up their stance it appears.

A week from today we get the quarterly Snout count or the Hogs and Pigs Report. That is always a lot of fun.

By the way, with the Scottish vote coming in a resounding "NO" in favor of independence, it was interesting watching the action in the British Pound last evening. As the first results started rolling in favoring remaining in the Union, the Pound began to rally. However, after the final vote was tallied the currency began to slowly relinquish its gains and is now firmly lower. This is a matter of "buy the rumor, sell the fact". The forex markets have an uncanny ability to predict election results as the Pound began rallying earlier this week AHEAD of the vote. Currency traders were clearly voting with their pocketbooks that the vote was going to be one of staying in the Union. Once the vote was cast and the results tabulated, there was no other reason to buy the Pound so down it went against King Dollar.  We are firmly back to trading interest rate differentials it would seem.